Tax discourse

Taxes are getting fresh attention after US Treasury Secretary Janet Yellen this week called for governments around the world to support the US in setting up a global minimum corporation tax rate. 

The Secretary’s argument is that imposing such a rule would ensure that the global economy thrives based on a more level playing field in the taxation of multinational corporations and would spur innovation, growth and prosperity. However, others have dismissed the idea as impractical and impossible to implement. 

Yellen did not specify a rate but it comes at a time when the US government is trying to raise the nation’s internal corporation tax rate from 21% to 28%. Closer to home, taxes have received renewed attention over the recent losses to Government revenue from a drastically reducing sugar tax and a more wide ranging discussion over tax concessions offered to potential Port City investors. 

The Port City Commission Bill that was gazetted by the Government earlier this month lists out powers for the commission to give sweeping tax concessions to investors for 40 years. The bill, which is expected to be presented to parliament after the New Year, also allows for businesses to be set up in other parts of the country under similar terms, provided they receive prior approval. This has been highlighted as cause for concern by stakeholders who argue that Sri Lanka stands to gain little from the $ 1.4 billion investment and could reduce its sovereignty into the bargain.

Sri Lanka has long struggled to attract significant Foreign Direct Investment (FDI) even after the end of the war and this is not due to a shortage in giving tax holidays. Unfortunately, the years of peace have not been used by successive governments to push forward reforms, strengthen the legal system and improve the business environment while the rest of the world has been forging ahead. This has been illustrated in multiple Ease of Doing Business indexes released by the World Bank that have shown Sri Lanka steadily losing steam in its bid to be globally competitive.  

Sri Lanka clearly cannot afford to try and bridge this gap by simply giving up its public revenue, especially since large amounts of investment in education, healthcare and infrastructure is needed to form the knowledge economy the government keeps paying lip service to. Public investment is essential to ensure sustainable development, particularly in areas outside of the Western Province that does not necessarily have the means to depend on other sources of funding. 

Supporters of Yellen’s universal corporate tax rate argue that countries should be allowed to use taxes to support their own policy priorities. They point out that while some countries have low corporate tax rates, many others such as Nigeria (30%), Brazil (34%), China (25%), and South Africa (28%) have sustained higher rates without necessarily losing investment and countries stand to benefit from focusing on more than tax concessions. 

In Sri Lanka’s case, the previous government increased the corporate tax rate to 28%, which was then slashed by the present Government to between 14%-18% with a lower rate given to exports and tourism while sin taxes of 40% are slapped on tobacco, alcohol and gaming companies. Policy makers have argued that keeping a moderate tax rate is beneficial to public revenue as more entities and individuals are then willing to pay taxes. 

Taxes need to be raised for public interest and utilised for the same reason. Taxes can be a vital tool in the formation of a sustainable economy and this should receive policy focus.