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Sri Lanka units of multi-nationals offered dividend tax carrot to boost exports

ECONOMYNEXT – Sri Lanka has offered to slash dividend taxes of multi-national firms catering to the domestic markets that increase their exports from 2021 in a bid to boost foreign exchange earnings according to a budget for next year.

Sri Lanka has a number of multi-nationals including Unilever, CEAT, Insee which mainly caters to the domestic market.

Firms like Chevron export to other South Asian markets while, Nestle exports coconut milk powder.

“In order to encourage the exports of multi-national companies which are import based for requirements of the domestic market, it is proposed to reduce the tax imposed on their dividends by 25 percent in 2021 and 50 percent in 2023 under the condition that they increase their exports by 30 percent and 50 percent in the respective years,” Prime Minister and Finance Minister Mahinda Rajapaksa said presenting a budget for 2021.

Other foreign companies were also encouraged to keep their dividends within the country.

He also offered to exempt dividend tax of foreign companies for three years if such dividends are re-invested on expansion of their businesses or if they are kept in money markets or stocks, or Sri Lanka sovereign bonds.

“I propose to exempt the tax on dividends of foreign companies for three years if such dividends are reinvested on expansion of their businesses or in the money or stock market or in Sri Lanka International sovereign bonds,” Prime Minister Rajapaksa said.

It was not specified whether ‘foreign companies’ resident firms owned by foreigners or foreign subsidiaries of domestic firms.

Dividends however have to be declared to attract a tax.

Profits that are re-invested internally are usually not declared as dividends and the question of dividend taxes do not arise. Many Board of Investment firms re-invest profits.

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Once declared the dividends no longer belong to the resident company but to their shareholders and it is not clear whether a tax refund will be made if the shareholders bring the money back.

Sri Lanka has banned many imports after printing money in 2020, after the rupee fell in March and April 2020 attracting downgrades.

Economists have called for central bank reform to regain monetary stability.

Sri Lanka runs into frequent foreign exchange shortages due to having a Prebisch-Triffin style central bank that has driven several Latin American nations into import substitution and sovereign default, analysts have shown. (Colombo/Nov18/2020)

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