Essential Reform for Macro Economic Advancement

Open letter to Finance Minister Mangala Samaraweera


This submission, of essential national macro-economic value, is being made for consideration to be implemented as a part of the 2019 Budget Proposals, due to be presented on 5th March 2019.

In positively advancing the macro-economic value of the country, and at the same time, mitigating potential economic risks, it is proposed that with the objectives of:

-Minimizing the wrongful and improper use of foreign exchange,

-Minimizing the opportunities for engaging in transfer pricing, in violation of applicable Inland Revenue Regulations

-Minimizing opportunities for trade based money laundering,

-Minimizing the leakage of state revenue by tax avoidance, and

-Minimizing the options available to related parties and parties with conflicts of interests in depriving minority shareholders and other stakeholders of businesses, of their due share of profits and wealth created through business operations

that all business entities domiciled and operating in Sri Lanka, be required to compulsorily be subject to the transfer pricing regulations of the Commissioner General of Inland Revenue, covered by the gazette dated 25 March 2015, whereby such entities are required to duly establish, that all transactions are at arm’s length and for due market value; and to support due compliance of same, with transparency, that required disclosures in the Annual Report and Accounts be made and be further supported by the submission to the Inland Revenue Authorities of certificates from approved accountants and directors; all as set out in the aforesaid regulations, where the during any financial year, the entity concerned engages in the following transactions, at levels exceeding the limits noted hereunder;

- Inward remittances of Professional services fees, royalties or Technical /Advisory or Other Professional Service fees, Intellectual Property related payments, dividends and Joint venture profit shares etc, exceeding USD 0.5 million (may be enhanced to USD 1 million in 4 years time)

-Payment of Royalties, Intellectual Property related payments, Technical /Advisory or Other Service fees exceeding USD one million (may be enhanced to USD 2 million in 4 years time)

-Payment of Dividends or Joint Venture Agreements based profit shares or other profit distributions exceeding USD 2.5 million ( may be enhanced to USD 5 million in 4 years time)

-Imports of goods or services exceeding USD ten million (may be enhanced to USD 20 million in 4 years time)

-Exports of goods and services exceeding USD twenty five million (may be enhanced to USD 50 million in 4 years time)

In addition, regulations should be issued preventing the use corporate credit/debit cards and similar facilities, in the commercial import of goods or services for trading or business purposes. In addition, Customs Regulations should prohibit the clearance of goods imported in commercial quantities, based on transactions made via Corporate Credit/Debit Cards or similar facilities.

Kindly note that these recommendations have been developed taking cognizance of the following:

- The current and future challenges in external sector and in external debt management,

-The references in the section titled "Foreign exchange management" in the Road Map - 2019 Monetary and Financial Sector Policies for 2019 and Beyond presented by the Governor CBSL,

-The Financial Action Task Force classification of Sri Lanka as high risk jurisdiction with a ‘Gery Listing’

- The reported and purportedly believed findings by law enforcement and revenue authorities, in their investigations in to and validations connected with money laundering, misuse of foreign exchange, and violation of Customs regulations etc,

- The research findings that the informal economy of Sri Lanka is significant and growing,

-Under valuation of imports and over valuation of exports and the use of tax free remittance options leveraged by organized criminals for trade based money laundering,

-Large scale organized smuggling of currency, precious metals and gems, believed to be taking place and Sri Lanka being a recognized transit point for narcotics and dangerous drugs,

-The published significant case studies on money laundering and transfer pricing identified in other similar jurisdictions,

-The recent decriminalization of foreign exchange offences in Sri Lanka and the verily believed rationale that high level capital flight out of the country is a significant risks with the freer operation of capital and current account transactions

In the light of the macro economic challenges faced by Sri Lanka, a country described by the Governor of the Central Bank as a state with extreme challenges arising from a twin deficit, I trust that you will recognize the importance and essential urgency, in taking the risk mitigation steps outlined by implementing the proposals herein before set out

Chandra Jayaratne

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