Investment Climate Statements for 2016 - Sri Lanka

Executive Summary

Sri Lanka is located in South Asia off the southern coast of India, on the main East-West Indian Ocean shipping lanes. In January 2015, President Maithripala Sirisena was elected to a six-year term. He campaigned on a platform of good governance and anti-corruption as well as ethnic reconciliation. Candidates running on a similar platform gained a majority of seats in parliamentary elections held in August 2015. Sirisena leads a national unity government comprising the pro-business United National Party (UNP), the reformist wing of the Sri Lanka Freedom Party (SLFP) and several smaller political parties. The coalition has embarked on a major political and economic reform process including constitutional reforms aimed at reducing the powers of the executive president. The government is working to improve its relations with other countries and to develop its economy to compete more effectively in the global marketplace. Specifically, Sri Lanka is working to position itself as a financial and trading hub in South Asia.

The Sirisena government’s initial attempts to introduce economic reforms received mixed reactions. The government’s 2016 budget contained extensive reforms that were commendable but which special interest groups were not prepared to accept. As a result, the government has reversed several reforms, creating uncertainty among investors. In March 2016, the government introduced new taxes to meet increasing debt obligations and to cover previously unannounced financial commitments made by the former administration. The government has identified the following key economic priorities: 1) integration of the economy into the global marketplace; 2) attracting increased foreign direct investment (FDI); 3) job creation; and 4) increased digitalization. The government is eager to enter into trade pacts with the United States, China, and Singapore to boost trade and investment and wants to expand the current Free Trade Agreement (FTA) with India to a broader Economic and Technology Agreement (ECTA). It is also trying to regain the European Union’s (EU) Generalized Scheme of Preferences (GSP+) privileges for Sri Lankan exports. The EU withdrew GSP+ status from Sri Lanka in 2010 due to alleged human rights abuses committed by the military and security forces during the 26 year long civil war that ended in 2009. Additionally, several government agencies are investigating suspected corruption by the previous administration. Several officials and politicians connected to the former regime have been arrested for corruption or are on bail.

The Sri Lankan economy grew 4.8 percent in 2015, a year in which the new government began reversing years of statist economic policies. Gross domestic product (GDP) reached USD82 billion in 2015, and the per capita GDP was USD3,925. Growth is expected to be approximately 5.3 percent in 2016. The new government’s efforts to boost the economy are hampered by a large fiscal deficit and the slowing global economy. The government tax revenue to GDP ratio is one of the lowest in the world. Sri Lanka also suffers from a large foreign debt burden and a persistent current account deficit. Foreign debt is comprised of concessional debt and commercial debt, including debt owed to China for recent infrastructure investment. Exports and foreign remittances from Sri Lankan workers overseas declined, and the rupee depreciated approximately nine percent in 2015. In March 2016, rating agencies downgraded Sri Lanka’s credit ratings and revised its rating outlook from `Stable’ to `Negative,’ citing increased refinancing risks, weak public finance, decline in foreign exchange reserves, and higher foreign debt. The government has requested assistance from the International Monetary Fund (IMF). Financing from the IMF could lead to substantial fiscal consolidation and increased taxation.

Sri Lanka’s annual exports are approximately USD10.5 billion, mostly tea and garments. Imports are approximately USD19 billion, leaving an annual trade deficit of nearly USD8.5 billion. The United States is the largest single market for Sri Lankan exports, capturing over USD2 billion of the total. Remittances from migrant workers, approximately USD7 billion per year, are Sri Lanka’s largest source of foreign exchange and help to offset the external deficits. Tourism is a USD2.9 billion industry with 1.8 million tourist arrivals in 2015.

Future growth will require structural changes to the economy, including a shift away from agriculture, as well as greater diversification of exports, improvements in productivity levels across all sectors, and the establishment of a more transparent regulatory and procurement framework. Sri Lanka needs to modernize education and improve government administration in order to build the foundation for long-term economic growth. The bloated civil service and losses at state-owned enterprises (SOEs) are significant challenges for the government.

Table 1

Measure	Year	Index or Rank	Website Address
TI Corruption Perceptions index	2015	83 of 175	transparency.org/cpi2014/results
World Bank’s Doing Business Report “Ease of Doing Business”	2015	107of 189	doingbusiness.org/rankings
Global Innovation Index	2015	85 of 143	globalinnovationindex.org/content/page/data-analysis
U.S. FDI in partner country ($M USD, stock positions)	2015	USD 111	BEA
World Bank GNI per capita	2014	USD 3,460	data.worldbank.org/indicator/NY.GNP.PCAP.CD

Millennium Challenge Corporation Country Scorecard

The Millennium Challenge Corporation, a U.S. Government entity charged with delivering development grants to countries that have demonstrated a commitment to reform, produced scorecards for countries with a per capita gross national income (GNI) of $4,125 or less. The most recent score card for Sri Lanka is available here: http://www.mcc.gov/pages/selection/scorecards. Details on each of the MCC’s indicators and a guide to reading the scorecards are available here: http://www.mcc.gov/pages/docs/doc/report-guide-to-the-indicators-and-the-selection-process-fy-2015.

1. Openness To, and Restrictions Upon, Foreign Investment

Attitude toward Foreign Direct Investment

Sri Lanka is a constitutional multiparty republic. In 1978 it shifted away from a socialist orientation and opened up to foreign investment, although changes in government have often been accompanied by reversals in economic policy. The current coalition government led by President Sirisena and Prime Minister Wickremesinghe has vowed to follow a pro-business stance with an emphasis on expanding exports, upgrading industry and boosting private investment and public-private partnerships. Prime Minister Ranil Wickremesinghe represents the pro-business United National Party.

Former President Rajapaksa (2005-2015) followed a statist economic policy, advocating government control of strategic enterprises and expanding the role of the state. The Rajapaksa administration also introduced a substantial government infrastructure development program, largely financed with Chinese loans. President Sirisena’s administration has suspended work on many of these projects pending review of possible corruption and some contracts are being renegotiated.

Sri Lanka will require high levels of foreign direct investment (FDI) to meet its growth targets. Most of the current economic potential is concentrated in the tourism sector, with 1.8 million tourists per year and growing. Several major international hotel franchises plan to build new hotels over the next few years. Investors are capitalizing on Sri Lanka’s environment, culture, religious history, and wildlife to attract high-end tourists, and to tap into the growing markets of India and China. Ports could be another important driver of growth, with the Colombo Port being one of the most active in the region, situated on a major global shipping lane.

Ample scope exists for an expansion in the information technology/business processing operations (IT/BPO) sector. With a growing middle class, investors see opportunities in franchising, retail, and services, as well as light manufacturing. However, importers to Sri Lanka face high taxes. According to a recent World Bank study, Sri Lanka’s present import regime is one of the most complex and protectionist in the world. The new government is keen to improve education and skills development. Sri Lanka’s free trade agreements (FTAs) with India and Pakistan offer preferential access to those markets, and Sri Lanka is currently negotiating an Economic and Technology Agreement (ETCA) with India and an FTA with China. The capital city of Colombo offers expatriate managers a good quality of life relative to the region.

Sri Lanka can still be a challenging place to do business, with high transaction costs caused by an unpredictable economic policy environment. While some government departments and ministries boast competent staff, the government’s overall provision of services is impeded by inefficiency. While the new administration has started to implement more transparent procurement practices, economic growth is stymied by lingering opaque government procurement practices.

Foreigners are prohibited from purchasing land and real estate except for apartments above the 4th floor. Currently, the Cabinet can approve a land purchase for an investment in the national interest, provided there is a substantial foreign remittance for the purchase of the land. A land transfer tax of 100 percent may still apply. The 2016 budget promised to consider further relaxing restrictions on land ownership on identified investments. Other policies of concern include the November 2011 Underutilized Assets Act, which resulted in the seizure of 37 companies. The current government imposed a one-time 25 percent tax on companies making profits over LKR 2 billion (USD 15 million) in the 2013/14 financial year. Foreign investors enjoying tax holidays are exempted from the tax. The government has said that they would refrain from introducing such retroactive policies and taxes in the future.

Local investors cite the risks of contract repudiation, cronyism, damage to reputation, and de facto or de jure expropriation as concerns, although the new government has started to address these issues. From an investor viewpoint, the power and petroleum sectors are particularly challenging, as decision-making authority is highly fragmented, and the capital investments required are substantial. Trade union opposition at both the Ceylon Petroleum Corporation and the Ceylon Electricity Board (CEB) make reform of these loss-generating state-owned enterprises (SOEs) very difficult.

Sri Lankan financial institutions may have trouble complying with the U.S. Foreign Accounts Tax Compliance Act (FATCA). The government has directed banks to register with the Internal Revenue Service (IRS). Almost all commercial banks have registered with the IRS.

Investors report that starting a business in Sri Lanka is relatively simple and quick – especially when compared to other frontier markets – and 20 percent cheaper than in neighboring countries. Scalability is a problem, however, as the lack of skilled labor and a smaller talent pool means companies can take years to double in size. Investors claim employee retention is good in Sri Lanka, but numerous public holidays, reluctance of workers to work at night (which is especially problematic in the IT/BPO sector), lack of labor mobility, and a difficulty in recruiting women can reduce efficiency and increase start-up times. The garment industry has had more difficulty with employee retention, especially in the North and East, due to quality of life issues in these regions. On the other hand, many service sector companies can rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products. Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards.

Other Investment Policy Reviews

Sri Lanka has been a member of the World Trade Organization (WTO) since 1995. The most recent WTO Trade Policy Review for Sri Lanka was conducted in 2010. This is Sri Lanka’s third Trade Policy Review. Additional information including both the full report and a summary may be found at: https://www.wto.org/english/tratop_e/tpr_e/tp337_e.htm

The government of Sri Lanka has not conducted any other investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the U.N Conference on Trade and Development (UNCTAD).

Laws/Regulations on Foreign Direct Investment

The Board of Investment (BOI, www.investsrilanka.com), an autonomous statutory agency, is the primary government authority responsible for investment, with a focus on foreign investment. BOI promotes the following sectors as priority sectors for FDI: tourism and leisure; infrastructure; knowledge services; utilities; apparel; export manufacturing; export services; agriculture; and education. BOI also promotes transshipment trading, international logistics services, operations of headquarters, off shore business and research and development.

The BOI manages a number of export processing zones that feature business-friendly regulations and improved infrastructure for foreign investors. The BOI is intended to provide "one-stop" service for foreign investors, with duties including the approval of projects, granting incentives, and arranging utility services. It also assists in obtaining resident visas for expatriate personnel and facilitates import and export clearances. The BOI is not yet a one-stop shop. Although the BOI is relatively effective in assisting investors who want to establish operations within its export processing zones, it is less effective in facilitating and servicing large investments outside these zones. Sri Lanka's bureaucracy often works at cross-purposes with BOI authorities. For example, registration of foreign company branch offices in Sri Lanka can be expensive.

The government is working to establish an apex body named the Agency for Development to facilitate policy regarding investments, tourism and exports and supervise state institutions - such as the BOI - in these sectors. The government has also promised to introduce a new investment law and an incentive regime.

Currently, the principal law governing foreign investment is Law No. 4, created in 1978 (known as the BOI Act), as amended in 1980, 1983, and 1992, along with implementing regulations established under the Act. The BOI Act provides for two types of investment approvals. Under Section 17 of the Act, the BOI is empowered to recommend concessions to companies satisfying certain eligibility criteria on minimum investment. Such companies are eligible for generous investment concessions. Investment approval under Section 16 of the BOI Act permits companies to operate under the "normal" laws of the country and applies to investments that do not satisfy eligibility criteria for BOI incentives. From 2008 to 2015, the Strategic Development Project Act of 2008 (SDPA) provided generous tax incentives for large projects that the Cabinet identifies as Strategic Development Projects. Such investments are expected to be covered by the new Investment Law in the future. Other laws affecting foreign investment are the Securities and Exchange Commission Act of 1987 as amended in 1991 and 2003, the Takeovers and Mergers Code of 1995 (revised in 2003), and the Companies Act of 2007. Various labor laws and regulations also affect investors. For more details, please visit: http://www.lawnet.lk/.

Foreign investments, particularly if not keyed toward export, are often more successful when guided by a local partner who can navigate the cultural and political landscape. Some sectors, however, such as IT/BPO, report relatively little need to rely on local agents or the government to start operations. Most investors agree that any export-based investment faces fewer problems, especially if the company is registered with the BOI. The greatest challenges lie in infrastructure contracts or competing for any government tender offer, where foreign investors find it difficult to navigate the opaque procurement process.

Business Registration

The Department of Registrar of Companies (www.drc.gov.lk) has the responsibility for business registration. There is no online registration system except for submitting the name approval application for a business registration. Registration at the Companies Registry takes, on average, 7 to 10 days. The business registration regime does not require a notary to sign the documents. In addition to the Registrar of Companies, businesses must register with the Inland Revenue Department to obtain a taxpayer identification number for payment of taxes, and the Department of Labor for payment of social security payments.

The Board of Investment facilitates foreign investment. BOI services are available to all investors. However, tax incentives are available only to investors meeting certain criteria such as minimum capital levels and a minimum number of employees.

According to the World Bank (http://iab.worldbank.org/) it takes six procedures and 65 days to establish a foreign-owned limited liability company (LLC) in Sri Lanka.

Industrial Promotion

The government aspires to promote goods and services exports, tourism, ICT industries, agriculture, education and research & development. The government has proposed to create an international finance center in the capital (Colombo) which will be a specific zone similar to the Dubai International Financial Centre. The proposed financial center will have its own commercial court for resolution of commercial disputes. The government is proposing to invite domestic and international banks to operate in the proposed center. The government also hopes the current Free Trade Agreement with India, a proposed ECTA with India, and the proposed FTA with China will help Sri Lanka to become a gateway to those significant markets.

Limits on Foreign Control and Right to Private Ownership and Establishment

The government allows 100 percent foreign investment in any commercial, trading, or industrial activity other than a few specified sectors: air transportation; coastal shipping; large scale mechanized mining of gems; lotteries; manufacture of military hardware, military vehicles, and aircraft; dangerous drugs; alcohol; toxic, hazardous, or carcinogenic materials; currency; and security documents. (These sectors are regulated and subject to approval by various government agencies or the BOI.)

Foreign investments in the following areas are restricted to 40 percent ownership: the production for export of goods subject to international quotas; growing and primary processing of tea, rubber, coconut; timber-based industries using local timber; deep-sea fishing; mass communications; education; freight forwarding; travel services; and businesses providing shipping services. Foreign ownership in excess of 40 percent must be preapproved on a case-by-case basis by the BOI. The government is considering opening higher education to foreign investment. Foreign investment is not permitted in the following businesses: non-bank money lending; pawn-brokering; retail trade with a capital investment of less than USD 1 million; and coastal fishing.

In areas where foreign investment is permitted, foreign investors are treated equally with domestic investors and may benefit from the wide range of incentives provided by the BOI or from the Treasury.

Private entities are free to establish, acquire and dispose of interests in business enterprises. Private enterprises enjoy benefits similar to those granted to public enterprises, and there are no known limitations in accessing markets, credit, or licenses. Foreign ownership is allowed in most sectors, although the land ownership law prohibits foreigners from owning land, with some exceptions. Most investors say acquiring land is often the biggest challenge for any new business in Sri Lanka. Private land ownership is limited to fifty acres per person. The government owns approximately 80 percent of the land in Sri Lanka, including land housing most tea, rubber, and coconut plantations, which are leased to the private sector on 50-year terms. Although state land for industrial use is usually allotted on a 50-year lease, the government may approve 99-year leases on a case-by-case basis, depending on the nature of the project. Many land title records were lost during the war, and significant disputes remain over property ownership in the North and East. The new government has started a program to hand back property taken by the government during the war to people in the North and East.

Privatization Program

The new government is seeking to improve the efficiency of state-owned enterprises (SOEs), through private sector-style management practices. It also proposes to list some SOEs on the Colombo Stock Exchange and fully or partially privatize non-strategic SOEs.

The previous government halted privatizations, preferring to maintain SOEs, and even reversed several privatizations it had granted in the past. SOE labor unions often oppose privatization and seem particularly averse to foreign ownership. In the past, this made the privatization of government entities problematic for new foreign owners.

Screening of FDI

The BOI (www.investsrilanka.com), an autonomous statutory agency, is the primary government authority responsible for investment, with a focus on foreign investment. Foreign investors applying for incentives offered under the Board of Investment law are screened by the BOI. Some investments, especially in utilities, are screened by respective statutory agencies or line ministries.

Competition Law

Sri Lanka does not have a specific competition law. Instead, BOI or the respective regulatory authority may review transactions for competition-related concerns.

2. Conversion and Transfer Policies

Foreign Exchange

Sri Lanka generally has investor-friendly conversion and transfer policies. Companies note they can repatriate funds relatively easily. In accordance with its Article VIII obligations as a member of the IMF (http://www.imf.org/external/pubs/ft/aa/aa08.htm), Sri Lanka liberalized exchange controls on current account transactions in 1994, and in 2010-2012, the government relaxed exchange controls on several categories of capital account transactions. When the government experiences balance of payments difficulties, the government tends to impose controls on foreign exchange transactions. In November 2015, the government imposed a 100 percent deposit requirement on motor vehicle imports, requiring importers to pay up front the full value of motor vehicles when opening letters of credit with commercial banks. The government lifted the 100 percent deposit requirement on December 1, 2015. At the same time, however, the government imposed a policy capping vehicle financing to no more than 70 percent of the value of the vehicle. This policy was intended to limit motor vehicle imports in an effort to counteract the increase of vehicle imports over the previous year, which adversely affected Sri Lanka’s trade deficit and caused traffic congestion in the capital.

Sri Lanka follows a flexible exchange rate regime with the Central Bank intervening to smoothen volatility. The rupee depreciated by over nine percent in 2015. Capital outflows intensified in 2015, and foreign exchange reserves declined. Foreigners are permitted to invest in Sri Lankan debt instruments, both government and corporate debt. The Central Bank’s rupee-denominated T-bill and T-bond issues in the local market are also open to foreign investors. Both foreign and local companies are permitted to borrow from foreign sources.

Remittance Policies

No barriers exist, legal or otherwise, to the expeditious remittance of corporate profits and dividends for foreign enterprises doing business in Sri Lanka, provided required documents are in place. The average delay for remitting investment returns, interest, and principal on private foreign debt, lease payments, royalties, and management fees through normal legal channels is one to four weeks. All stock market investments can be remitted without prior approval of the Central Bank through a special bank account. Investment returns can be remitted in any convertible currency at the legal market rate. Sales proceeds and gains from real estate can be transferred provided there is sufficient evidence to prove the funds used to originally purchase the property were remitted into the country to acquire the property. Exporters must repatriate export proceeds within 120 days to settle export credit facilities. Other export proceeds can be retained abroad, provided such funds are not used for acquisition of property or other capital assets outside Sri Lanka. An informal money transfer/exchange system is available to facilitate Sri Lankans working overseas and sending money home, although with higher rates. In June 2013, the Financial Action Task Force (FATF) removed Sri Lanka from the list of countries that are subject to FATF’s monitoring process. A Financial Intelligence Unit (FIU) was created in 2006 and operates under the Central Bank.

3. Expropriation and Compensation

Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment. The last expropriation dispute was resolved in 1998. However, in 2011, the previous government approved the Revival of Underperforming Enterprises and Underutilized Assets Act, allowing for the expropriation of assets belonging to 37 companies the government considered as underperforming. These companies had leased land from the government, but the government claimed the companies were not meeting the conditions of the agreement. Although many of the companies were defunct, several others were viable businesses. The Central Bank stated that the Act was to be considered a one-off measure. The law increases investor uncertainty regarding property rights in Sri Lanka and is often cited as having a chilling effect on foreign direct investment.

Apart from the Underutilized Assets Act, the land acquisition law empowers the government to take over private land for public purposes. Compensation is paid based on government valuation, which some local investors consider relatively fair. There are cases, however, of the military taking over businesses in the North and East - on claims they are on government land - with little or no compensation. Many land records were lost or destroyed during the war, which complicates land tenure issues and delays resolution. Under the previous regime, there were reports of government taking over private lands throughout the country purportedly for public purposes. The new government has pledged to refrain from the takeover of private assets.

In January 2015, the new government presented an interim budget. The budget included a one-time 25 percent tax entitled the “super gain tax” on companies or individuals who reported more than LKR 2 billion (USD 15 million) in profits (before income tax) in the tax year ending March 2014. Foreign investors enjoying tax holidays were exempted.

4. Dispute Settlement

Legal System, Specialized Courts, Judicial Independence, Judgments of Foreign Courts

Sri Lanka's legal system reflects diverse cultural influences. Criminal law is fundamentally British. Basic civil law is Roman-Dutch. Laws pertaining to marriage, divorce, and inheritance are ethnic. Sri Lankan commercial law is almost entirely statutory. The law reflects colonial British law, but amendments have largely kept pace with subsequent legal changes in the United Kingdom. Several important legislative enactments regulate commercial matters: the Board of Investment Law; the Intellectual Property Act; the Companies Act; the Securities and Exchange Commission Act; the Banking Act; the Industrial Promotion Act; and the Consumer Affairs Authority Act (http://www.lawnet.lk/).

Sri Lanka's court system consists of the Supreme Court, the Court of Appeal, provincial high courts and the Courts of First Instance, i.e., district courts (with general civil jurisdiction) and magistrate courts (with criminal jurisdiction). The provincial high courts have original, appellate, and reversionary criminal jurisdiction. The Court of Appeal is the intermediate appellate court with a limited right of appeal to the Supreme Court. The Supreme Court exercises final appellate jurisdiction for all criminal and civil cases. Citizens may apply directly to the Supreme Court for protection if they believe any government or administrative action has violated their fundamental human rights.

All commercial matters, including intellectual property claims, exceeding the value of LKR 3 million (approximately USD 20,700) fall within the jurisdiction of the Commercial High Court of Colombo. A number of tribunals also exercise judicial functions, such as the Labor Tribunals that hear cases brought by workers against their employers. Litigation can be slow. Monetary judgments are usually made in local currency, but procedures exist for enforcing foreign judgments. Overall, Sri Lanka’s record in handling investment disputes is problematic. Disputes have become politicized, and the stability of contracts in general could be improved.

Bankruptcy

The Companies Act and the Insolvency Ordinance provide for dissolution of insolvent companies, but there is no mechanism to facilitate the reorganization of financially-troubled companies. Other laws make it difficult to keep a struggling company solvent. The Termination of Employment of Workmen Special Provisions Act (TEWA), for example, makes it difficult to fire or lay off workers who have been employed for more than six months for any reason other than serious, well-documented disciplinary problems, unless the employee agrees to such termination.

In the absence of proper bankruptcy laws, extra-judicial powers granted by law to financial institutions protect the rights of creditors. A creditor may petition the court to dissolve the company if it cannot meet a creditor’s demands for payment of money in excess of LKR 50,000 (USD 380.00). Lenders are also empowered to foreclose on loan collateral without court intervention. However, loans below LKR 5 million (USD 38,000) are exempt, and lenders cannot foreclose on collateral provided by guarantors to a loan. Financial institutions also face other legal challenges as defaulters obtain restraining orders on frivolous grounds due to technical defects in the recovery laws.

The Companies Act of 2007 introduced a solvency test to determine the financial stability of a company. The solvency test is intended to prevent companies without sufficient assets from obtaining loans and to protect rights of creditors. The law sets forth the responsibilities of a company's directors in cases of serious loss of capital. While the Companies Act does not provide for the revival of struggling companies, the courts generally take a liberal attitude towards any restructuring plans that would benefit a company.

Investment Disputes

Sri Lanka's courts have a mixed record with regard to upholding the sanctity of contracts. The courts are not practical for resolving disputes or obtaining remediation, because their procedures allow one party to prolong cases indefinitely. Aggrieved investors (especially those dealing with government projects) have frequently pursued out-of-court settlements in hopes of speedier resolution. In late 2008, the Supreme Court, in an interim order, halted payments to five international and local banks involved in oil hedge contracts with the government. One of the involved banks was American. The banks filed for international arbitration.

Some U.S. companies have experienced problems with payment of valid contracts, and implementation of agreements with the government, despite demonstrated superior performance, high value, and competitive bids. In practice, it may be advisable to seek to include provisions for international arbitration in legal documents.

Soon after coming to power the current government halted several major infrastructure projects negotiated between the Rajapaksa administration and China, most notably the USD 1.4 billion Colombo Port City project. The government cited irregularities, environmental issues and allegations of corruption for the suspension of the projects. After a review, most of the projects have been authorized to continue.

Civil society groups and environmentalists have been active in disputes involving foreign investors. In the case of the Colombo Port City project, at least two civil society groups sought court intervention to stop the project. The Center for Environmental Justice sought an order from the Court of Appeal to suspend what it described as illegal agreements without following the proper legal procedures. A fisheries organization also filed a Fundamental Rights petition before the Supreme Court complaining that sand mining for this project may adversely affect fisheries. Other civil society groups have protested saying the project is likely to harm the environment.

International Arbitration

Most investors tend to prefer arbitration over litigation. Arbitral awards made abroad are now enforceable in Sri Lanka. Similarly, awards made in Sri Lanka are enforceable abroad. There is a considerable delay in enforcing arbitral awards and the respondents are often seen making objections based on technicalities or on public policy considerations.

The Institute for the Development of Commercial Law and Practice (ICLP) (www.iclparbitrationcentre.com) and Sri Lanka National Arbitration Centre (www.slnarbcentre.com) engage in private settlement of commercial disputes through arbitration.

ICSID Convention and New York Convention

Sri Lanka is a member state to the International Centre for the Settlement of Investment Disputes (ICSID convention). It is also a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) without reservations.

Sri Lanka’s Arbitration Act of 1995 recognizes within its legal framework the terms of the New York Convention.

Duration of Dispute Resolution – Local Courts

It takes between two to three years to resolve a commercial dispute valued at less than LKR 5 million (USD 34,500) in a district court. Commercial disputes over LKR 5 million come under the jurisdiction of the Commercial High Court and take a year or two for a final judgment. These timeframes exclude any time taken to resolve subsequent appeals filed in higher courts.

District courts have a backlog of cases, driving the majority of delays. The time between court hearings is, therefore, long, delaying resolution. The Commercial High Court consists of three court houses and judges are specialized in hearing commercial disputes. The delays in the high court are generally related to the long backlog of cases fixed for a particular date or other urgent matters taking precedence.

Enforcement of a court decision in the event the losing party does not comply is implemented by means of execution of the writ with the assistance of the court.

5. Performance Requirements and Investment Incentives

WTO/TRIMS

To qualify for investment incentives, the BOI specifies certain minimum investment amounts for both local and foreign investors. A member of the World Trade Organization (WTO), Sri Lanka complies with WTO Trade Related Investment Measures (TRIMS) obligations.

Investment Incentives

Sri Lanka offers various investment incentives. The government plans to introduce a new investment regime and an incentive structure in mid-2016. Currently, the BOI is following BOI regulation No.2 of 2006 when granting approvals and incentives until a new investment law and incentives are formulated. Some of the current incentives are listed below. Potential investors are encouraged to contact the BOI directly for information as the incentive structure is undergoing changes.

Incentive Program I

Qualifying industries: Non-traditional manufacturing exports and companies supplying to exporting companies, export oriented services, manufacture of industrial machinery, small-scale infrastructure, research and development, agriculture and agro-processing industries, and export trading houses in the rural sector.

Incentives: A five-year tax holiday and preferential tax rates thereafter. Some of these industries qualify for duty-free imports. Exporting companies and export-oriented services will be exempted from exchange control regulations. They will also qualify for free repatriation of profits and dividends and free transferability of shares. Minimum investment levels apply.

Incentive Program II

Qualifying Industries: Information technology, information technology training institutes, business process outsourcing, and regional operating headquarters. Minimum investment and employment levels apply.

Incentives: IT services, IT training institutes, and BPO firms qualify for tax holidays of five to12 years provided they meet minimum employment levels. Otherwise, a preferential tax of 10 percent applies for two years. Regional operating headquarters qualify for a three-year tax holiday. Preferential tax rates apply after the tax holiday. Capital goods for these projects will be exempted from import duty.

Five to 15 year tax holidays are available for large infrastructure projects.

For further information on investment incentives and other investment-related issues, potential investors should contact the BOI directly (www.investsrilanka.com or info@boi.lk.)

Research and Development (R&D)

Government funding of research is limited and currently restricted to state research institutions and universities. Private sector companies engaged

Performance Requirements

There are no performance requirements. In most cases, firms enjoying preferential incentives in the manufacturing sector must export 80 percent of production, while those in the service sector must earn at least 70 percent of their income in foreign exchange. Foreign investors are generally not expected to reduce their equity over time, nor are they expected to transfer technology within a specified period of time, except for build-own-transfer or other such projects in which the terms are specified within pertinent contracts.

Foreign investors who remit at least USD 250,000 can qualify for a one-year resident visa, which can be renewed. Employment of foreign personnel is permitted when there is a demonstrated shortage of qualified local labor. Technical and managerial personnel are in short supply, and this shortage is likely to continue in the near future. Foreign employees in the commercial sector do not experience significant problems in obtaining work or residence permits. Sri Lanka offers dual citizenship status to Sri Lankans who have obtained foreign citizenship in seven designated countries. Tourist and business visas are granted for one month, with possible extensions.

Data Storage

Sri Lanka has no specific requirements for foreign IT providers to turn over source code or provide access to surveillance. Provisions relating to interception of communications for cybercrime issues are subject to court supervision under the Computer Crimes Act of 2007. Sri Lanka became a party to the Budapest Cybercrime Convention in 2015. As a result, safeguards based on this convention are in force. Although, there is no comprehensive legislative protection of electronic data, the Computer Crimes Act has a provision to protect data and information. Steps are being taken by the Government to formulate data protection legislation. There is no ban on the sale of electronic data for marketing purposes.

Sri Lanka ratified the UN Electronic Commerce Convention in July 2015 and began implementing it on February 1, 2016 by taking steps to amend the Sri Lanka Electronic Transactions law to comply with the convention.

6. Protection of Property Rights

Real Property

Secured interests in property in Sri Lanka are generally recognized and enforced, but many investors claim protection can be flimsy. A fairly reliable registration system exists for recording private property including land, buildings, and mortgages, although problems exist due to fraud and forged documents. In the World Bank’s 2016 “Doing Business Index” Sri Lanka ranked 153 out of 189 countries in the category of registering a property. Property registration required, on average, completion of nine procedures lasting 51 days. Foreigners are prohibited from the purchase of lands. A regulation imposing a 15 percent tax on leases to foreigners was removed in January 2016.

Intellectual Property Rights

IPR enforcement is improving in Sri Lanka, although counterfeit goods continue to be widely available, making it difficult for the legitimate industries to protect their markets. Local agents of well-known U.S. and other international companies representing recording, software, movie, clothing, and consumer product industries continue to complain that lack of IPR protection damages their businesses. Sri Lanka has a comprehensive IPR law and several offenders have been charged or convicted. Overall, progress on IPR protection is improving in the country. For instance, the government's information technology (IT) policy requires government agencies to use licensed or open source software. Software companies have reported an increased interest by large companies in improving IPR regimes. Sri Lanka does not track and report on seizures of counterfeit goods.

Sri Lanka is a party to major intellectual property agreements. Sri Lanka adopted an intellectual property law in 2003 that was intended to meet both U.S.-Sri Lanka bilateral IPR agreements and, to a great extent, trade-related aspects of intellectual property rights (TRIPS) obligations. The law governs copyrights and related rights; industrial designs; patents, trademarks and service marks; trade names; layout designs of integrated circuits; geographical indications; unfair competition; databases; computer programs; and undisclosed information (e.g., trade secrets). All trademarks, designs, industrial designs, and patents must be registered with the Director General of Intellectual Property. No legal provisions exist for registration of copyrights and trade secrets.

The National Intellectual Property Office has stepped up efforts to improve the trademarks and patents administration regime. Infringement of intellectual property rights is a punishable offense under the IP law with criminal and civil penalties. Recourse available to owners includes injunctive relief; seizure and destruction of infringing goods and plates or implements used for the making of infringing copies; and prohibition of imports and exports. Penalties for the first offense include up to six months imprisonment or a fine of up to LKR 500,000 (USD 34,500), but smaller penalties are the norm. Aggrieved parties can seek redress for any IPR violations through the courts, though this can be a frustrating and time-consuming process. In recent times warning letters have proved to be an effective alternative to litigation in cases of minor copyright and trademark infringements. Sri Lanka Customs’ regulatory code provides ex officio authority to seize suspected counterfeit shipments at the borders. However, police and customs authorities generally do not proactively initiate action against IPR violators unless the victims bring it to the authorities’ attention and work with them on enforcement actions. Judicial cooperation continues to improve. The government has established a special antipiracy and counterfeit unit in the Criminal Investigation Division (CID) of the police to specifically address IPR concerns. There is also an IPR unit in the Social Protection Unit of Sri Lankan Customs, and a trademark database to advance IPR protection. The government has yet to make full use of this database.

The U.S. Embassy, the United States Patent and Trademarks Office (USPTO), and the American Chamber of Commerce of Sri Lanka are working to pursue more aggressive enforcement and enhance public awareness. Sri Lanka is not listed in USTR’s Special 301 report.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

Contact at U.S. Embassy Colombo:

William Humnicky, Economic Officer
94-11-2498500
Email: commercialcolombo@state.gov
Local lawyers list: http://srilanka.usembassy.gov/service/legal-resources-in-sri-lanka.html

Country/Economy Resources:

American Chamber of Commerce in Sri Lanka: www.amcham.lk
National Intellectual Property Office of Sri Lanka: www.nipo.gov.lk

7. Transparency of the Regulatory System

The BOI strives to inform potential investors about laws and regulations affecting operations in Sri Lanka, and the new government has stated a commitment to reform and reorganize relevant government agencies to improve services. However, existing laws remain hard to find, and proposed laws and regulations, while generally made available for public comment, are occasionally published without public discussion. Foreign and domestic investors complain the regulatory system is unpredictable due to outdated regulations, rigid administrative procedures, and excessive leeway for bureaucratic discretion. Effective enforcement mechanisms are sometimes lacking, and investors cite coordination problems between the BOI and relevant line agencies. Lethargy and indifference on the part of mid- and lower-level public servants compound transparency problems. Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during tendering. Under the former government, the Sri Lankan Cabinet had to approve strategic projects in order for private investors to receive incentives. It is unclear what the new government’s approval process will be.

Although many foreign investors, including U.S. firms, have had positive experiences in Sri Lanka, some encountered significant problems with the former government’s practices and regulations. Under the previous regime, some claimed that the level of corruption made it difficult to compete against bidders not subject to the U.S. Foreign Corrupt Practices Act. While the new government has started to implement its platform of good governance and transparency, the administration has yet to eliminate all elements of corruption in the bidding process. Some multinational firms continue to experience delays in reaching agreement on investment projects, largely due to the new government’s desire to review all existing projects.

The Institute of Chartered Accountants of Sri Lanka (ICASL) is responsible for setting and updating accounting standards to comply with current accounting and audit standards adopted by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB) respectively. Sri Lanka follows International Financial Reporting Standards (IFRS) for financial reporting purposes set by the IASB.

Sri Lankan accounting standards are applicable for all banks, companies listed on the stock exchange, and all other large and medium-sized companies in Sri Lanka. Accounts of such enterprises are required to be audited by professionally qualified auditors holding ICASL membership. ICASL has published accounting standards for small companies as well. The

Accounting Standards Monitoring Board (ASMB) is responsible for monitoring compliance with Sri Lankan accounting and auditing standards. British professional accounting bodies are quite active in Sri Lanka. The Chartered Institute of Management Accountants (CIMA), a leading professional accounting body based in the United Kingdom and spread over the Commonwealth, has its largest overseas presence in Sri Lanka.

At pre-enactment stage, bills are drafted by respective ministries. Public consultation at this stage is limited in most instances. Every bill must be published in the government gazette at least seven days before it is placed on the Order Paper of the Parliament. This is the first occasion the public is officially informed of proposed laws. Until this time the draft is treated as a confidential document. Any member of the public can challenge the bill in the Supreme Court if they do so within one week of its placement on the Order Paper of the Parliament. If the Supreme Court orders amendments to the bill, these have to be incorporated before can be debated and passed.

8. Efficient Capital Markets and Portfolio Investment

The Securities and Exchange Commission (SEC) covers the Colombo Stock Exchange (CSE), unit trusts, stock brokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies, and securities depositories. Portfolio investment is encouraged. Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in numerous permitted sectors. In order to facilitate portfolio investments, country and regional funds may obtain SEC approval to invest in Sri Lanka's stock market. These funds make transactions through share investments in external rupee accounts maintained in commercial banks.

The new government has vowed to improve stock market regulation, and has appointed a new SEC management. The SEC has recently expanded the investigation and enforcement divisions and reopened several stock market manipulation cases.

Previous attempts to investigate insider trading and fraud at the CSE during 2011-2012 had to be abandoned as the SEC came under pressure from powerful market players. Four senior SEC officials resigned over regulatory issues during this period, citing pressures from high net-worth local investors.

In accordance with its IMF Article VIII obligations, the government and the Central Bank generally refrain from restrictions on current international transfers. When the government experiences balance of payments difficulties, it does tend to impose controls on foreign exchange transactions, but it in recent years has exercised restraint in resorting to such measures.

The state consumes over 50 percent of the country's domestic financial resources and has a virtual monopoly on the management and use of long-term savings in the country. This inhibits the free flow of financial resources to product and factor markets. In the past, high budget deficits have caused interest rates to rise and resulted in higher inflation. Average inflation in December 2015 was 0.9 percent compared to 3.3 percent in December 2014. The Average Prime Lending rate was 11 percent in December 2015. Both inflation and interest rates are on an upward trend in 2016. The Central Bank increased policy interest rates by 50 basis points in February and has not ruled out a further increase in 2016. Retained profits finance a significant portion of private investment in Sri Lanka. Commercial banks are the principal source of bank finance. Bank loans are the most widely used credit instrument for the private sector. Large companies raise funds through corporate debentures as well. Credit ratings are now mandatory for all deposit-taking institutions and for all varieties of debt instruments. Local companies are allowed to borrow from foreign sources. Foreign direct investment finances about six percent of overall investment. Foreign investors are allowed to access credit on the local market and are free to raise foreign currency loans.

Money and Banking System, Hostile Takeovers

Sri Lanka has a fairly well-diversified banking system. There are 25 commercial banks – 13 local and 12 foreign. In addition, there are seven local specialized banks. Citibank NA is the only U.S. bank operating in Sri Lanka. Several domestic private commercial banks have substantial government equity acquired through investment agencies controlled by the government. In 2014, the Central Bank actively promoted consolidation in the banking and financial sector. The new government is reviewing consolidation plans.

The Central Bank is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning, and public disclosure of banking sector performance. Credit ratings are mandatory for all banks operating in Sri Lanka. The Central Bank has accepted the Basel II standardized approach framework, and has introduced accounting standards corresponding to International Financial Reporting Standards for banks.

Total assets of commercial banks stood at LKR 5,884 billion (USD 45 billion) as of December 31, 2014. The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are still important players, accounting for about 40 percent of all banking assets. The two state banks have a large portfolio of non-performing loans. Both these banks have significant exposure to state-owned companies, which are treated as performing loans. However, as these banks are implicitly guaranteed by the state, their problems have not harmed the credibility of the rest of the banking system.

Private commercial banks and foreign banks operating in Sri Lanka generally follow more prudent credit policies and, as a group, are in better financial shape. Foreign banks tend to follow international best practices, as most foreign bank branches are subject to supervision in their own country in addition to that of the Sri Lankan Central Bank. Fitch maintains a stable sector outlook for the Sri Lankan banking sector for 2016, forecasting little or no deterioration in this sector's credit profile, even though operating conditions could worsen. Capital adequacy ratio (CAR) for the banking industry declined in 2014 but remained above the regulatory minimums of five percent and 10 percent set by the Central Bank of Sri Lanka for core CAR and total capital, respectively. The capital quality of Sri Lankan banks is generally high, consisting mostly of core capital. However, Sri Lankan bank CARs are overstated due to the absence of a capital charge on certain asset exposures including gold-backed loans and foreign currency-denominated exposures.

9. Competition from State-Owned Enterprises

State Owned Enterprises (SOEs) are active in transport (bus and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. Since the end of the war, Sri Lankan armed forces have begun operating air services, tourist resorts, and farms for civilian purposes, crowding out some private investment. In total, there are 245 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important SOEs. SOEs employ over 221,000 people. There is widespread recognition that SOEs are poorly managed and in urgent need of reforms. SOEs make purchases from private companies and foreign firms and have easy access to credit from state-owned-banks and to government-owned land. SOEs do not engage in research and development (R&D). The current government is keen to improve SOE management.

OECD Guidelines on Corporate Governance of SOEs

Sri Lanka has not taken a position on the OECD guidelines on corporate governance of SOEs.

The government has not specified an ownership policy for SOEs. Directors of SOEs are appointed by the Cabinet or a line ministry. The government allocates board seats to both senior government officials and politically-affiliated individuals. In the past, government-owned banks were required to take on debt from inefficient SOEs, forcing them to carry a greater share of non-performing loans. In addition, there are several large private banks in which multiple government entities own interest. On aggregate, therefore, these companies are majority government owned. By virtue of its shareholding, the government exerts control over the appointment of boards of directors and management of these banks. SOE governance structures are not strong. SOE senior managers usually report to politically-affiliated boards of directors and SOEs are often charged with operating based upon political agendas.

The new government has vowed to improve SOE governance and management. The government plans to bring all SOEs under a government-owned holding company. This holding company would be operated based on sound financial principles and market economics. A new Public Enterprise Act is to be enacted to provide the necessary legal framework to this effect.

Sovereign Wealth Funds

Sri Lanka does not have a sovereign wealth fund. Instead the government manages and controls large pension funds from private sector employees and uses these funds for budgetary purposes and stock market investments. In the past, the government and the Central Bank have been accused of misusing the Employees’ Provident Fund (EPF), a large retirement fund of private sector workers managed by the Central Bank, for unwise stock market investments and to help supporters of the governing party. When funds are invested in stock market listed companies, government representatives have played an active role in the management of such companies. Experts argue the fund must be segregated from politics and professionalized. The new government has vowed to improve the management of the pension funds. SOEs and government-managed pension funds must meet Sri Lankan accounting standards.

10. Responsible Business Conduct

The concept of Corporate Social Responsibility (CSR) is more widely recognized among Sri Lankan companies than the Responsible Business Conduct (RBC) initiative. Leading companies in Sri Lanka are actively promoting CSR, and some small and medium enterprises have also started to promote CSR. The Ceylon Chamber of Commerce, the largest business chamber in Sri Lanka, promotes CSR among its membership. Several organizations promote good business practices through programs and awards to recognize sustainability policies, good corporate governance, and sound management practices. Internationally, some of Sri Lanka's leading companies have joined the UN Global Compact initiative.

The apparel industry, Sri Lanka’s largest export industry, has a specially designated CSR program for the industry under the title "Garments without Guilt" (www.garmentswithoutguilt.com). The ethical sourcing and sustainable development practices under the program aim to empower women and their communities. In addition, the program endeavors to promote sustainable eco-friendly manufacturing practices.

The majority of private sector CSR programs in Sri Lanka are professional and competent, but the government does not regulate the programs. The SEC together with the ICASL published the “Code of Best Practices on Corporate Governance” in 2008 in order to establish good corporate governance practices in the Sri Lankan capital markets.

The government has not launched an initiative to promote RBC principles such as the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights endorsed by the UN Human Rights Council.

11. Political Violence

The Sri Lankan government's military campaign against the Liberation Tigers of Tamil Eelam (LTTE) ended in May 2009 with the defeat of the LTTE. During the war, the LTTE had a history of attacks against civilians, although none of the attacks were directed against U.S. citizens. There have been no terrorist attacks since the end of the conflict. The government has authority throughout the island. Demonstrations take place in Sri Lanka from time to time in response to world events or local developments. Demonstrations near Western embassies are not uncommon. Protests aimed at Western embassies have been well-contained, with support from the Sri Lankan police and military.

Business-related Violence

Business-related violence has not been notable over the last two years but there has been business-related violence in the past. In August 2013, a large rubber glove manufacturing factory was forced to move to a new location due to protests. Residents near the factory protested, alleging it had polluted water in the area. An army crackdown on protesters resulted in three deaths. In March 2014, residents near another rubber factory protested against water pollution. In mid-2013, a leading international food company temporarily suspended operations in Sri Lanka, citing precautionary measures to ensure the safety of its employees after it faced product bans, court cases, and angry demonstrators over the sale of contaminated milk powder. In 2013, a group of local politicians were charged with killing a Sri Lankan tea estate manager.

In May 2011, workers at the Katunayake Export Processing Zone (EPZ), the country’s largest EPZ, held a large protest demanding the withdrawal of a proposed new pension plan covering all private sector employees. The protest led to a violent clash between workers and police. The clashes resulted in the death of one EPZ worker, injuries to a number of protestors and police officers, and damage to several factories. The government closed the EPZ for two days as a precautionary measure. Following the clash, the government withdrew the pension bill.

12. Corruption

While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is considered weak and inconsistent. U.S. firms identify corruption as a constraint on foreign investment but generally not a major threat to operating in Sri Lanka once contracts have been established. The business community claims that corruption has the greatest effect on investors in large projects and on those pursuing government procurement contracts. Some claim that the level of corruption makes it difficult to compete with bidders not subject to the U.S. Foreign Corrupt Practices Act. Projects geared toward exports face fewer problems. Local investors say internal controls do exist, although they are weak. The new government created new departments and agencies to investigate corruption allegations, mostly from the previous regime, and granted new resources to existing anticorruption departments. It also appointed the local head of Transparency International as a senior advisor on anticorruption matters. The government has introduced a Right to Information Act in Parliament to increase transparency.

The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations. The Bribery Commission institutes proceedings against responsible individuals in the appropriate court. The law states a public official's offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and a fine at the discretion of the courts. A bribe by a local company to a foreign official is not covered by the Bribery Act.

In response to allegations of corruption during the previous Rajapaksa administration, the government has appointed a multitude of agencies and commissions to probe allegations.

Some of the newly created agencies are:

Anti-Corruption Secretariat under the Prime Minister's Office
A Presidential Commission of Inquiry to probe allegations of corruption and abuse of power
Police Financial Crimes Investigation Division (FCID)
State Asset Recovery Task Force (START)
National Executive Council's Subcommittee on Corruption

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Sri Lanka signed and ratified the UN Convention against Corruption in March 2004. Sri Lanka has signed but not ratified the UN Convention against Transnational Organized Crime. Sri Lanka is a signatory to the OECD-ADB Anti-Corruption Regional Plan, but has not joined the OECD Anti-Bribery Convention.

Resources to Report Corruption

Contact at Government Agency responsible for combating corruption:

Dilrukshi Wickremasinghe, Director General
Commission to Investigate Allegations of Bribery or Corruption
No 36, Malalasekara Mawatha, Colombo 7
Phone: 94-11- 2595039
Email: dgbribery@gmail.com

Contact at watchdog organization:

Chairman
Transparency International, Sri Lanka
183/5 High Level Road, Colombo 6
Phone: 94-11- 4369783???
Email: tisl@tisrilanka.org

13. Bilateral Investment Agreements

The government of Sri Lanka has signed investment protection agreements with the United States (which came into force in May 1993) and with the following other countries: Australia, Belgium-Luxembourg, China, Denmark, Egypt, Finland, France, Germany, Indonesia, India, Iran, Italy, Japan, Korea, Kuwait, Malaysia, the Netherlands, Norway, Pakistan, Romania, Singapore, Sweden, Switzerland, Thailand, the United Kingdom, and Vietnam. Under Article 157 of the Sri Lankan Constitution, investment protection agreements enjoy the force of law, and no legislative, executive, or administrative action can contravene them

Bilateral Taxation Treaties

Sri Lanka signed a bilateral taxation treaty with the United States in 1985, which was amended in 2002. Information about the treaty can be found at: http://www.irs.gov/Businesses/International-Businesses/Sri-Lanka---Tax-Treaty-Documents

The Embassy encourages prospective U.S. investors to contact an international auditing firm operating in Sri Lanka to assess their tax liability.

14. OPIC and Other Investment Insurance Programs

Sri Lanka and the Overseas Private Investment Corporation (OPIC) concluded an agreement in 1966 which was subsequently renewed in 1993. This agreement provides investment insurance guarantees for U.S. investors. OPIC currently provides coverage to U.S. banking and power sector investments in Sri Lanka.

Sri Lanka is a founding member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, which offers the opportunity for insurance against non-commercial risks.

15. Labor

Sri Lanka’s labor market is small, with a limited pool of skilled workers. Engineering, accounting, legal, and architectural professions follow high standards, although local design talent is still underdeveloped. Labor is available at relatively low cost, though higher than in other South Asian countries. Many of Sri Lanka’s top graduates seek employment outside the country. For those who remain, Sri Lanka's labor laws afford many employee protections. Many investors consider this legal framework somewhat rigid, however, making it difficult for companies to reduce their workforce even when market conditions warrant doing so. The cost of dismissing an employee in Sri Lanka is calculated based upon a percentage of wages over an average of 54 salary weeks, one of the highest in the world. There is no unemployment insurance or other social safety net for laid off workers. Sri Lanka's labor force is literate (particularly in local languages) and trainable, although weak in certain technical skills and the English language. The average worker has eight years of schooling, and two-thirds of the labor force is male. Retention is fairly good in the IT/BPO sector, but the garment industry reports up to a 40 percent staff turnover rate. Lack of labor mobility in the North and East is also a problem, with workers reluctant to leave their families and villages for employment elsewhere.

In 2014, 8.4 million Sri Lankans were employed, with 45 percent in services, 26 percent in industry, and 29 percent in agriculture. Overall, 41 percent of the workforce is in the private sector and 15 percent in the government. Self-employed workers constitute 35 percent of all employed, while another nine percent were unpaid family workers. About 60 percent of the employed are in the informal sector.

The unemployment rate has declined in recent years to an estimated five percent, although low unemployment rates are due in part to a large outflow of Sri Lankan migrant labor. Unemployment among women and high school/college graduates has been proportionally higher than the rate for less-educated workers. Youth and entry-level unemployment and underemployment remain a problem. A significant proportion of unemployed people seek "white collar" employment, often preferring low-paying but stable government jobs. Most sectors seeking employees offer manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency. The construction, plantation, and apparel industries also report a shortage of workers. Some investors have faced problems in finding sufficient employees with the requisite skills, a situation the tourism industry is likely to face as more hotels open in the near future. The government has initiated educational reforms it hopes will lead to better preparation of students and better matches between graduates and jobs. More computer, accounting, business skills, and English language training programs are becoming available. The demand for these skills still outpaces supply.

Migrant Workers Abroad

There are an estimated 1.8 million Sri Lankan workers abroad. Remittances from migrant workers, at about USD 7 billion per year, make up Sri Lanka’s largest source of foreign exchange. The majority of this labor force is unskilled (housemaids and factory laborers) and located primarily in the Middle East. Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad.

Trade Unions

Approximately 20 percent of the workforce is unionized, but union membership is declining. There are more than 1,900 registered trade unions (many of which have 50 or fewer members), and 19 federations. About 15 percent of labor in the industry and service sector is unionized. Most of the major trade unions are affiliated with political parties, creating a highly politicized labor environment. Several unions are affiliated with different political parties and work at state-owned enterprises. This is not the case for private companies, which only have one union or perhaps a workers' council to represent the employees. Some employers have alleged that the People's Liberation Front of Sri Lanka (JVP), a Marxist political party opposed to private enterprise, can provoke strikes under the pretense of trade union activity. Due to the JVP's violent past, employers generally opposed to it and are reluctant to deal with its trade union arm, the Inter-Company Trade Union. There are also some independent unions.

All workers, other than police, armed forces, prison service, and those in essential services, have the right to strike. By law, workers may lodge complaints to protect their rights with the Commissioner of Labor, a labor tribunal, or the Supreme Court. The President retains the power to designate any industry as an essential service.

Unions represent workers in many large private firms, but workers in small-scale agriculture and small businesses usually do not belong to unions. The tea industry, however, is highly unionized, and public sector employees are unionized at very high rates. Labor in the export processing zone (EPZ) enterprises tend to be represented by non-union worker councils, although unions also exist in the EPZs. The BOI has requested companies recognize trade unions, allow union access to export processing zones, and accept the right to collective bargaining. The BOI has issued guidelines for employee councils, giving them the power to negotiate binding collective agreements. According to the BOI, where both a recognized trade union with bargaining power and a non-union worker council exist in an enterprise, the trade union will have the power to represent the employees in collective bargaining. The International Labor Organization's (ILO) Freedom of Association Committee has observed that Sri Lankan trade unions and worker councils can co-exist, but advises that there should not be any discrimination against those employees choosing to join a union. The right of worker councils to engage in collective bargaining has been recognized by the ILO.

Unions have complained that the BOI and some employers, especially in the export processing zones, prohibit union access and do not register unions on a timely basis.

Collective bargaining exists but is not universal. The Employers' Federation of Ceylon, the main employers’ association in Sri Lanka, assists its member companies to negotiate with unions and sign collective bargaining agreements. While about a quarter of the 592 members of the Employers' Federation of Ceylon are unionized, approximately 100 of these companies (including a number of foreign-owned firms) are bound by collective agreements. A further 30 have signed memorandums of understanding with trade unions. However, there were only a few collective bargaining agreements signed with companies located in EPZs.

The law prohibits all forms of forced and compulsory labor. In March 2016, the Parliament approved a law to introduce a national minimum wage for the first time. The new national minimum wage is set at Rs 10,000 ($70) per month or Rs 400 ($2.75) per day. Previously, 44 “wage boards” were established by the Ministry of Labor to set minimum wages and working conditions by sector and industry in consultation with unions and employers. The minimum wages established by these sector-specific wage boards tend to be higher than the new national minimum wage. The minimum wages established by these wage boards were limited to their respective sector. Informal sector workers are not covered by any wage board and so have only the new (and lower) nationwide minimum wage.

Sri Lankan law does not require equal pay for equal work for women. The law prohibits most full-time workers from regularly working more than 45 hours per week without receiving overtime (premium pay). In addition, the law stipulates a rest period of one hour per day. Regulations limit the maximum overtime hours to 15 per week. The law provides for paid annual holidays, sick leave, and maternity leave. Occupational health and safety regulations do not fully meet international standards.

Despite private sector condemnation, the government interferes in private sector wage setting from time to time. The government announced a Rs 2,500 (USD17) wage increase to private sector workers from 2016. The increase is to be given to all private sector workers currently earning a salary below Rs 40,000 (USD278) per month. Child labor is prohibited and virtually nonexistent in the organized sectors, although child labor occurs in informal sectors. The minimum legal age for employment is set at 14. The minimum age for employment in hazardous work is 18 years. The Hazardous Occupations Regulation contains a list of 51 occupations considered to be hazardous forms of child labor in Sri Lanka.

Previously confrontational labor-management relations have improved in the last few years as employers have worked harder to motivate and care for employees. While labor-management relations vary from organization to organization, managers who emphasize communication with workers and offer training opportunities generally experience fewer difficulties. U.S. investors in Sri Lanka (including U.S. garment buyers) generally promote good labor management relations and labor conditions that exceed local standards.

Sri Lanka is a member of the ILO and has ratified 31 international labor conventions, including all eight of the ILO’s core labor conventions. The labor laws of Sri Lanka are laid out in almost 50 different statutes, and the Ministry of Labor and Trade Union Relations has consolidated these in a Labor Code. The ILO and the Employers' Federation of Ceylon are working to improve awareness of core labor standards, and the ILO also promotes its Decent Work Agenda program in Sri Lanka.

16. Foreign Trade Zones/Free Ports/Trade Facilitation

Sri Lanka has 12 free trade zones, also called export processing zones, administered by the BOI. In addition, a large private apparel company runs a fabric park. The company invites local and foreign companies to set up fabric and apparel factories in this eco-friendly park.

In the past, firms preferred to locate their factories near the Colombo harbor or airport to reduce transport time and cost. However, excessive concentration of industries around Colombo has caused heavy traffic, higher real estate prices, environmental pollution, and scarcity of labor. The BOI and the government now encourage export-oriented factories to set up in industrial zones farther from Colombo, although Sri Lanka's poor roads make these outlying zones more challenging.

17. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

	Host Country Statistical source		USG or international statistical source		USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data	Year	Amount	Year	Amount
Host Country Gross Domestic Product (GDP) ($M USD)	2015	$82,000	2014	$78,820	www.worldbank.org/en/country
Foreign Direct Investment	Host Country Statistical source		USG or international statistical source		USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions)	2014	NA	2014	$111	BEA data available at http://bea.gov/international/direct_investment_ multinational_companies_comprehensive_data.htm
Host country’s FDI in the United States ($M USD, stock positions)	2014	NA	2014	NA	BEA data available at http://bea.gov/international/direct_investment_ multinational_companies_comprehensive_data.htm
Total inbound stock of FDI as % host GDP	2014	NA	2014	NA	.NA

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions), 2014
Inward Direct Investment			Outward Direct Investment
Total Inward	Amount	100%	Total Outward	Amount	100%
Netherlands	1,861	18%	Singapore	295	49%
U.K.	1,381	13%	Malaysia	175	29%
India	996	9.5%	Maldives	30	5%
Switzerland	851	8%	India	24	4%
Mauritius	838	8%	Jordan	16	3%
"0" reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment

Portfolio investment data are unavailable for Sri Lanka.

18. Contact for More Information

William Humnicky, Economic Officer
U.S. Embassy Colombo
210 Galle Road, Colombo 3, Sri Lanka
Telephone: +94-11-2498500
Email: commercialcolombo@state.gov

ecoi.net-Beschreibung:: Jahresbericht zum Investitionsklima, inkl. Informationen zum Rechtssystem, zu politischer Gewalt, Korruption, Wirtschaftslage, etc. (Stand März 2016)

Land:: Sri Lanka
Quelle:: USDOS – US Department of State (Autor)
Veröffentlicht:: 5. Juli 2016
Originallink:: http://www.state.gov/e/eb/rls/othr/ics/2016/sca/254491.htm
Dokumentart:: Periodischer Bericht
Sprache:: Englisch
Dokument-ID:: 1276355 (frühere ID 332540)