Foreign Investment and Ownership in Sri Lanka - Think about the realities

There just does not seem to be a proper assessment of what type of foreign participation Sri Lanka needs, wants or should attract. As a result there is a very disjointed and somewhat fragmented approach to foreign ownership and investment in Sri Lanka. The powers running the country just don’t seem to have any sense of what direction they should approach this very important and politically sensitive topic, nor do they understand the pros and cons.

I will gloss over some of the areas and will in future take one at a time to try and give an opinion of the positives and negatives of each type of investment. We must first realize that the world is becoming a smaller place and with the ever increasing migration of Sri Lankans to pasture overseas, there is inevitably a desire of people from other countries wanting invest and/or live in Sri Lanka.

First there is property ownership. Technically the foreigner who wants to purchase property, be it just land or homes on the Island has to pay a 100% tax on the purchase price to the government. One way this is avoided, is in under-pricing the purchase where an element of the purchase is paid to the seller in foreign currency into an account nominated by the seller. Only the value used for the deed on which stamp duty is paid is used to calculate this tax. Other ways this can be avoided is by the purchase of companies with exchange control permission, and these companies which are Sri Lankan can then purchase, build or develop property free of any additional taxes. I am sure a smart mind can come up with more novel schemes, and often foreigners buy in the names of locals to avoid paying the tax.

There is the BOI route which is highly publicized, but in reality unbelievably complicated, and fraught with pot holes along the way. The idea of the BOI is to pave the way for foreign investment, to make it easy and give these investors considerable tax concessions that are not available to local companies engaged in the same business. This enrages and disadvantages local companies. The duty concessions of these companies receive makes it very hard for local companies to compete as there is no level playing field especially when it comes to import duty concessions, unless the local party also forms a new BOI company to obtain these same concessions. BOI investments are also available to 100% local businesses which fall under certain parameters as set out under the Board of Investment rules. The taxation concessions, in my view are significant enough to put existing companies out of business, and is a significant area that requires a complete tax overhaul to make it more equitable to the investor, be they local or foreign, irrespective of them being old or new.