The absorption feature detected in the prompt X-ray emission of GRB 990705 bears important consequences. We investigate different production mechanisms and we conclude that the absorbing material cannot be very close to the burster and is likely to be moderately clumped. These properties challenge any model in which the burst explodes in coincidence with the core-collapse of a massive rotating star. We show that the straightforward interpretation of the absorption feature as a photoionization K edge of neutral iron faces a severe problem in that it requires a huge amount of iron in the close vicinity of the burster. We then discuss an alternative scenario, in which iron ions are kept in a high ionization state by the burst flux, and the absorption feature is produced by resonant scattering from hydrogen-like iron, broadened by a range outflow velocities. In this case the physical conditions and geometry of the absorbing material are fully consistent with the presence of a young supernova remnant surrounding the burst site at a radius R ~ 10^{16} cm. We finally discuss how this remnant might affect the generation of afterglows with a standard power-law flux decay.