Tax break for lucrative mine may cost Myanmar $163m while companies reap huge profits

Myanmar is set to lose out on hundreds of billions of kyat to an Australian-led mining consortium under a tax relief scheme – even though the project in Shan State is expected to be hugely profitable.

A consortium that includes Perth-based Myanmar Metals, which has a 51% stake in Bawdwin mine, is planning to apply for a tax holiday that could save it an estimated 237.5 billion kyat – or roughly $163m.

That is enough to pay for more than 109,000 primary school teachers’ salaries for a year.

The mine will be one of the world’s top producers of silver and lead, generating Myanmar Metals and its partners, Win Myint Mo Industries and East Asia Power enormous wealth.

Myanmar Metals argues the incentive is needed because the conflict-torn state is a risky investment. Not paying corporation tax for seven years will make it easier to improve the local economy, it says.

But a new report by Berlin-based OpenOil, a company which advises governments on mine and oil contracts, suggests the Bawdwin joint venture stands to make a massive profit on the venture even without a tax break.

“Bawdwin looks as though it would still be ‘investible’ without the tax break,” OpenOil’s director Johnny West told Myanmar Now.

“It looks clear from our analysis… that such an incentive wouldn’t play a significant role in determining the mine’s profitability,” he added.

Mae Buenaventura, senior policy officer at the Asian Peoples’ Movement on Debt and Development, said: “Income tax holidays especially for large scale mining are a mere cash transfer by countries that are cash-strapped to begin with.

“They must be scrapped immediately as part of progressive tax reforms.”

A decision on whether to grant Bawdwin the tax break is expected later this year.

It will be up to the Myanmar Investment Commission, which says the company still needs to apply for permission to develop the project.

Lucrative site

Bawdwin mine, which contains rich deposits of silver, lead, zinc and copper, is among the most lucrative in Myanmar. By 2023, it is expected to produce more in tax revenues than the country’s entire mining industry did in 2017.

OpenOil’s estimates are based on a pre-feasibility study of the mine and information published on Myanmar Metal’s website.

Myanmar Metals CEO John Lamb argued that the tax break is necessary.

“It’s a very, very difficult jurisdiction to gain investment in,” he told Myanmar Now.

Exploiting a “critical mineral asset in a remote and impoverished area” would benefit the local community and the country, he added.

“Local investment tends to have a higher impact per dollar spent, and tends to have a higher multiplier effect in the economy than money spent with big businesses in the major cities,” he said.

Aung Kyaw Moe, a Shan state-based member of the Myanmar Alliance for Transparency and Accountability, disagreed.

He said the region surrounding the mine is still at risk of conflict, and that the government must consider the mine’s impact on stability in the area.

“It is still too early to allow this mine,” he told Myanmar Now.

“The government should not grant them seven years of tax breaks while also giving them the country’s natural resources for all those years,” he added.

Tax holidays ‘inefficient and ineffective’

Tax holidays to incentivise investment from large companies are facing increased scrutiny around the world.

Many say these offers are too generous and cause countries to lose out on large sums of money that could be used to improve peoples’ lives.

A 2018 study by the Organisation for Economic Co-operation and Development (OECD) concluded that tax holidays are an “inefficient and ineffective incentive for mining” and said they can encourage abusive corporate behaviour.

“Investors may increase their income during the tax-free period by speeding up the rate of production, and shifting the profits offshore,” the report said.

The New York-based Natural Resource Governance Institute (NRGI) shares this concern.

“In dealing with investments like Bawdwin and in seeking to attract further large mines in the future, the government must strike a balance between offering tax terms that are attractive to companies, while also optimizing revenue for the country,” it wrote in a 2019 policy briefing.

“Corporate income tax holidays are among the most dangerous and damaging of tax perks, and yet also the most common among Asian developing countries,” said Buenaventura. “In the case of mining projects [they] are redundant and wasteful because the investment is likely to have been made anyway without the incentive.”

Myanmar investment law allows the government to waive the country’s 25% corporate income tax on profits in certain cases for three, five or seven years.

Without a tax holiday, Myanmar Metals’ projected profit on the Bawdwin mine would still be high enough to justify its investment, according to OpenOil’s analysis.

 

Investors would earn a 36% return with the tax holiday and over 30% without it. Both figures are well above the minimal rates investors usually accept for putting their money into such a project, according to OpenOil.

“Before deciding on whether or not to concede a tax incentive, it is important for any government to weigh both the cost of the incentive and the need for it,” said West.

“In the case of Bawdwin, it looks clear from our analysis—that follows the company’s own provisions—that such an incentive wouldn’t play a significant role in determining the mine’s profitability,” he added.

Myanmar Metals and Win Myint Mo Industries plan to negotiate a seven-year tax exemption with the government after submitting its final feasibility study in the first quarter of this year, according to company documents.

Production at the mine is expected to begin in approximately 12 months.

Secret agreements

NRGI found in a 2018 report that large mining companies investing in Myanmar had negotiated “bespoke” agreements that “deviate significantly from the standard terms” defined by the Ministry of Natural Resources and Environmental Conservation (MONREC).

“This creates risks,” the report said. “Negotiators may make unjustified and inconsistent concessions, which then must be rectified in subsequent renegotiations.”

As a result Myanmar risks losing out on significant tax revenues and creating an uncertain investment climate, it added: “Frequent changes to contracts deter investment and create opportunities for mistakes that can cost the country billions of kyat.”

The government does not usually disclose the terms of bespoke tax breaks, making it hard to know whether the public is getting a good deal.

Bawdwin mine contains enormous quantities of lead, copper and zinc and has the potential to dwarf the tax revenues of Myanmar’s entire mining industry.

Without the tax break, the government stands to make up to $1.87bn in the next 13 years from the mine, according to OpenOil’s analysis, though revenue levels depend on how the global market for these metals perform over time.

Even if it grants the tax holiday, the government will receive $112 million a year by 2023 in fees, charges, royalties and profits from a state-owned firm with a stake in the mine, according to OpenOil. That would be 40% more than the entire mining industry contributed in 2017. Myanmar Metals is projecting it will make a profit of $580m during the 13-year “starter pit” phase.

Formerly known as Top End Minerals, the company paid Myanmar’s Win Myint Mo Industries (WMM) — whose parent company National Infrastructure Holdings Co has held concessions since 2009 — a $1.5m deposit for the option to acquire an interest in the project in 2017.

It later exercised the option and acquired a 51% participating interest in the project, forming the Bawdwin Joint Venture consortium with WMM and another firm called East Asia Power.

There are no public details on how the revenues will be divided between the partners.

Kyaw Se, a director at Win Myint Mo Industries said the consortium “will only apply for a tax exemption in line with the investment law. We will request no special privileges.”

Reporting by Chan Thar, Nick Mathiason and Tin Htet Paing

Editing by Joshua Carroll and Danny Fenster

Photos by Kan Thar/ RFA

Finance Uncovered, a UK-based investigative journalism training and reporting organisation, contributed to this story.