Burma Experiments with Special Economic Zones

After the two-decade failure of Burma's so-called market economy, the ruling military junta has announced a new "Myanmar Special Economic Zone Law" to attract more foreign investment in the country with an unprecedented package of benefits.

The law, signed into effect by junta head Senior-Gen Than Shwe, is designed to establish Special Economic Zones to attract foreign direct investment with a wide range of economic concessions, allowing businesses to operate freely in specially designated areas.

Contracted foreign direct investment has remained stubbornly low despite efforts to increase it, especially in the face of a total ban on investment by the United States, the European Union and others because of the junta’s political repression of its own people. US dollar transactions are barred. That has left the door open to China, India, Thailand and South Korea, which have largely ignored the sanctions.

Burma’s Central Statistical Organization reported in July that FDI amounted to US$16 billion. But of that, someUS$9.81 billion was in the oil and gas sector with another US$997 million in mining and another US$5.03 billion in electricity production. Thus, of the total, virtually all of it was in extractive industries that contributed almost nothing to the real economy.

The new law defines three specific zone types: special economic zones, export processing zones and sub-trading zones. It also classifies the roles of developers as infrastructure builders and investors to do business activities in the SEZ. It includes a package of benefits to attract investors, both foreign and local, who intend to set up businesses within the export-processing zones.

Investors are to benefit from income tax exemptions for five years after starting an export business and to pay just 50 percent of taxes for the next five years. Investors who reinvest export profits in the zone can apply for a further five years of 50 percent tax relief.

Moreover, after the expiration of the previous tax exemptions, large-scale businesses that are able to export more than 50 percent of their products within a year can apply for tax exemptions for that year under Article 18 of the law. (Medium- and small-scale businesses must export 60 and 70 percent of their goods, respectively, to qualify for the same exemption.)

Export-oriented enterprises can also apply for exemptions from commercial taxes and value-added tax (VAT) for their export items, while imports of raw materials, machinery and equipment are eligible for exemptions from customs duties under Articles 23 and 24 of the law.

Companies importing machines and motor vehicles will be exempt from paying customs duties and other revenues for the first five years, and will receive a 50 percent reduction for the next five years.

The law also gives enterprises set up outside of export processing zones the right to apply for tax exemptions, but only if they are operating within an SEZ.

One of the biggest challenges facing foreign investors looking to do business in Burma is the unreasonable official foreign exchange rate, which is very different from the real market rate.

The law allows business enterprises within the SEZ to open bank accounts in any bank without specifying whether the bank is national or foreign in an attempt to get around the block on US dollar transactions.

Although the law gives a number of benefits and rights to the business entities operating in the SEZ, they are entitled to exercise them only within the specified area. The law carefully distinguishes between SEZs and the rest of the local market through separate administrative procedures as well as income tax and revenue walls.

The last chapter of the law guarantees that the government won't nationalize businesses in the SEZ "within the permitted period."

The launch of the law comes months after the military junta revealed a plan to establish the country's first-ever SEZ and international deep-sea port in Tavoy, in southern Burma's Tenesserim Division last November. The junta gave a 60-year grant to the Italian-Thai Development Public Company Ltd., Thailand's largest construction conglomerate, to construct the multibillion-dollar project under a BOT (Build-Operate-Transfer) system.

Some local businessmen cautiously welcomed the law, but pointed out that Burma's business environment would not significantly improve unless the government reduces bureaucratic procedures and provides, for example, one-stop service to eliminate red tape.

Asia Sentinel has a content-sharing agreement with The Irrawaddy.