Thursday, August 17, 2017

Commercial tax: like VAT, but not quite

The most important taxes businesses deal within Myanmar are income tax and commercial tax. Very simply put, commercial tax is levied on a company’s revenue, whereas income tax is levied on what is left from the revenue after business expenses have been deducted.

Commercial tax is similar to the VAT of other jurisdictions, but there are two important differences: Unlike in the case of VAT, services are not generally subject to commercial tax. And it is not always possible to offset input with output tax.

Commercial tax applies to the sale of goods by a domestic manufacturer, and to the resale and the import of goods. There is no commercial tax on the export of goods with very few exceptions. Services are only subject to commercial tax if they are listed in schedule 7 to the Commercial Tax Law.

There is a distinction, which is probably not found anywhere else in the world, between the initial sale by the domestic manufacturer of goods and subsequent sales by resellers. If, for instance, B, a wholesaler, buys beer from manufacturer A in order to sell it to supermarket C, the sale from A to B is treated differently from the sale from B to C. In fact, the sale from B to C is a “trade”, which, interestingly, is considered to be a service.

The tax rate for trade (ie, the sale from B to C), as for the other services listed in schedule 7, is 5 percent. The tax rate for the initial sale by the manufacturer (ie, the sale from A to B) is usually also 5pc. However, the initial sale of goods listed in schedule 1 (mostly agricultural products and other goods considered to be essential) are tax exempt. Furthermore, there are higher rates for the initial sale of luxury goods listed in schedule 6: 100pc for cigarettes; 50pc for other tobacco products, betel chewing preparations, alcoholic beverages, teak and other hardwood logs; 30pc for jade and other precious stones; 25pc for certain cars; 10pc for petrol, diesel oil and jet fuel; 8pc for natural gas.

Beer is listed in schedule 6. The commercial tax rate for the initial sale from A to B is therefore not 5pc, but 50pc. The subsequent sale from B to C, however, is taxed at 5pc. The tax base is the turnover of the sale.

Commercial tax is also charged on the import of goods. The tax rate is 5pc with the exception of luxury goods listed in schedule 6 which are subject to a higher rate. There is no exemption for “essential goods”. The tax base is the “landed costs” which is the total of customs duty and 1.05 times the CIF value. It is important to realise that customs duty applies in addition to commercial tax; these are two separate taxes.

Commercial tax is not charged on the export of goods with the exception of the export of teak and other logs and cuttings (50pc of the turnover), jade and other precious stones (30pc), natural gas (8pc) and oil (5pc).

Only services listed in schedule 7 are subject to commercial tax (at 5pc of the turnover). Apart from trade, these are in particular the design and renovation of buildings, insurance, brokerage, agency services, legal advice, accounting, advertising, cinemas, services in the tourism sector, passenger transport, sale of food and drinks, entertainment, vehicle maintenance, beauty and fitness services, printing, computer-assisted design and data input.

Thinzar Khine and Sebastian Pawlita are with Polastri Wint & Partners in Yangon.