Sherpa Hossainy's Blog

Foreign investment rules in practice in Myanmar (Part 4)

Posted in Agriculture, Investment, Legal, Myanmar, Yangon by Sherpa Hossainy on July 10, 2013

Part 4: Manufacturing of foods and beverages; non-food manufacturing; agriculture, forestry, livestock and fisheries

Published in Myanmar Business Today (Vol 1, Issue 22) on July 4, 2013

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Recently, international law firm Clifford Chance and VDB Loi have jointly released a briefing note on the practical implementation of the Foreign Investment Law in Myanmar. This is the fourth and final part of Myanmar Business Today’s series of sector-wise analysis based on the briefing. This week’s topics are manufacturing of foods and beverages; non-food manufacturing; agriculture, forestry, livestock and fisheries.

The Myanmar government implemented the country’s Foreign Investment Law (FIL) 2012 with two notifications or FIL Rules, creating a practical framework to match the government’s policy of welcoming foreign investment. Both notifications, 11/2013 of the Ministry of National Planning and Economic Development and 1/2013 of the Myanmar Investment Commission (MIC), were released on January 31.

Manufacturing of beverages

A joint venture (JV) is in principle required for the “production, blending, distilling, bottling, and distribution of beverages,” according to the rules. A JV is also required for barley fermentation and the production and distribution of products made from barley fermentation. In addition, a JV is required for all “purified water enterprises”.

“In practice, the commercial tax, a combination of an excise duty and a turnover tax, dictates how a producer of beer or spirits should be structured in Myanmar. The commercial tax weighs heaviest on the importation phase and the manufacturing phase of the supply chain, and investors may need to carefully devise a supply chain over different entities in Myanmar, keeping in mind unnecessary tax imposts and licensing restraints,” Edwin Vanderbruggen, co-author of the report and a partner at VDB Loi, a specialised law and tax advisory firm with offices across Southeast Asia, told Myanmar Business Today.

The rules say for the production, distribution and sale of soft drinks and other beverages, the investor must use at least 20 percent local raw materials for the first three years of production. Afterwards, the investor must use at least 60 percent local agricultural raw materials.

Manufacturing of foods

A JV is as a rule required for the “production, canning and distribution of foodstuffs except dairy products”, according to the rules. However, the foreign investor may hold up to 80 pecent in the JV as per current regulations.

“In reality a foreign investor would not purchase shares from an existing Myanmar shareholder in a local company, or subscribe for shares issued by such existing Myanmar company. In other words, the JV company would not be the existing company of the local partner. Instead, a new JV company is established under the FIL. Licences, assets and land leases are transferred from the local partner company to the new JV company through a contribution in capital. The transfer is done based on the terms agreed between the parties, subject to MIC approval,” Edwin said.

For the production, distribution and sale of vegetable and animal oils, at least 80 percent local raw materials must be used, while for production of Monosodium Glutamate (MSG), local raw materials must be used for the first three years of production.

Non-food manufacturing

Generally, there is no requirement for a local partner when manufacturing non-foods. A JV is required only for a few selected sectors including the production, distribution and sale of cotton threads, various types of paper, rubber, plastic and leather.

“Notification 1/2013 does not set out a lot of local content requirements in non-food, cosmetics and cigarettes being the main exceptions, but in our experience the Ministry of Industry may request the use of a certain amount of local raw materials,” Edwin explained. The Ministry of Industry provides recommendations to the MIC about the feasibility of proposed manufacturing investment projects.

Land used for manufacturing that is leased from the government or private parties must be obtained with the permission of the MIC. “Generally a minimum capital amount of $500,000 is required for manufacturing companies with an investment permit,” Edwin said.

Agriculture, forestry, livestock and fisheries

“Currently, we mostly see interest in palm oil, sugar, rubber, rice and livestock. Although some agricultural and livestock activities feature on the list of activities that require a JV, it is our view that the government may in practice decide to allow large investment projects in this field that are considered particularly beneficial to the country on a fully foreign-owned basis,” Edwin said.

In most cases, the government can offer land to the investor that is suitable for the project, either through the Ministry of Environmental Conservation and Forestry or the Ministry of Agriculture and Irrigation. Different lease prices and maximum sizes of plots apply depending on the authority and the status of the land.

Forests are normally not available for investment projects, but degraded forests may be leased for various projects, including wood-based industries and reforestation. Although the union government in theory has final say, the local authorities also need to cooperate with the allocation of land for a project. If the land is already in use by local farmers or residents, the resettlement and compensation may be particularly challenging and at times a major risk to the completion of the project.

A JV is required for small-scale agricultural businesses, as well as for agricultural businesses that do not use modern machinery. A JV is also required for the “growing and planting of traditional medicinal herbs (plantations),” as well as the “production and distribution of hybrid seeds”, the rules say.

A foreign investor involved in the development of modern farm land, production and distribution of seeds, fertiliser, pesticides, mechanised farm tools and machinery or crops must obtain a confirmation from the Union Government Board and comply with the guidance of the Ministry of Agriculture and Irrigation.

For livestock and fishery activities, a JV is required for small-scale livestock businesses, livestock businesses that do not use modern machinery and fishing in lakes, inland waters and from shores. Investors wishing to fish offshore in Myanmar territorial waters for saltwater fish, shrimp and other marine animals must operate through a JV and obtain the prior permission of the government.

According to the rules, investors involved in fresh or saltwater fish breeding may not breed such fish as would affect Myanmar’s biodiversity. The production of bee products must be conducted in accordance with Good Manufacturing Practice (GMP) technology. Investors involved in lab testing of marine products must perform such tests in accordance with ISO 17025, the rules say.

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