The Port City Colombo SEZ: How well would it navigate Asia’s evolving economic landscape?

By Taamara de Silva

From bustling metropolises to serene island paradises, the Asian continent has been prided as an oasis for diverse locations with tax-friendly policies that translate into higher standards of living. However, the tides are turning as mature economies adopt global minimum tax standards, eroding traditional tax advantages and pressuring high-income countries to adjust. 

This shift affects Asian economies that have long relied on competitive tax rates to attract multinationals. Now, SEZs in countries like Singapore are adapting by promoting high-value industries, digital infrastructure, and skilled labor as key draws. Emerging SEZs in regions like Port City Colombo (PCC), Sri Lanka and SEZs in Vietnam, however, still leverage flexible tax policies to attract investment, creating a dynamic and evolving landscape across Asia. 

In the aftermath of the global financial crisis (GFC), Governments across the globe had initiated various tax changes and COVID-19 offered a litmus test for how corporates manage their taxes during the pandemic in light of past tax reforms. The governments too required tax revenues to support banks and corporates and restore financial stability through massive bailouts.

Unlike the GFC, which mostly impacted developed countries, the COVID-19 pandemic significantly compressed many Asian economies while containment measures saw corporates struggle as they experienced revenue declines. Tax savings became a critical source of internal financing as corporates engaged in aggressive tax planning as a means to mitigate adverse impacts of uncertainty. 

With global supply chains disrupted, SEZs offered attractive locations with tax incentives and streamlined regulations, making them ideal for businesses looking to diversify their supply bases in resilient, lower-cost environments. Many Asian nations, including India, Vietnam, and Indonesia, expanded SEZ initiatives to attract manufacturing, tech, and service industries, positioning SEZs as strategic hubs for economic recovery and long-term growth.

In general, successful zone programs have a strategic plan to gradually eliminate tax incentives and integrate the SEZ tax regime with the national economy. China took this path of progressive integration and eventually eliminated a significant portion of tax breaks. Similar approaches have been taken in Vietnam and Mauritius.

Mature SEZs, particularly those in high-income countries like Singapore, are moving towards global minimum tax standards under OECD and G20 mandates. This new tax landscape sets a floor on corporate tax rates to prevent tax base erosion – where multinationals shift profits to low or no-tax locations where they have little or no economic activity or erode tax bases through deductible payments like interest or royalties.

To address challenges in a globalized and digital economy, over 135 jurisdictions joined a groundbreaking initiative to reform outdated international tax rules in October 2021. The Global Anti-Base Erosion (GloBE) Rules are central to this framework, ensuring that large multinational enterprises pay a minimum tax rate on income earned within each country they operate. 

For instance, Singapore plans to implement GloBE Rules and Domestic Top-up Tax as of 1 January 2025. Should the Multinational Enterprise (Minimum Tax) Bill be passed in Parliament, multinational enterprises (MNEs) operating in Singapore will have to pay a minimum effective tax rate of 15% on their groups’ profits. Second Minister for Finance Indranee Rajah was quoted saying that it is in Singapore’s interest to impose the two new top-up corporate taxes and collect the taxes, rather than cede them to other jurisdictions. According to a report published by EY, companies with a presence in Singapore should take this timeline into account when evaluating their investment decisions and realigning their supply chains. 

Hong Kong, despite its low-tax appeal, faces regulatory pressures from China that may impact investor confidence. Meanwhile, Dubai remains attractive with its zero-tax policies in free zones, though a new 9% corporate tax was introduced in 2023. In parallel, India and ASEAN countries are enhancing tax compliance and transparency, while also promoting sector-specific investment incentives to maintain competitiveness in the region.

Port City Colombo, being Sri Lanka’s first foreign-currency designated Special Economic Zone, dedicated to the export of modern services, allows more flexibility in offering tax incentives to appeal to businesses that might seek alternative locations.

At the onset, Port City Colombo offers substantial fiscal incentives such as 25-year corporate tax exemptions, 100% capital and profit repatriation, 100% foreign ownership and 0% personal income tax for employees. In addition, Port City Colombo is economically ring fenced and there is also a provision for transactions to be executed in designated foreign currencies for businesses classified as “Businesses of Strategic Importance” under the Colombo Port City Economic Commission Act (CPCEC). By offering these concessions, Port City Colombo expects investment inflows from international businesses, in addition to attracting local companies that have already invested in foreign countries to return and re-establish operations in Sri Lanka, taking advantage of the time-sensitive window of opportunity. 

While it faces challenges such as regulatory precision and competition from established markets, Port City Colombo has its own established alternative dispute resolution center for resolving commercial legal disputes and a commitment to building robust financial and technological infrastructure. 

From a geo-political standpoint, the Port City Colombo project is a gateway to South Asia, Middle East, and Asia-Pacific regions, attracting companies that traditionally gravitate towards these competitive markets, and is also expected to benefit from riding the Indian growth wave. It is equally important to note that Port City Colombo has been positioned as a regional expansion option for international businesses in the broader Asia pacific region.  

Additionally, sectors like Fin-tech, logistics, and maritime trade are likely to attract significant investor interest, capitalizing on Sri Lanka’s strategic location. The fiscal incentives offered by the Port City Colombo project could serve as key motivators for Foreign Direct Investment, positioning Sri Lanka as an appealing alternative to other competitive markets, particularly in India, the Middle East, and the Asia-Pacific region.

The question is, can Port City Colombo seize the moment in a fast changing and disruptive investment landscape? While clear governance, competitive policies, and effective marketing to attract global players is paramount, Port City Colombo has the potential to become a financial hub if it can balance smart, futuristic tax incentives with stability and transparency. Furthermore, creating local employment opportunities, expanding international trade, and increasing foreign reserves through FDI would contribute significantly to the national economy.

By offering adaptable regulatory frameworks, an advantageous location, and a commitment to building world-class infrastructure, Port City Colombo is undoubtedly a strong contender for forward-thinking businesses and investors as its braves for the right to win in the competitive race for global investment and influence in Asia.

(The writer is an Investment Specialist and a Senior Consultant for a Global Strategy Consulting firm.)