A gazette notification containing tax concessions to Chinese firms building the Colombo Port City artificial island has been cancelled and a new one granting even broader terms has been issued. This includes a complete, eight-year waiver of corporate income tax for China Harbour Engineering Company Ltd. (CHEC), which is the contractor for engineering, procurement and construction [...]

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Port City project: Sweeping tax concessions to China

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A gazette notification containing tax concessions to Chinese firms building the Colombo Port City artificial island has been cancelled and a new one granting even broader terms has been issued. This includes a complete, eight-year waiver of corporate income tax for China Harbour Engineering Company Ltd. (CHEC), which is the contractor for engineering, procurement and construction of the project.

This concession had earlier been granted only to C/c China Communication Construction Company (CCCC), a subsidiary of CHEC that is handling the Colombo Port City Project. Implementation will be done by a fully-owned company of CCCC set up in Sri Lanka and it will be called CHEC Port City Colombo (Pvt) Ltd. The Government of China is the majority shareholder of CCCC.

The new gazette issued by Investment Promotion Minister Lakshman Yapa Abeywardena allows for the “transfer or lease of reclaimed lands to the prospective buyers”– a clause that was notably absent from the earlier one, which he rescinded. The transfer or lease of reclaimed lands to the project company or by the project company to prospective buyers has been exempted from the payment of Value Added Tax. The Nation Building Tax is waived for the project company and for the contractor and subcontractors during the project implementation period.

The old gazette, dated January 24, 2014, was rescinded on September 11. A new one with amendments was issued on the same day but its contents were not available on the website of the Department of Government Printing till September 15 — the day before Chinese President Xi Jingping’s arrival. When the Sunday Times on September 13 asked Minister Abeywardena about the new gazette, he said there were “minor changes” but did not specify what they were. However, several significant amendments have been introduced.

The cost of the project has risen by US$ 37 million (Rs. 4.8 billion) to US$ 1,337 million (Rs. 174 billion) in the eight month period between January and September 2014. The investment is to be made by CCCC.  The island will be 233 hectares in extent. Once completed, CCCC will have effective control of 108 hectares of land—20 hectares on freehold basis; 88 hectares on a 99-year lease. The Sri Lankan Government will have 62 hectares for development and 63 hectares for common facilities such as roads.

The clause related to exemption of CHEC from corporate income tax reads: “The provisions of the Inland Revenue Act, No. 10 of 2006 relating to the imposition of income tax on the China Harbour Engineering Company Ltd (CHEC) on the profit and income generated from the activities from the said Project shall not apply for a period of eight (08) years.”

“The said Tax Exemption Period of Eight (08) years shall commence from the year in which the China Harbour Engineering Company (CHEC) commences the construction of the Project,” it adds.  On Tuesday, President Mahinda Rajapaksa and his Chinese counterpart, President Xi, witnessed the signing of a “term-sheet” agreement on the Colombo Port City Developing Project (Phase I). According to the official media statement, CHEC Chairman Mo Wenhe signed on behalf of Sri Lanka while China Development Bank Chairman and Executive Director Hu Huaibang signed for China.

The online Investopedia dictionary defines “term sheet” as a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legal documents. Once the parties reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.

Another agreement related to the Colombo Port City was entered into on the same day between the Sri Lankan Government and CHEC Port City Colombo (Pvt) Ltd. R.W.R. Pemasiri, Secretary to the Ministry of Highways, Ports and Shipping, signed for Sri Lanka. Chen Fenjian, President of CCCC, signed for China.

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