Jade and Gem Smuggling Costs Myanmar Billions

Myanmar’s poorly regulated jade and gemstones production means up to two-thirds of all the country produces is possibly not subjected to tax, a new report by the Natural Resource Governance Institute (NRGI) reveals. Experts believe that this, as well as chronic undervaluing of registered jade and gemstones, costs the country billions of dollars in lost tax revenue.

Myanmar produces 90 percent of the world’s jade and is a leading producer of rubies, sapphires, and other varieties of colored gemstones. China is the largest beneficiary of this trade, with untold amounts of jade and gemstones being imported and smuggled across the border to meet the demands of its growing elite.

Myanmar, a former British colony, was under military rule from 1962 to 2011, during which time it was increasingly internationally isolated and became one of the world’s most impoverished countries. Military rule was dissolved in 2011 and since then, the country has engaged in a turbulent liberalization process. Its GDP has grown steadily over the past several years, reaching an all-time high of $69.32 billion in 2017.

Despite significant growth, 32 percent of Myanmar’s citizens still live in poverty and the nation’s infrastructure is ranked 146th out of 148 countries in the world. This is in large part because Myanmar does not collect enough tax. A recent report by the Asia Foundation revealed that Myanmar’s tax receipts for 2016-17 were only 6 to 7 percent of its GDP, the lowest among all ASEAN nations. Myanmar’s tax receipts are also lower than those of its peers globally — countries at similar income levels on average collect 10 to 20 percent of their GDP in taxes. As NRGI suggests, introducing a new tax regime for the jade and gemstone sector and enforcing it evenly and transparently could provide substantial revenue to be used for the provision of sorely needed public goods and social services.

Myanmar has made positive steps in this direction. In 2014, as part of the government’s efforts to join the international community and to reduce corruption in its mineral sector, Myanmar joined the Extractive Industries Transparency Initiative (EITI) as a candidate country. EITI membership requires both companies and country governments to publicly disclose their revenues from extracted resources. Simply put, the figures from these reports should match, and if not, the public can see where the money went missing.

In March 2018, Myanmar submitted EITI reports for fiscal years 2014-15 and 2015-16. While marking significant progress, NRGI writes that these disclosures have been extremely limited in scope and accuracy. Nearly half of jade and gemstone company data shared from these reports was missing, incomplete, or irreconcilable with government data. Moreover, after interviewing industry stakeholders, NRGI believes that the Myanmar government only collected government revenue on 2 to 5 percent of production value.

Part of the problem, the report reveals, is Myanmar’s taxation system. Paul Shortell, the report’s author says, “If the effective tax rate was actually [as high as the official rate], no one would be mining in Myanmar.” The official tax system double or triple taxes jade and gemstones, motivating companies to underreport or undervalue their production. Covert payments to regulators and power brokers drive these and other forms of tax evasion. Worse still, many companies instead smuggle jade and gemstones into neighboring China where they may fetch comparable or better margins.

Just because companies aren’t paying government taxes on jade and gemstones doesn’t mean that they’re not paying fees for their extraction and export. Since Myanmar’s independence, civil wars have been a near-constant feature, and the jade and gemstone trade exacerbates issues of ethnic and subnational autonomy. In an interview, Paul Donowitz of Global Witness told The Diplomat that both the Kachin Independence Army (KIA) and government-sponsored militias control smuggling routes and extort fees, involving the military and border guard in this widespread ring of corruption. These revenues have funded armed conflict, which has led to death, the use of child soldiers, and the displacement of over 100,000 people since 2011, according to UN estimates. Moreover, according to Myanmar expert Hunter Marston of Global Wonks, “The jade industry fuels insurgency and a plethora of other illegal economies, including prostitution, drugs, as well as labor and human rights abuses.”

China buys the vast majority of Myanmar’s jade. According to NRGI’s report, between 2012 and 2016, the Myanmar government registered selling an average of $1.2 billion per year at its official emporiums. However, China reported importing more than twice this amount — $2.6 billion — over the same period. While it is clear that these figures are incongruous unto themselves, NRGI estimates that the value of Myanmar’s jade production in fiscal year 2015-16 alone was between $3.7 billion and $43.1 billion, far larger than either Myanmar or China’s reported trade amounts.

China’s demand for jade and gemstones has grown as the country has become wealthier, with high-end jade sometimes exceeding the price of gold. However, the country’s consumption of Myanmar jade may be slowing. Since taking office in 2012, Chinese President Xi Jinping has engaged in a fierce anti-corruption campaign. Where before traders paid large bribes to smuggle jade and gemstones across the Chinese border, they now proceed with greater caution.

In addition to its heavy investment in Myanmar’s jade trade, China has many reasons to promote stability along its Myanmar border. According to Dr. Bradley Jensen Murg, a professor of political science at Seattle Pacific University who specializes in Southeast Asian politics, stability in Myanmar is crucial in the Belt and Road Initiative’s construction of a corridor linking Yunnan to the Bay of Bengal. “It is difficult to overstate the importance of the Myanmar corridor,” Murg said. “If instability continues or exacerbates in these areas, the future of the corridor will be uncertain and one of China’s flagship Belt and Road Initiatives will fail or at the very least be seriously delayed.” Accordingly, China has also been involved in trying to facilitate peace in northern Myanmar.

This past summer, Beijing played a behind-the-scenes role in encouraging representatives of Myanmar’s Northern Alliance, including the KIA, to participate in peace talks. Despite China’s involvement, peace talks have yielded little progress, especially on issues of natural resource ownership.

A new Jade and Gemstone Law is currently winding its way through the Myanmar legislative process, though reformers are not optimistic about its content, explaining that its formulation was opaque and did not include key stakeholders. Maw Htun Aung, NRGI’s Myanmar country officer, said that the draft law “is not a radical departure from business as usual.” Unfortunately, as NRGI’s report explains, improving revenue collection will require significant reform of the tax system and strengthening of monitoring and oversight.

In conversation with The Diplomat, Thet Zaw Htwe, of Myanmar-based NGO Spectrum Sustainable Development Knowledge Network, explained that getting its tax code right will have reverberations beyond the jade and gemstone sector and is critical to Myanmar’s future. “The extractive industries set a bad precedent for companies to evade taxes and to not engage in good practices. Once all these natural resources dry up or are no longer economically viable, all we’ll have left is the bad precedent of tax evasion rooted in our culture. Tax evasion of any kind, not just for natural resources, has to be corrected, otherwise it will set a bad precedent for the future.”