The National Chamber of Exporters conducted a seminar on 20th February at the Hotel Galadari for Member exporters and others on the Tax and Fiscal issues related to exports under the new Foreign Exchange Act, and the new Inland Revenue Act. The Seminar also dealt with specific Taxation and Fiscal issues related to the Budget Proposals for 2018, and the Double Taxation Treaty of Sri Lanka with Singapore related to the Free Trade Agreement that was signed recently.
The Seminar was attended by over 100 Senior Officials of Export Enterprises who were able to benefit from the knowledge that was imparted on the practical aspects of the Taxation and Fiscal issues related to the new Foreign Exchange Act and the Inland Revenue Act.
The main presentation at the Seminar was made by Mr. Suresh Perera; Principal Tax and Regulatory of KPMG, who is an Attorney at-Law, FCMA and a Professional in Taxation issues. He is also a Board Member representing CIMA in the Regional Boards in the Middle East, South Asia, and North Africa. He is also the Chairman of the Tax Committee of the Bar Association of Sri Lanka, and a Member of the Accounting Standards Committee of the Institute of Chartered Accountants.
The Comprehensive Presentation made by Mr. Suresh Perera, was followed by a panel discussion to clarify issues of concerns of the participants. The Members of the Panel in addition to the main Resource Person Mr. Suresh Perera were Mrs. Yvette Fernando, Deputy Governor of the Central Bank, Mr. R. D. S. Hettiarachchi, Senior Commissioner of the Department of Inland Revenue, Messrs. M. Guneratne – Deputy Director, P. Saparamadu – Deputy Director, and M. A. Hazis – Superintendent of the Department of Customs & Mr. Sarath Wijesinghe Council Member of the NCE.
The presentation on the new Foreign Exchange Act, which came in to effect from 20th November 2017 replacing the hitherto existed Exchange Control Act, liberalizing exchange control regulation which were issued on 17th November 2017, covered new accounts, capital and current transactions, import and export of foreign currency and Sri Lankan currency, regulations relating to the possession of Foreign Exchange, identification of a “Resident”, as well as the administrative and penal provisions under the Act.
In this regard it was explained that the concept of the new Foreign Exchange Act permits all transactions unless specifically prohibited, which was the reverse previously. Further the new Act also liberalizes policies as well as streamlines and simplifies the types of accounts that could be maintained by authorized dealers. Further, the stipulated categories who could open and maintain accounts in Foreign Jurisdictions which includes exporters, permitted outbound investors, individuals, and companies as well as firms registered in Sri Lanka performing Professional and Vocational services outside Sri Lanka, were explained.
In regard to the regulations under the new Inland Revenue Act which comes into effect from 1st April 2018, Mr. Perera explained that profits arising out of exports of Goods and Services were taxable at 14% subject to the stipulation that 80% of the Gross income from exports of an enterprise exceeds 80%. Otherwise the taxable income was subject to a tax rate of 28%. It was further explained that the “Exporter” has a very wide definition and includes Freight Forwarders, Service providers to exporters, Transshipment services, Logistic service providers, Front end services to overseas clients, Manufacture and Supply of Non-Traditional goods to an exporter etc.
In regard to the Capital Gains Tax introduced in the Budget Proposals for 2018, it was explained that the Capital Gains Tax was not confined only to transactions related to land, but to other capital assets as well, excluding certain categories of depreciable assets which were elaborated.
In regard to the Double Tax Treaty with Singapore effective from 1st January 2018, there are withholding tax provisions pertaining to Cross Border payments etc. The new treaty also impacts on the computation of taxable income of companies for the year of assessment commencing from 2018/2019. It was explained that the new treaty substitutes the old treaty introduced in 1979, where the withholding tax on cross border dividends is as low as 7.5% if more than 25% of shares of a enterprise is held in the service country. The implications of the Double Tax Treaty in respect of Individuals and Corporates in either country was also clarified.
During the Panel discussion clarification was sought regarding the repatriation of export proceeds of Sri Lankan exporters within the stipulated period of 120 days in spite of the relaxations introduced under the new Act in response Mrs. Yvette Fernando – Deputy Governor of the Central Bank clarified that although at one time there was no specific requirement to ensure repatriation of export proceeds into Sri Lanka, the current requirement was later introduced apparently to boost Foreign Exchange Reserves. However, it was explained that if the proceeds are received to a Business Foreign Currency Account in Sri Lanka within the stipulated period (120 days + 30 days grace period) the Foreign Currency could be taken out at any time for specific requirements under the rules. It was further stated that the BOI is currently studying the manner of resolving issues faced by BOI Companies due to the new Foreign Exchange Act.
Clarification was also sought regarding the Double Tax Deduction allowed for expenditures on Research & Development activities as stipulated in the Budget Proposals for 2018, where there was a requirement to prove yields arising out of R & D Expenditures to be eligible for the Double Tax deduction. In response the representatives of the Department of Inland Revenue stated that there appears to be no such requirement, and requested representations in this regard to obtain a clear ruling.
In regard to clarification sought on the latest developments related to customs procedures, the representatives of the Department of Customs requested that exporters access the Website of the Customs to obtain all information of relevance to exports.
In regard to the requirement for an export enterprise to have a gross turnover of over 80% related to exports to be eligible for the concessionary corporate tax rate of 14%, it was stated that the Chambers including the NCE had pointed out earlier that it was a regressive measure, apparently although introduced for revenue purposes, since many enterprises, particularly SMEs are unable to achieve such a high percentage of gross revenue when embarking on exports, which was the case in regard to many large current export ventures when they entered the field of exports initially. The solution therefore would have been to grant the applicable corporate tax rate for export enterprises only for the percentage of turnover related to exports, while the normal tax rate could be applied to the percentage of local sales. During the discussion it was pointed out that one option would be for enterprises with a Gross Export Turnover of less than 80% of the total turnover, to separate and carry out the export transactions through a separate legal entity to avail of the tax benefit.