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OECD’s global tax pact: Lanka seeks more time, wary of repercussions
Sri Lanka has sought more time to consider whether it should join a major global taxation agreement introduced by the Paris based Organisation for Economic Co-operation and Development (OECD) — an agreement the OECD says will ensure Multinational Enterprises (MNEs) are subjected to a minimum 15% tax rate from 2023 onwards.
Sri Lanka is among the only four countries that are yet to agree to the deal from a total of 140 member states. The other three countries are Kenya, Nigeria and Pakistan.
After years of intensive talks, the Finance Ministry informed the OECD in writing early this month that the new tax deal which sought to fundamentally reform international tax rules would have “far-reaching consequences for the country’s tax policies” Therefore, Sri Lanka has asked for more time to consider whether it should join the agreement.
For developing countries like Sri Lanka, the tax deal could be beneficial on many fronts including ensuring minimum tax returns to the state and reducing the government pressure to offer tax incentives and tax holidays when it comes to Foreign Direct Investments (FDI), a top official said.
“FDI is critically important for our economy. If we are to levy a 15 percent tax for foreign investments, how can we attract such investments in future? Not only Sri Lanka, there are many other countries which have raised similar concerns about this but they kept silent,” Inland Revenue Department Commissioner General H.M.W.C. Bandara told the Sunday Times.
Since Sri Lanka had already declared a 40-year tax holiday for multinational companies that invest in the Colombo Port City in terms of the Colombo Port City Economic Commission Act, agreeing to certain clauses in this agreement would be difficult. Besides that, amending tax laws were a matter for Parliament, said an IRD official who has been involved in the talks.
“This global taxation policy is complicated and many countries accepted this deal at a policy level but expressed concerns in the implementation process. However, they wanted to finalise the deal by early this month but we need more time to study it,” the senior official said.
According to the two-pillar OECD policy document, the global minimum tax agreement does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it, and will see countries collect around USD 150 billion in new revenues annually.
Under pillar one, multinational enterprises with global sales above EUR 20 billion and profitability above 10% — that can be considered as the winners of globalisation — will be covered by the new rules, with 25% of the profit above the 10% threshold to be reallocated to market jurisdictions.
Pillar two introduces a global minimum corporate tax rate set at 15%. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually, the policy brief said.
Currently, Sri Lanka is negotiating with the OECD administration to reduce the threshold of the limits since it is significantly high compared to the market value of local companies.
For example, if Sri Lanka becomes a party to the agreement and a UK based multinational company invests in the Colombo Port City under the 40 year tax holiday scheme, the company will be required to pay 15 percent tax in its home country for profits generated here in terms of the OECD agreement.
“Sri Lanka is a member of the Inclusive Framework and has been involved in all the phases of the negotiations. Sri Lanka indicated it needed more time before committing to the agreement. We are waiting for news from Sri Lanka and it is welcome to join any time. The other 136 countries have already become parties to the agreement,” an OCED spokesperson told the Sunday Times.
Another Sri Lanka official who is part of the negotiation team that he believed that this G20-led initiative was intended to manipulate developing economies with attractive tax deals but the main objective was to ensure gaining tax for European based companies since most of them moved towards developing countries due to various reasons in the recent past.