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Sri Lanka to give tax free salaries to top executives of billion dollar China project

ECONOMYNEXT – Sri Lanka will give tax free salaries to 30 executives of billion dollar property project from China which will be a landmark in the reclamation that is expanding the island’s capital into the Indian Ocean.

“During the project implementation period, up to a maximum number of thirty (30) expatriates staff at any given
time shall be exempted from the payment of Pay As You Earn Tax (PAYE) / Personal Income Tax Applicable,” a gazette notice under Sri Lanka’s Stategic Development Projects Law.

The controversial law, which allows projects to negotiate tax benefits individually has given such exemptions before. Why foreigners are given tax free salaries is not clear.

Most fast growing countries in East Asia allowed foreigners to come in with relative ease in their development phase but they had to pay taxes like everyone else, analysts say.

Singapore in particular invited high earning expatriates to become permanent residents. The project has limits for expatriate workers. About 2,500 workers are expected to be employed in the development phase.

Labeled the Colombo International Financial Center (CIFC), the projects will have five commercial and residential towers.

The last administration led by the United National Front attempted to build an international financial centre without reforming the central bank and imposed restriction on gold and vehicles as two balance of payment crises were triggered with pro-cyclical rate cuts enforced with liquidity injections.

Of the ‘white collar workers’ 75 percent has to be local. “White Collar workers to be paid in foreign
currency, if the project company is permitted,” the notice said.

It is not clear whether the salaries would be dollarized or rupee denominated salaries would be paid in dollars. In countries with bad central banks people think dollars are better than domestic currency. However dollar denomination can help protect against depreciation or real effective exchange rate targeting.

The first phase of the CIFC will be an office tower and two residential towers with an investment of 440 million US dollars on a 7-acre plot in the newly reclaimed CHEC Port City Colombo.

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The second phase would be two office towers in a 10 acre area.

The project will be exempt from income tax for 15 years, except for sale of apartments, which would only be exempt for 06 years starting from 3-year after project start or when it makes profits whichever comes first.

After that income tax will be charged at the rate of 7 percent or half that of hotels. Dividend tax will be exempt for 15 year and 01 year after.

Taxes will be exempt from royalty payments and management fees if they are below 0 percent of gross operating revenue.

Value added tax will be exempt from any project related goods. Customs duty will also be exempt, except for a negative list for 08 years, as will Port and Airport Development Levy. (Colombo/Aug01/2020)