IMF: Proposed tax laws a joint ‘product’ with Sri Lanka authorities

Proposed new tax laws, seen radicalising Sri Lanka’s tax revenue structure, is a joint collaboration between the International Monetary Fund (IMF) and local authorities, the fund said this week, defending claims that it was an ‘entirely IMF-driven product’.

“The Inland Revenue Act (IRA) is a product of the IMF’s extensive collaboration with the Sri Lankan authorities over the past year and incorporates feedback from local experts,” the fund said in response to queries from the Business Times.

In an email communication, Washington- based Jaewoo Lee, Mission Chief for Sri Lanka noted that the IMF has supported numerous member countries with their tax law reform initiatives over many decades.

He was in particular answering a question as to whether IMF experts had prepared the IRA without consulting local experts and allegations that it was a carbon copy of Ghana’s Inland Revenue Laws introduced by IMF recently.

An April 2 Business Times report said that “the new Act has been prepared by IMF experts on the line of Ghana’s new tax law prescribed by the IMF and in fact the proposed Sri Lankan act was the carbon copy of that country’s new legislation, several eminent tax experts said claiming that they have documentary evidence to prove this fact”.

However Mr. Lee said the legal framework ultimately adopted by the authorities is always adhered to the specificities and circum- stances of the individual country concerned.

The framework underpinning the new IRA reflects international good practices and is influenced by a number of key G20 common law tax systems, he said.

Mr. Lee pointed out that the IRA carefully incorporates, among other things, Sri Lanka’s unique treatment of partnerships and trusts;

The Inland Revenue Act (IRA) is a product of the IMF’s extensive collaboration with the Sri Lankan authorities over the past year and incorporates feedback from local experts

reintroduces the announced capital gains tax (CGT); simplifies and modernises existing tax regimes; and incorporates the relevant 2016 and 2017 Budget measures, as well as the Government’s investment incentive package.

It has also been substantially strengthened and supplemented by recent international developments, he said.

Meanwhile the IMF Executive Board is expected to consider Sri Lanka’s request for completion of the second review in June 2017, by which time the new Act is expected to be submitted to Parliament as a prior action.

The third tranche of US$168 million out of thee total $1.5 billion extended fund facility should have been given in April but was postponed in view of the delay in presenting the tax laws, official sources said.

The new law should pave the way for a durable fiscal consolidation based on revenue mobilisation—a key pillar of the government’s reform programme, the fund said in a separate statement.

The IMF team reached a staff-level agreement with Sri Lankan authorities on the second review under an economic reform programme supported by a three-year Extended Fund Facility arrangement, subject to the completion of a prior action by the authorities and the approval of the IMF Executive Board.

The team has commended the authorities for resuming accumulating net international reserves as a corrective action for missing the end-2016 target. This reserve accumulation should continue and help reduce Sri Lanka’s external vulnerability.

The authorities are making progress with their economic reform programme, particularly on improving the fiscal position. Maintaining the reform momentum in an uncertain external environment will be important for addressing fiscal and external imbalances, the statement said.