Countries with a VAT system have a mechanism in place aimed at preventing the accumulation of VAT over the value chain. The idea behind it is that ultimately only the end-customer should bear the burden of VAT. Transactions between businesses should be VAT neutral.
The commercial tax system in Myanmar which in many aspects resembles VAT also allows the offset of tax charged in incoming invoices (“input tax”) with tax charged in outgoing invoices (“output tax”). However, the offset is limited to certain transactions.
A domestic manufacturer can offset the commercial tax paid when purchasing or importing raw materials and semi-finished goods with the commercial tax charged to the buyer of the finished goods. Furthermore, a reseller can offset the commercial tax paid when purchasing or importing goods with the commercial tax charged to the buyer when reselling the goods.
Apart from these transactions, it is not possible to offset input with output tax. In particular, services companies are prevented from obtaining a credit for commercial tax charged in incoming invoices and from issuing certificates that could be used by their recipients to obtain a commercial tax credit. An exception is, of course, trading companies: “Trade” is considered to be a service under schedule 7 to the Commercial Tax Law, but a trading company can, as a reseller, offset input tax on inventory purchased with output tax on inventory sold.
The limits on the offset of commercial tax is something that foreign sellers have to bear in mind when calculating the price of machinery, equipment, construction material and other goods that they intend to sell to companies in Myanmar. If, for instance, a foreign manufacturer of machines sells its products to a factory in Myanmar, this factory has to pay 5 percent commercial tax when importing the machines (unless it happens to enjoy an exemption, eg under the Citizen Investment Law) without the possibility to offset the amount with output tax as the machines are not “raw materials and semi-finished goods”. As a result, the factory’s costs for the machines increase accordingly.
Further limits on the offset of commercial tax are contained in schedule 6: Domestic manufacturers and importers of luxury goods listed in this schedule may not offset commercial tax paid when purchasing or importing raw materials or semi-finished goods, or when importing the luxury goods, with commercial tax charged to the buyer. As an exception, such an offset is possible in the case of petrol, diesel oil and jet fuel according to notifications 323/2012 and 543/2013.
The upper limit on any offset is the amount of output tax. It is not possible to claim a refund of the excessive amount if the input tax is higher than the output tax.
Example: Domestic beer manufacturer A purchases raw materials from X, a trader of agricultural products, for 105 (net price 100 plus 5pc commercial tax). A produces the beer and sells it to wholesaler B for 330 (net price 220 plus 50pc commercial tax). B resells it to supermarket C for 378 (net price 360 plus 5pc commercial tax). A cannot offset commercial tax paid to X with commercial tax collected from B as beer is listed in schedule 6. From the commercial tax in the amount of 110 paid by B to A, B can offset 18 with the commercial tax paid by B to C. B cannot claim a refund of the remaining amount as the Commercial Tax Regulations states that “the offset amount shall not exceed the tax due on the resale of goods”.
Sebastian Pawlita and Thinzar Khine are with Polastri Wint & Partners Legal & Tax Advisors.