Posted on soc.culture.burma -- "inv

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Subject: Posted on soc.culture.burma -- "investment in Myanmar"

TODAY MAGAZINE, Jun 1-16, Vol4.

AN UPDATED LOOK AT WHETHER INVESTORS IN SOUTHEAST ASIA SHOULD ENTER
MYANMAR

by  James Finch and David Schmahman

I. INTRODUCTION

Myanmar is on many companies' short list as a place to consider for
expansion sometime in the future.  And there are real political
reasons why it may be prudent for some to take their time.  Investment
in Myanmar is not for the faint of heart or the thinly capitalized.
Those who have invested in Myanmar, however, have noticed quite a
number of changes in the legal environment and environment climate in
recent months.  What follows is an update on several basic questions
which a foreign investor must ask to determine if the timing is right
to enter Myanmar. Notwithstanding the timing issue, certain things
about Myanmar are certain.  Myanmar is the largest country in mainland
Southeast Asia with abundant natural resources and a motivated and
educated population.  The thirty years of self-imposed isolation that
kept it from fulfiling its potential have ended and investment is now
encouraged even as the logistics of it are, still being ironed out.
Consider, for instance, that 

-	Myanmars population of 43 million is 85% literate, and that
two thirds of the population -still earns its, living in agriculture.
Despite these facts, only 12% of Myanmar's cultivable land is being
fartned. 

-	Myanmar has a continental shelf of 230,000 square kilometers
but the fishing industry extracts barely half its sustainable stock.
Myamnar has 80% of the world's teak forests, and huge reserves of oil,
gas, coal, tin, tungsten, lead, zinc, iron, copper, gold, and a
variety of precious stones, that await extraction.

-	The question is therefore not whether Myanmar will become a
major center of economic activity but when, and who will be best
positioned to participate when this happens.


II.  TEN QUESTIONS ABOUT INVESTING IN MYANMAR

	The Myanmar investment regimen and legal system may seem
impenetrable to the uninitiated, but they are not.  Similarly the
business choices any venture encounters -whether and how to
incorporate, when and in what form to import capital, expertise, or
equipment, in what circumstances one should consider involving a local
partner, or how Myanmar's old British company law interacts with its
new foreign investment structures are not as perplexing as they seem.

	We have tried to distil what we have learned - often the hard
way - into ten questions and answers which are, designed at the time
of this writing - to do two things: First, alert the reader to the
basic consideration of doing business in Myanmar.  Second, decide if
now is the time to invest.

They follow:

1.	ARE CERTAN KNDS OF ECOMONIC ACTIVITIES  STILL OFF-LIMIT TO
FOREIGN INVESTMENT ?

	One of the first acts of the new regime (the State Law and
Order Restoration Council or SLORC) in 1988 was to promulgate a
Foreign Investment Law which permitted foreign investment 'in
accordance with [certain] basic principles.' These principles
emphasize selfreliance, orderly economic development that includes the
country's regions as well as its hubs, the acquisition of expertise
and technology, and the exploration of natural resources.

	Investment in Myanmar by foreigners must be shown to comport
with these objectives and, consistent with them, certain items are
off-limits except with special dispensation.  "Restricted activities
include the harvesting and sale abroad of teak, exploration for and
extraction of oil and gas, pearls, ja.de, precious stones and metals,
fish and prawn breeding, post and telegraphs, air transport, Banking
and insurance, broadcasting, electricity generation, and the
manufacture of defense-related  products. These areas, presumably, are
those in which the, government wishes to retain control, emphasize
self sufficiency, or drive a harder bargain with potential investor
given the scale of potential profits.

	There is significant foreign involvement already in the energy
field by several major energy companies.  Agreements with the
government on investment in other "restricted' are-as, usually in the
form of joint ventures with the goverrunent, are similarly available,
but the chances of success are greatly improved if one has prior
intelligence as to what the govemment's mM objectives and concerns
are.  A prudent investor must take care to anticipate and meet these
concerns as they pertain to the particular kind of economic activity
that the investor contemplates, and these can be learned by doing
one's homework, in exploratory meetings with government officials, and
by I ing what others have done in analogous circumstances.


2.	WHAT BUSNESS STRUCTURES ARE SUITABLE  FOR  INVESTMENT IN
MYANMAR?

There is a fairly complex regulatory scheme in place that creates a
series of roadmaps for potential investors depending on what specific
business activities they contemplate and the level of investment they
propose.  In very general terms an investor's choices, and the
consequences of each choice, are as follows:

Appointment of a Business Representative - This is the least expensive
and least regulated way in which to establish at Rresent in Myanmar.
The cost to a foreign investor is basically the cost of the
appointment letter and the registration fees with the Ministry of
Trade, but there are obvious limitations too.  The investor may not
have foreign employees, the scope of the business is basically limited
to having a sales agent in the country, and there are no investment or
tax incentives.

Establishment of a Branch Office -This approach requires the investor
to obtain a permit to trade, a process that requires a fair amount of
paperwork, has certain levels of mandatory importation of foreign
capital, and takes several months to shepherd through the regulatory
process.  An application for a permit to trade may be submitted
through the Company Registration Office and is valid for two years
from the date of issue, although it is renewable.

The advantages of registering a branch office are that an investor can
hire foreign employees and gain brand name exposure in the country
and, of course, the level of business that can be conducted is
significantly greater than that which can be conducted by a business
representative.  One disadvantage is that the head office of the
branch may be liable for the branchs debts.

The minimum, capital requirements for establishment of a branch office
are as follows.  A manufacturing company must import the hard currency
equivalent of Ks. 1,000,000, a trading company Ks. 500,000, and a
service company Ks. 300,000, all at the official rate.  Only half that
amount, however, needs to be brought into the country before, the
business commences operations.  Imported capital can be used to pay
incorporation expenses, rent, salaries and the like, and can also be
in the form of capital equipment.  Once actually imported, the hard
currency may be converted to kyat at the unofficial rate to the
dollar.  Consideration should be given to meeting this requirement by
the importation of machinery or equipment.

Unlike a 100% foreign owned local subsidiary, which would be taxed at
a 30% corporate rate, a branch office would be taxed at non-resident
rate of at least 35%. Incorporation of a 100% Foreign Owned Local
Subsidiary - Urvlike several other Southeast Asian countries, Myanmar
allows 1000/o ownership of local companies.  As with a branch office,
a permit to trade is required along with its requirement that certain
amount of capital be imported, depending on whether the local entity
is to engage in manufacturing, trading or services.  The company would
also be subject, both in the requirements for its incorporation and
once established, to various requirements- of the Myanmar Companies
Act of 1914, a corporate code that would be, familiar to lawyers in
many former British colonies.

The company . s memorandum and articles of association must describe
its business objectives and these basically are limited to trading,
manufacturing and construction services, insurance, banking and
fmance, and hotels and tourism, as defined by the Companies
Registration Office.  Standard forms for these documents are available
and should be used whenever possible since this makes translation and
acceptance by officials far easier.  In naming a local company the
Myanmar Investment Commission prefers to have the word "Myanmar"
appear in the company's name, and if it does so appear, it must be the
first word in the name.

Local companies are, as stated above, subject to a 30% tax and must
comply with the various provisions of the Myanmar Companies Act.

Incorporation of a Joint Venture

Company - A joint venture with a local person or company need not be
incorporated.  The basic requirements pertaining to a permit to trade
and compliance with the Myanmar Companies Act apply to investors
wishing to enter the Myaranar market with a local partner and
incorporate.  If the foreign party wishes to incorporate with a
government entity as a joint venture the permit to trade requirement
is not applicable.  Likewise, with a goverranent partner, the company
would be formed tinder the Myanmar Special Companies Act rather than
Myanmar Companies Act.  Since it is not yet resolved whether the
exchange rate on purchasing further shares would be the official or
the market rate, an investor should try to get that portion of the
company's capital which he wants at the outset and not try to resolve,
this later.

There are, of course, certain advantages to entering a joint venture
with a local entity, including local knowledge the local joint
venturer may have, reduced start up time, and perhaps the local joint
venturer's local contacts.

Myanmar Foreign Investment Law (MFIL) (more details
inhttp://www.myanmar.com/)-The Myanmar Government has adopted an
investment scheme that provides incentives for certain larger favoured
investments (over US$500,000 for manufacturing concerns are US$300,000
for service companies) and which imposes a correspondingly more
complicated paperwork process on those who wish to take advantage. of
it.  Ain investment under the MFIL can be 100% foreign owned, a joint
venture between a foreigner and a citizen, a joint venture between the
goverrument and a foreigner or even a sole proprietorship or
partnership.  If the investment is a joint venture, at least 35% of
the equity capital must be contributed by the foreign partner.

Incentives under the MFIL include a three-year tax holiday, guarantees
against nationalization, and a variety of other tax benefits and
exemptions depending on the circumstances of the investment, often
subject to negotiation.

3. HOW EASY IS IT TO GET BASIC THINGS, LIKE OPENING BANK ACCOUNTS,
DONE?

Not very.  Banks in Myanmar are for the most part not computerized,
transactions that can be done abroad at an ATM may take a morning, and
basic banking services may prove to be unavailable just when you need
them (wire transfers, for instance.)

As discussed above, when an investor forms a local company the
investor will be required to bring in a certain amount of cash in the
first year.  Usually, half has to come in before the company is
allowed to open its doors, and officials will not grant long term
visas or allow the company to rent property, hire employees, or open a
bank account., until the money comes in.  Once the money comes in it
will be placed in a sundry account and not released to the company's
own account without negotiation, paperwork and patience.  A company
conunencing operations in Myanmar should count on at least three weeks
before money shipped in to Myanmar becomes available.

Other matters one takes for granted elsewhere such as reliable
electricity, Internet access, and adequate telephone lines are not
automatically available even in Yangon, but patience and creativity do
prevail in the end.

4. SHOULD WE TAKE ON A LOCAL PARTNER?

This may be the most important decision an investor in Myanmar will
make.  We have heard and participated in the debate dozens of times,
and the outcome differs.  A local partner may know the envirorunent,
have contacts and local experience, and know the ropes.  As mentioned
above, moreover, investments in certain industries must be with a
government partner.

But then there is the cultural divide, the inscrutability of
mannerisms, loyalties, and objectives.  Our contribution to the debate
each company will have on this score is as follows.  Myanmar is a
traditional society.  There is no substitute in Myanmar for developing
longstanding personal relationships.  If a company's operations in
Myanmar are significant enough for management to be concerned about
them, somebody at a management level must be based in Myanmar
regardless of whether a local joint venture, partner is brought on
board.  It is folly, almost invariably, for foreign investors to fly
in, set up structures, get the business going, and then turn it over
to a local partner for management without frequent, consistent, and
well structured supervision.

Foreign management must expect to socialize with Myanmar business
counterparts, participate. in local activities, and make efforts to
develop a variety of personal relationships.

5. HOW ENFORCEABLE ARE LEGAL COMMITMENTS IN MYANMAR COURTS ?

To a great extent Myanmar's legal system was shaped by Britain during
the colonial period and many facets of its basic business law will be
familiar to investors from common law jurisdictions.  Indeed, since
Burma as it was then known was administered with India, when much of
the common law was codified in India the codification was similarly
adapted in Burma and eventually compiled into the 13 volumes of the
Burma Code.  After independence the Burmese Parliament supplemented
and amended parts of the Code, and from the early 1960s until 1988 a
socialist regime decreed further changes.

The most important additions to the law, however, are the recent legal
reforms contained in the post- 1988 decrees of the State Law and Order
Restoration Councils.  It is these decrees that are of primary
interest. to foreign investors and the goverrunent has shown every
inclination to take them seriously, to have them taken very seriously,
and to have all parties rely on their force, intent, and the binding
nature of the reciprocal conunitment-s- they create.

6. WILL  THINGS CHANGE ONCE MYANMAR BECOMES A MEMBER OF ASEAN ?

For sure, and for the better.  When Vietnam became a member of ASEAN a
variety of economic reforms, particularly in the trade area, were made
without much fanfare even though Vietnam had long resisted pressure
from western nations to make the same changes.  Some observers noted
that the explanation for this was that as a member of ASEAN Vietnam
could make the changes and save face I-)ecatise they were required to
do so by an Asian organization which they had volii ntarily joined.

Myanmar is stated for membership in ASEAN later this year.  At some
point in every developing countly's history it "opens up" in way that
Myanmar has not yet done.  It is our view that ASEAN membership will
be the predicate event to a variety of economic changes in Myanmar,
and as a result, Myanmar will become more sought, after, more
competitive, and therefore more, rather than less, difficult to enter
as an investor.

It is our view that the race to success will most probably go to those
with the oldest, best researched, and most resilient local
relationships.

7. HOW MANY LAYERS OF DEPARTMENTAL HIERARCHY MUST ONE DEAL WITH IN
EMBARKING ON A BUSINESS VENTURE IN MYANMAR?

Potential investors need only to deal with the government in obtaining
their basic permits and approvals, but that said it is not as simple
as it sounds.  There is a fair amount of discretion built into the
various approval processes, and levels of officialdom sometimes
substitute for levels of government in other environments.  There is
not, in short, "a one stop shop" facility for foreign investors in
Myanmar as there is in some other countries.  While often, when MFIL
approvals have been obtained, other approvals follow fairly easily,
this is not always the case and is certainly not guaranteed.  Under
the MFIL process, however, because of the level of detail required in
one's submission to the Myanmar Investment Conunission, it is often
true that the required permits and  licenses,-are exedited liecatise
an investors entire business plan has already, by definition  been
approved at the highest levels.

The Myanmar Investment Commission, which administers and approves
applications tinder the MFIL, takes the position that the MFIL is the
supreme law and pre-ei-npts other requirements such as earlier laws
that require official registration and stamp duties to be paid upon
certain documents.  Since there. is really no way to determine whether
the MFIL will, in fact, be treated as preempting the registration and
stamp duty requirements, an investor should and can first determine
whether these apply to a particular deal and, if they do, get the
government to waive them.
There are, of course, a variety of other licenses and permits that are
required, depending on the specific business activities contemplated.
Trading companies, for instance, after obtaining their permits to
trade and being daily incorporated, still need to obtain export and
import licenses and comply with the various registration requirements
of the Export/Import Department of the Ministry of Commerce.

8. HOW EXPENSIVE IS LABOR IN MYANMAR, AND HOW ONEROUS IS COMPLIANCE
WITH  MYANMAR  LABOR  LAWS?

Labor rates are low in Myanmar, and labor laws are less favourable to
the worker than those in most other developing countries.  There are
no legal requirements for termination pay for laid-off workers, for
instqnre, although private enterprises having more than five employees
mdst contribute 3% of each employee's wages to a social security fund
for that employee, and must register to do so with the township
department in which the employee lives.  On occasion this can be a
bureaucratic process with attendant frustrations, but it is, like
compliance with most Myanmar paperwork, manageable and always simpler
the second time.

9. TO WHAT TAXES WLLL OUR ENTERPRISE BE SUBJECT ?

An overview of the taxes a foreign enterprise and individual might
Encounter in Myanmar is presented below:

-	Residents (those who are in Myanmar for more. than 182 days in
a tax year)- taxed at progressive marginal rates from 5% to '.10% for
income over 500,000 kyats.  Residents working for companies which have
MFIL benefits may he granted a flat 10% tax rate.

-	Companies incorporated in Myanmar: taxed at a flat rate of
30%, with certain deductions that may serve to decrease taxable
income.  Companies which have MFII, I-)enefits usually receive a
three-year tax holiday and numerous other tax benefits.

-	Non-resident individuals and foreign country  branches-. taxed
at either 35% or on a progressive scale of from 5% to 40%, whichever
is higher.

-	Myanmar citizens: taxed at a flat 1O% of income earned in
foreign currency, and at progressive rates for kyat income.

-	Miscellancous taxes:

-	Commercial or turnover tax.  Essential items are exempted from
this.  It is paid on imports and a wide variety of local goods and
services.

-	Service taxes (hotels and restaurants, for instance) are
subject to a 10% commercial tax,
-	Import duties;
-	Export taxes (maximum 5%);
-	Capital gains tax.  This is 20% for residents and 40% for
non-resident foreigners, unless the non-resident foreigner is
operating under the MFIL in which case the capital gain rate is 30%.
-	Withholding taxes.  For example, interest paid abroad is
subject to 15% withholding when paid by resident foreigners and
citizens, and 20% when paid by non-resident foreigners.
-	Payment for work done by a foreign contractor is subject to a
2.5% withholding rate when paid by resident foreigners and citizens,
and 3% by non-resident foreigners,

10. WILL OUR INTELLECTUAL PROPERTY BE PROTECTED IN MYANMAR ?

There has never been specific trademark legislation in Myanmar,
although a draft law is presently under consideration.  A prudent
investor should not rely on its being enacted immediately.  Most
companies protect their trademarks by filing a declaration of
ownership with the Registrar of  Deeds in Yangon and placing a
cautionary notice in the local newspaper, the New Light of Myarnmar.
This is not a true registration, however, and would be considered only
to be evidence of a mark's use and ownership.  While technically this
evidence could be used in a common law 'passing off ' action against
an infringer, it would be an ixnprudent investor indeed who acted in
complete reliance on the certainty of prompt and effective legal
redress in a Myanmar court.

That being said, the following is also true.  Our experience is that
the brazen infringement of trademarks is rare, and that once their
ownership has been established to offictaidom's satisfaction further
infringement can sometimes be discouraged by other means.  We would
advise extreme caution, however, in the unrestricted transfer of
proprietary technologies.

II. CONCLUSION.

If there is a conunon thread running through our discussion it is that
business in Myanmar cannot be done by remote control.  For the serious
investor nothing will substitute for exploratory visits and
introductions to and meetings with local businessmen, professionals,
and government officials.  The development of such relationships, as
well as a sensitivity to the subtleties and undercurrents of Myarunar
life and to "how things are always done" in Yangon, is not only
important to anyone considering doing business in the country but so
important as to render it foolhardy even to consider a business
enterprise in Myanmar without first having done it.

And even if one does not plan to invest in Myarunar in the near
future, the far-sighted investor will consider whether now is not the
time to beginthe process of building this type of knowledge base and
relationship.  All else aside, Yangon may be one of the most pleasant
cities in Asia in to do such research.
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James Finch and David Schmahman

1.	James Finch is a partner in the law firm of Rtissin & Vecchi,
International Legal Counsellors, LLP and is its resident partner in
Yangon, Myamnar.

2.	David Schmahman is a partner in the Boston, Massachusetts law
ftrm of Nutter, McClennen & Fish, LLP.

The authors have collaborated on numerous matters relating to Myanmar.




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