Chandra J’s Budget proposal: An essential reform for macroeconomic advancement

Good governance activist Chandra Jayaratne has written to Minister of Finance and Mass Media Mangala Samaraweera on 10 January on an essential reform for macroeconomic advancement. Jayaratne has copied his written submission to the President, Prime Minister, Minister of Law and Order, Minister of Justice, Central Bank Governor, Secretary Finance, Attorney General, Auditor General, Commissioner General of Inland Revenue, Registrar of Companies, Chairman and Members of the SEC, Directors General of Customs, Inspector General of Police, Snr DIGs CID and FCID, FCID and CID Directors, CIABOC Director General, Ceylon Chamber of Commerce Chairman and Institute of Chartered Accountants President and Council. Following are excerpts from the letter:

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 5 March. 

Minister of Finance and Mass Media Mangala Samaraweera

Chandra Jayaratne

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:

 

• Minimising the wrongful and improper use of foreign exchange,
• Minimising the opportunities for engaging in transfer pricing, in violation of applicable Inland   Revenue regulations
• Minimising opportunities for trade based money laundering, 
• Minimising the leakage of state revenue by tax avoidance, and
• Minimising  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 $ 0.5 million (may be enhanced to $ 1 million in four years’ time)
• Payment of royalties, Intellectual Property related payments, technical/advisory or other service fees exceeding $ 1 million (may be enhanced to $ 2 million in four years’ time)
• Payment of dividends or Joint Venture agreements based profit shares or other profit distributions exceeding $ 2.5 million (may be enhanced to $ 5 million in four years’ time)
• Imports of goods or services exceeding $ 10 million (may be enhanced to $ 20 million in four years’ time)
• Exports of goods and services exceeding $ 25 million (may be enhanced to $ 50 million in four 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 cognisance 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 ‘Grey 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 organised criminals for trade based money laundering, 
• Large-scale organised smuggling of currency, precious metals and gems, believed to be taking place and Sri Lanka being a recognised 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 decriminalisation 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 macroeconomic 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 recognise the importance and essential urgency, in taking the risk mitigation steps outlined by implementing the proposals herein before set out.