How to Start an Overseas Business in Sri Lanka | Business Impact of Foreign Exchange and Tax Regulations on Business Expansion from Sri Lanka to Overseas Markets

This article delves into the foreign exchange regulations and tax policies that affect the expansion efforts of Overseas Businesses in Sri Lanka. in overseas markets. It focuses on resident investors and does not cover investments made by entities other than private limited companies or alternative forms of foreign exchange transactions.

Foreign Exchange Regulations

Under the Foreign Exchange Act, eligible resident investors are permitted to establish and maintain overseas offices, branches, or projects (referred to as overseas offices) in foreign countries.

Limits on Outward Investments

Capital transactions for outward remittances must be conducted through an Outward Investment Account (OIA), which is opened and maintained by the eligible resident investor through an authorized dealer or a restricted dealer. These transactions are subject to limits specified in issued directions and the provisions of the Foreign Exchange Act.

For companies or partnerships investing in overseas offices/branches, the limit is set at USD 300,000 per calendar year or an equivalent amount in other designated foreign currencies. However, the usage of outward investment accounts for payments has been suspended since June 2022, following a gazette notification by the finance minister at that time.

Additionally, the gazette order imposes a maximum limit of USD 20,000 or its equivalent in other designated foreign currencies for outward remittances on capital transactions made through Business Foreign Currency Accounts or Personal Foreign Currency Accounts held by resident individuals in Sri Lanka, during the effective period of the notification.

Repatriation of Income and Liquidation Proceeds

Any income and capital proceeds from investments must be brought back to Sri Lanka through the same outward investment account used for the initial investment, within three months from the date of receipt.

Incentives for Resident Investors

Eligible resident investors are allowed to utilize funds up to fifty per cent (50%) of the value of capital gains from previous outward investments credited to their outward investment account, without being subjected to the permitted limits. However, this incentive has also been restricted by the aforementioned gazette notification since June 2022.

Other Terms, Conditions, and Reporting Requirements for Foreign Investments

1. Prior to each outward remittance, the investor must obtain a clearance letter from the Head of the Department of Foreign Exchange through an authorized dealer or a restricted dealer. Investors planning subsequent foreign investments must provide a certificate obtained from a Fellow member of the Institute of Chartered Accountants of Sri Lanka or a Charter holder of the Chartered Financial Analyst (CFA) Institute, outlining the progress and status of their previous investments, along with supporting documents. The Head of the Department of Foreign Exchange will issue the clearance letter upon being satisfied with the progress of the previous investments.
2. The Board of Directors of an investment company that has invested in an unlisted company outside Sri Lanka must evaluate the progress of such investment annually and submit a report to the Head of the Department of Foreign Exchange, including details on the investee's profit or loss, dividends declared by the investee, or dividends received by the investor. This report must be submitted on or before March 31 of the following year or as specified by the Head of the Department of Foreign Exchange for a particular investment.
3. In order to be eligible for permitted investments under foreign exchange regulations, investors must maintain a sound financial position and performance. They must also provide a recommendation from a Fellow member of the Institute of Chartered Accountants or a Charter holder of the Chartered Financial Analyst Institute, in line with the directions issued by the Central Bank. Additionally, the feasibility of the proposed investment must be demonstrated to the Head of the Department of Foreign Exchange.

Tax Regulations

Determining Applicable Taxes for Foreign Subsidiaries/Branches

To ascertain the applicable taxes for foreign investments, companies must submit relevant agreements, business details, business process details, and organizational charts in writing to the tax policy unit of the Inland Revenue Department. Subsequently, the tax policy unit will consult with the interpretation committee and provide details regarding the taxes applicable to the specific foreign investment.

Tax Clearance Requirements for Outward Remittances in Foreign Currency

For foreign currency remittances, a tax clearance must be obtained from the Inland Revenue Department (IRD), except in cases mentioned in the negative list under the Inland Revenue Act. The tax clearance certificate issued by the IRD must then be submitted to the bank to initiate the remittance process.

Due to the Withholding Tax (WHT) imposed on payments received by non-residents, the company must submit a tax clearance certificate issued by the IRD to the bank in order to process outward remittances. The WHT rate will be determined based on the provisions of the Inland Revenue Act but will be subject to the provisions of double tax avoidance agreements.

Payments to resident individuals will be subject to the Advance Personal Income Tax (PAYE/WHT) as per the provisions of the Inland Revenue Act. Invoices and related agreements must be submitted to both the IRD and the bank in all the aforementioned circumstances.

Note: The above information is based on the current regulations and should be verified with the relevant authorities for any updates or changes.

GLOBALIZATION & ITS IMPACT WITH STATISTICAL EVIDENCE

Introduction

We are unable to find a universal definition for the term of Globalization. But everyone should
know the scientific definition of globalization because it is affected by everyone in the world.
Human behavior also influenced by the process of globalization.

“Globalization as a state of the world involving networks of interdependence at multi –
continental distances with multiple economic/financial, political, national security,
environmental, social/cultural, markets and individuals” (Friedman and Keohane)
There is a lot of definitions available for the globalization. The world is narrowing the
the geographical distance between societies through the process of globalization.
Effectiveness of the globalization depends on the two policies. They are whether the country is
opened to the world and barriers to trade for the capital, goods, and services. A country which
opened to the world and there are lower barriers for money, products, and services to flow,
Globalization will useful in that country. Efforts on reducing broader tariffs and other restrictions
on the movement of goods and services, establishing a rule-based system on trade to help the
process grow faster by World Trade Organization and General Agreement on Tariff and Trade.
There are a lot of benefits that can be gain from globalization. Preliminary can be mention three main
benefits. First one is the globalization offers access to a large market. Secondly, it increases
competitions among countries, and thirdly it facilitates technology and knowledge to countries.

Globalization in Sri Lanka

Before 1977 Sri Lanka experienced self – sufficient economic system which categorizes as a
mercantilism international trade policy. In that time Sri Lanka was a leading global trading
country at a hub in the Indian Ocean. During this period, Sri Lanka was influenced to shift to export and import. During the 1970-1977 period, the average annual economic growth rate is less
than 3% also the country experiences high unemployment in that period. In 1972 Sri Lanka
experienced a 24% highest unemployment level and during the period from 1970to 1977 average
unemployment rate was17%. In 1977 Sri Lankan economy disregarded the self – sufficient
economic system. The export and import economy has both advantages and disadvantages.
However, Sri Lanka continuously earned a deficit trade balance. Sri Lanka introduced an open
a market economy with trade and FDI liberalization in 1977 and became the most open economy
in South Asia.

During the first phase(Period from 1977 to 1982 ) of Globalization, the Sri Lankan economy
experienced high economic growth and low unemployment by achieving internal balance. But in
the second phase (Period from 1983 to 1994) inflation was high, and also the very high
unemployment was recorded. After the year of 1994 Sri Lankan economy is facing a lot of
economic problems. But globalization process provided many opportunities to Sri Lanka by
the side of education, infrastructure, technology, etc.

Globalization Index

KOF Globalization index is a primary index for measuring globalization. This introduced in 2002.
This index covers the economic, social, and political dimensions of globalization. There are three
dimensions used in this index. They are Economic, Social, and Political globalization.
The dimensions of KOF index are described as follows,

❖ Economic globalization
There are two dimensions in the Economic Globalization. First one is Actual economic flow it
includes foreign direct investment stock as a percentage of GDP, Portfolio investment, and data
on trade provided by the World Bank. The second one is restrictions to trade and capital using hidden
import barriers, mean tariff rates, taxes on international trade, and capital account restrictions.
❖ Social Globalization
KOF index classifies social globalization in three categories. First one is data on personal
contacts. It includes telephone traffic, transfers, international tourism, foreign population, and
international letters. Second sub-index of information flow is measured the potential influx of ideas
and images. It includes several Internet, television, and newspaper users. Third sub-index is
data on cultural proximity. It provides several McDonald’s Restaurants, Number of Ikea, and
trade in books.
❖ Political globalization
To find the degree of political globalization their Number of embassies in-country,
membership in international organizations, participation in U.N. Security council mission and
several treaties.

Impact of Globalization to Sri Lanka

Tourism Industry

Tourism is one of the growing industry in Sri Lanka. It provides many job opportunities to Sri
Lankan people. The reasons for the growth of the tourism industry are rising global incomes, increasing
leisure time, a rising world population; fall in real transport, reduced travel time, and
globalization. The tourism industry is heavily influenced by economic and political stability and as
well as by terrorist threats. As an example in Sri Lanka, tourist arrival is declined in the past war
period. 182,620 in 1987 but in 1982 tourist arrival is 407,230. But 1983 started a civil war, and it
affected the reduction of tourism arrivals to 182,630. In 1990 recorded tourism arrivals are
297,888 and started to increase tourism arrivals at a stable level with small fluctuations. But after
the 2009 tourism arrivals are increased rapidly with the end of civil war in 2009. That peaceful
situation affects the global tourism attraction to Sri Lanka. Government promotes the
tourism sector by promoting the industry using advertising.

Trade Balance

With the liberalization in 1977 exports and imports are increased by a considerable amount. It is
improved the balance of trade in Sri Lanka. In the year 1977 US $ 86.31 Million trade surplus
shows in Sri Lankan economy. Also, this indicates an increasing pattern of export and import. Imports
are growing fast than exports. Sri Lankan economy experiences a growing trend of trade
deficit. Because of interrelationship and interdependency among countries in the world got an
opportunity for trading with other countries as a result of globalization. Sri Lanka signed the first
bilateral agreement was ISFTA. Sri Lanka has entered into several trade agreements such as,
South Asian Free Trade Agreement (SAFTA), Asia-Pacific Trade Agreement (APTA), Indo-Sri
Lanka Free Trade Agreement (ISFTA), Pakistan -Sri Lanka Free Trade Agreement (PSFTA).

Unemployment

Before 1977 in Sri Lanka recorded a high unemployment rate but after the liberalization that
impacts to the globalization unemployment in Sri Lanka declined gradually. For example, expand
of the tourism industry, garment industry, etc. Because of the foreign employment, Sri Lankan
unemployment level is reduced as a result of globalization.

Foreign Employment

With the liberalization, the Sri Lankan economy was opened to the world. Labor migration is
a moment of people from one country to another with the purpose of unemployment. Globalization
brought all countries more closely to each other in the world. It created many opportunities for Sri
Lankan people who are seeking to get knowledge, job opportunities, and educational
opportunities. Because of that, labor migration is increased with globalization. Sri Lanka is a significant labor-sending country in Asia. Globalization helped to improve foreign employment
departure year by year because it grew the interrelationship between Sri Lanka and other
countries in the world, and it allowed increasing the demand for Sri Lankan labor
force. Foreign employment from 1988 to 2007 female overseas work is more significant than a male
international job. In 2016 total departure for the external job is 242,930.

Foreign Direct Investment

During the British Colonial period from 1815 to 1918the UK was the primary source of foreign
direct investment in Sri Lanka. British FDIs forecasted to the development of infrastructure
facilities that were required for their investment in the plantation sector of the country. After achieving independence in 1948, Sri Lanka followed different changes until 1977. FDI flows
negligible as a percentage of gross domestic capital formation until the late 1970s. Foreign direct
investment during the period from 1970 to 1977 was the only US $ 0.5 Million. And it was around
only 0.2% Gross Domestic Capital Formation. With introducing liberalization policy in 1977
there was a rapid increase in FDI because of the global attraction to Sri Lanka.
Because of the civil war started from the year 1983, the upward trend of FDI trend was disrupted.
With the end of the civil war in 2009, Sri Lankan foreign direct investment was grown rapidly.