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    IMF red flags Sri Lanka’s China-backed tax free zone

    GovernanceAccountabilityIMF red flags Sri Lanka’s China-backed tax free zone
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    IMF red flags Sri Lanka’s China-backed tax free zone

    The Colombo Port City SEZ conflicts with OECD’s minimum global tax regime. As a dollarized entity, the Port City has been envisaged to be free from currency depreciation and hardships created by the soft-pegged central bank of Sri Lanka.

    Sri Lanka’s China-backed Colombo Port City special economic zone is in conflict with the stipulated minimum 15 per cent global tax, a report from the International Monetary Fund (IMF) has warned. The port city is giving long term tax holiday.

    The tax free jurisdiction could draw dirty money, it is apprehended.

    “The creation of a low-tax jurisdiction is likely to draw attention from the international community given a renewed focus on such matters, including in the context of the recently agreed OECD-led Inclusive Framework,” an IMF report on Sri Lanka said.

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    “It would therefore be important to adhere to international tax and regulatory standards and information exchange agreements established with foreign counterparts, including those guided by the OECD’s Common Reporting Standard.

    There is also pressure to reconsider the blanket tax-free structure of the Colombo Port City special economic zone and cover it under the country’s income tax laws.

    Colombo Port City SEZ is free from most turnover taxes. The freedom from taxable income tax can result in the money being siphoned to serve corrupt means. It can also kill investible capital and jobs by giving it to politicians to fritter away on the public sector expansion and vote buying gimmicks.

    Controversial law

    The SEZ has had a controversial history and islanders see it from a lens of corrupt links the ruling Rajpaksa family has had with the China, beginning with the Hambantota port.

    The construction contract for the project would be given to the China Harbour Engineering Company (CHEC) on 269 hectares (ha) of land reclaimed from the sea.

    The SEZ owes its legitimacy to the ‘Colombo Port City Economic Commission Act’ of 2021 that provides for the establishment of the Colombo Port City Special Economic Zone (SEZ) and the Colombo Port City Economic Commission (CPCEC).

    There will be no elected representatives and disputes will be referred to the arbitration alone, keeping the SEZ outside the jurisdiction of the Sri Lankan courts.

    The law was made to provide for a single-window clearing facilitator for the promotion of ease-of-doing business within the SEZ to attract investment.

    According to the law, the CPCEC would be appointed by the President of Sri Lanka, not by the country’s Parliament, and would be the sole authority to grant registrations, licenses, authorisations, and other approvals to carry on businesses and other activities within the Colombo Port City (CPC).

    The act raised concerns in Sri Lanka’s civil society. Whistle-blowers point out that CPCEC, which is vested with wide-ranging powers, will comprise non-citizens as members. It has also been kept out of the purview of the laws and regulations of the local government bodies.

    Tax haven

    State spending in the island nation has risen from around 17 per cent of GDP in 2014 to 20.6 per cent under a ‘revenue based fiscal consolidation’ that made a mockery of government adherence to spending cuts.

    Businesses that invest in the Colombo Port City SEZ could attempt avoiding taxes, the IMF has warned. For this reason, they should file a tax return, even if nothing was paid, the IMF has suggested.

    “Effective revenue administration is critical for mitigating risks from tax planning between offshore entities and their onshore affiliates and can be supported by significantly scaling back the list of taxes eligible for exemptions to reduce administrative hurdles,” the IMF said.

    ”IRD’s capacity and expertise should be leveraged to safeguard transparency and accountability, by requiring all SEZ companies (regardless of their tax-exempt status) to file tax returns.

    “Besides, a tax expenditure review covering the SEZ should be part of the annual budgetary process and subject to periodical evaluation.”

    Besides conflicting with OECD’s minimum global tax regime, the Colombo Port City SEZ has been envisaged to be free from currency depreciation and hardships created by the soft-pegged central bank of Sri Lanka. It’s dollarized status too comes with its share of concerns.

     

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