Taxation experts and economists are sounding the alarm about the proposed tax-free regime for the Colombo Port City, warning that the exemptions are unlikely to attract foreign investors but could easily turn the reclaimed island into an offshore tax haven and money laundering hub for foreigners and locals alike.
The proposed Port City Economic Zone bill presented to Parliament on Thursday (9) is raising serious questions about whether Sri Lanka is currently being governed by a criminal cartel, using a super majority in Parliament to enact legislation purely to drive profit for a burgeoning class of oligarchs and racketeers.
The bill seeks to establish a parallel governance structure for the Port City adjacent to Galle Face, which will be run by a special Commission appointed by the President. Parliament will have no oversight in the administration of the Port City. Companies and individuals setting up shop in the Port City will be entitled to a 40-year exemption from a slew of Sri Lankan taxes, including levies imposed on casinos and gaming, excise and foreign exchange controls, entertainment taxes, customs levies and income tax.
Renowned political economist and former MIT professor and taxation expert Mick Moore explained in a recent article that global experience had proved that sweeping tax exemptions do not attract foreign investors. Prof. Moore pointed out that foreign investors are far more attracted by the reliability of a tax structure, rather than exceptions that can be removed at the stroke of a pen.
Prof. Moore argued that tax exemptions were unlikely to draw foreign investors to the Port City because tax rates on corporates are already quite low in Sri Lanka with many exemptions for VAT etc.
“There is however a broader question. Port City is intended, among other things, to become a financial services hub. That is an ambitious target. Dozens of governments in the world talk of doing the same thing, but success is rare,” Moore explained.
The Professor said that a successful financial hub requires two things that cannot be quickly achieved. “One is density: a cluster of companies operating within the same niche area of financial services, to generate synergies. The other is probity: a reputation for high quality, honest regulation, supported by a competent and efficient judicial system,” he wrote.
“Without that, the only money that is entrusted is likely to be of very doubtful provenance, and highly mobile,” Prof Moore warned.
He also raised the alarm about the fact investors could opt-in to the Port City tax benefits on activities undertaken anywhere in Sri Lanka, “SUBJECT TO THE AGREEMENT OF THE PRESIDENT OR THE MINISTER IN CHARGE”
“Manufacture brushes in Mawathagama, but pay Port City taxes, i.e. none – no income tax, no value added tax, no excise tax, no debit tax, and no customs duties. Even after five years, there would be little to prevent any company operating in the island from establishing a (shell) affiliated company in Port City and transferring all of its taxable profits to that company,” Professor Moore wrote.
Legal experts have criticized the Government’s decision to table the Port City bill just ahead of the April new year holidays, giving critics less than four days to challenge the draft law in court because of the string of public holidays.
“The all-powerful port city commission could have foreigners on it. There will be foreign arbitrators, compulsory arbitration (I.e. judgment by foreigners) a specialized system of laws (no one country one law) foreign lawyers allowed to practice,” said lawyer Luwie Ganeshathesan on Twitter.
The attorney at law pointed out that foreign involvement in the Port City went beyond everything the SLPP said could not happen in the context of investigations and prosecutions into human rights abuses.
The Rajapaksa led Joint Opposition (JO) raised hell over the inclusion of ‘foreign judges’ in the 2015 UN Human Rights Council resolution, even though the resolution did not specify that the involvement of foreign judges and other experts would be in the context of arbitration or judgment in the cases. At the time, the JO and its self-proclaimed legal experts, including former Justice Minister Wijeyadasa Rajapakshe said including “foreign judges” in an accountability mechanism was a clear violation of Sri Lanka’s constitution.
In Opposition, the Joint Opposition also strongly opposed the Millennium Challenge Corporation (MCC) grant worth over USD 600 million on the basis that it would create a fictional “economic corridor” from Trincomalee to the North Central Province, and Sri Lankans would require a “visa” to cross the corridor and travel to Anuradhapura.
The Government Medical Officers Association and the Bar Association of Sri Lanka strongly opposed the MCC grant and forced a deferral of its signing in 2019 based on sovereignty loss and foreign interference. The Bar Association and the GMOA also strongly opposed the Economic and Technology Cooperation Agreement (ETCA) that was proposed to be signed between India and Sri Lanka, on the basis that it would permit Indian lawyers and doctors to work in Sri Lanka.
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