📈 Sri Lanka Moves to Shield Tax Revenue with "Two-Basket" FDI Strategy

As global tax rules shift, Sri Lanka is urged to overhaul its investment incentives to prevent local tax revenue from being siphoned by foreign treasuries. With the OECD’s Global Minimum Tax (GMT) of 15% now active for major economies, traditional tax holidays for large firms are becoming obsolete. • The Pillar Two Challenge Under the OECD framework, Multinational Enterprises (MNEs) with annual revenues over €750 million must pay a minimum 15% tax globally. If Sri Lanka offers a 0% rate, the firm’s home country can collect the 15% "Top-Up Tax," effectively turning Sri Lankan concessions into a "donation" to foreign governments. • Proposed "Two-Basket" Strategy Basket 1 (SMEs): Retain traditional profit-based incentives and tax holidays for smaller investors (under €750M revenue) to drive local employment. Basket 2 (Large MNEs): Shift to cost-based incentives, such as Enhanced Capital Allowances (ECA), to reward actual physical investment rather than paper profits. • Technical Modernization Substance-Based Income Exclusion (SBIE): Leveraging carve-outs for "real" economic activity like factories and payroll. Qualified Refundable Tax Credits (QRTC): Adopting cash-refundable credits—the global "gold standard"—to benefit investors without lowering their effective tax rate below the 15% threshold. • Regional Context Competitors like Vietnam, Thailand, and Singapore are already legislating these "smart" incentives. Experts warn that sticking to blanket tax holidays for large ICT/BPM or manufacturing giants risks making Sri Lanka's fiscal toolkit uncompetitive in a "streaming era."