China’s Colombo port logistic centre gets generous tax relief
Posted on December 25th, 2023

By Namini Wijedasa/Sunday Times

Colombo, December 24: President Ranil Wickremesinghe, in his capacity as Investment Promotion Minister, on Friday gazetted the initiative under the 2008 Strategic Development Projects Act (SDPA), stating that the aim was to turn the Colombo Port into a logistics hub for South Asia.

The use of the SDPA goes contrary to IMF strictures.

The multilateral financial agency has consistently held that the Act should be abolished or suspended until structures and processes are in place to evaluate the effectiveness of the offered incentives—that is, to determine whether incentives previously granted under the law have delivered the intended benefits to the country.

According to the gazette, China Merchants Port Holdings Company Limited (CMPort) holds 70 percent and the Sri Lanka Ports Authority (SLPA) holds 15 percent of the special purpose vehicle (SPV) set up to run the South Asia Commercial and Logistics (SACL) Hub. Access Engineering PLC owns the remaining 15 percent.

The company is also not expected to pay withholding tax for the entire project period of two years.

The corporate income tax exemption is for profits and gains generated from its activities and will start from the first year in which the company makes taxable profits or after two years from the commencement of commercial operations (whichever occurs earlier).

Dividends distributed and received by shareholders out of the exempted profits and gains shall be free from income tax for 15 years and one year thereafter. The Value-Added Tax (VAT), the Ports and Airports Development Levy, cess and Customs duties will not apply to imports of any project-related goods, as approved by the Board of Investment (BOI), for two years. The expatriate employees of the project company shall be exempted from income tax for five years (subject to a maximum of 30 expatriates).

Investment in the first phase is stated as US$ 280 million or Rs 91.2 billion based on a debt-to-equity ratio of 70:30 (70 percent debt, 30 percent investment). The total project is to design, construct, finance, develop, operate, manage, maintain, and transfer, and it is a 50-year public-private partnership with the SLPA.

The gazette defines the project as a national interest that is likely to bring economic and social benefit to the country” by providing efficient and effective cargo clearance to or from the logistic warehouses; quality bonded storage facilities; and warehouse facilities including temperature-controlled storage.

The first phase includes building warehouses and offices, for which two years have been granted from the date the agreement is entered into with the Board of Investment (BOI). The second phase will be a distribution and trading centre which will be carried out as a build, operate and transfer agreement.

In 2016, the then-Wickremesinghe-led Government suspended the SDPA under an IMF programme that it had signed on to. In its most recent Governance Diagnostic Report on Sri Lanka, the IMF reiterated that the legislation continues granting wide-ranging tax exemptions without scrutiny”—where projects are selected by the BOI and approved by the Investment Promotion Ministry in consultation with the Finance Ministry.

There is no definition of what criteria need to be satisfied for a project to be of strategic relevance, and the revenue forgone from such projects is not systematically contrasted against their potential benefit in a transparent process,” the IMF report observes. Crucially, the DoFP [Department of Fiscal Policy] is not involved in the selection or evaluation of projects, and any data that may exist is not shared with the department.”

The DoFP is the government’s focal point in shaping the tax system, guiding the reform of most taxes, except for the special commodity levy and customs duties, which are under the authority of the Department of Investment and Trade.

While the specific concessions given to companies benefiting from provisions of the SDP Act differ, the revenue consequences are likely significant,” it states.

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