Progressing slowly yet steadily

  • Discussing the next milestones for Port City

By Imesh Ranasinghe

It’s been three months since the Colombo Port City Economic Commission Act No. 11 of 2021 was passed in Parliament with almost a two-thirds majority.

State Minister of Money, Capital Markets, and State Enterprise Reforms Ajith Nivard Cabraal said in May this year that the Colombo Port City could add $ 12 billion US annual gross domestic product (GDP) when in full operation and $ 4.5 billion in initial years.

However, there has been less talk about the Port City after the Act was passed in Parliament.

What’s going on?

Speaking at a webinar organised by the Institute of Chartered Accountants in Sri Lanka (CA Sri Lanka), CHEC Port City Colombo (Pvt.) Ltd. Assistant Managing Director (MD) Thulci Aluwihare said that the Infrastructure development of the Port City is progressing very slowly with the pandemic, but close to 100 hectares of land is now ready for investments.

“Most of the infrastructure utilities such as roadways, bridges, and landscape work are going as scheduled, and we hope to finish the majority of them by mid-next year,” he said, adding that there were plans to have the marina area beach open for the public before the end of August, which had to be delayed further due to Covid-19.

Moreover, he said the newly appointed Port City Economic Commission had many meetings with outside third parties, government agencies, and regulators, as they needed some room to fully understand the project.

According to him, the next milestone of the Commission is to select a director general whose role is quite a vital role, and applications have already been called. “Hopefully, there will be a lot of interest from international professionals and CEOs who have done this before,” he added.

Following the appointment of a suitable director general, Aluwihare said the next milestone will be the setting up of required regulations, as the law is only an enabler, and for it to be operationalised, further regulations are required.

Aluwihare said the Commission has called for proposals from reputed international firms to assist them in setting up procedures. 

“Because non-regulatory businesses require only certain procedures/criteria to be set out on the eligibility criteria and the administration process in terms of operation, the regulatory business is much more complex. Whatever the regulations drafted under the Port City Act need to be in congruence with the regulations and financial systems with the rest of Sri lanka. Ideally, the objective is that it should not have any adverse impact to the stability of the financial system,” he explained.

Who can engage in business in Port City?

Even though the content of the Port City Bill was extensively reported by the media due to its controversial nature, the Supreme Court determination, when the Bill was challenged, set out many changes to the Bill as some were not in line with the Constitution of Sri Lanka.

Speaking at the same webinar, Attorney-at-Law Riad Ameen explained certain important aspects of the Act which makes it special. According to the Port City law, only an authorised person is allowed to operate in business within Port City limits, he said.

Based on the requirements listed out in Section 26 and Section 32 of the Act, an authorised person is a person who has to have a license issued by the Port City Economic Commission. In addition to a license, he should also have a certificate of registration and must also enter into an agreement with the Port City Commission.

“When a person applies to be an authorised person to the Port City Commission, following all guidelines, the Commission will decide whether that person is authorised to carry out that business or not. Following authorisation, a business will be issued a license and a registration mentioning the type of business and the terms and conditions that will apply,” Ameen said.

He said that an authorised person can engage in business in Sri Lankan rupees (LKR) and cannot engage in business with foreign currency reserves that are held in Sri Lanka in accounts such as NRFC and RFC.

The funds have to be sourced from abroad; it can be loans obtained from abroad or from own equity funds that are held abroad.

However, he said the challenge would be when some part of the business would have to be done in LKR, when payments for certain services are received in LKR, since employees are expected to be paid in foreign currency and funds should be sourced in foreign currency.

The conversion of LKR to foreign currency within the Port City requires regulations, which will determine the conversions into foreign currency when payments are received for services in LKR.

Further, Ameen said an authorised person should obtain approval from the Commission to do business with Sri Lankan businesses or a resident outside Port City limits, as an authorised person is not automatically allowed to do business with Sri Lankans outside the Port City.

“To do so, you need to obtain permission from the Commission, and the Commission will give approval based on the threshold that it is in the national interest and advancement of the national economy,” he said.

However, he said the Act does not immediately entitle an authorised person for tax exemptions. In order to be entitled for tax exemptions, an authorised person must satisfy certain requirements which makes them a “business with strategic importance”. Only businesses with strategic importance will ultimately be entitled to obtain tax benefits.

According to the Port City Act, tax laws that are exempted for businesses with strategic importance include the Inland Revenue Act, the Value-Added Tax (VAT) Act, the Finance Act , the Excise (Special Provisions) Act, the Custom Ordinance, the Ports and Airports Development Levy (PAL), and the Sri lanka Export Development Act which is the statute that imposes Cess.

Ameen said that exemptions are also given from laws applicable for betting, gaming, and casino, adding: “There is some contemplation in the Act that casinos will be allowed. So the Entertainment Tax Ordinance and the Casino Business (Regulation) Act will be exempted.”

Also, the exemptions will be given from the Foreign Exchange Act and certain provisions in the Termination of Employment of Workmen Act, while the exemptions can be granted for 40 years.

To be identified as a business of strategic importance, a business within the Port City should fulfill the requirements that are laid down in Section 52 of the Act, and also based on the fact that it brings economic and social benefits to the country and changes the landscape of the Port City.

According to Ameen, certain categories of global and regional businesses will be allowed expressly, if they satisfy certain requirements, because of the strategic importance they have, such as inflow of foreign exchange, generation of employment, the knowledge, promotion of tourism, setting up of corporate HQ, and regional distributional operations.

However, he said the manner in which exemptions are granted to businesses with strategic importance from the mentioned Acts should be in a manner prescribed by regulations, which needs to be framed.

Elaborating on the process followed to recognise a business with strategic importance, he said  that according to Section 53 of the Act, after the Commission is satisfied with the requirements an entity has in relation to becoming a business of strategic importance, the Commission has to make a recommendation either to the president or the minister in charge of the subject for recognition as a business with strategic importance.

Here, the president or the minister has to present a cabinet memorandum based on the set of essential requirements laid in the Act for the cabinet memorandum.

“In the cabinet memorandum, you have set out the rationale as to why you consider the entity as a business of strategic importance and mention from which tax enactments the business will be exempted along with the time period of the exemption,” he said.

Once the Cabinet approves, a gazette has to be published with the same information as in the cabinet memorandum and tabled in Parliament for information. He said the benefits and exemption that would be granted should be framed by regulations that need to be approved by Parliament.

However, he also added that the challenge in this elaborate process are the multiple approvals required from multiple people, and if any of those approvals don’t meet the requirements in the Act or regulation, those approvals can be subjected to judicial review.

Exemptions in labour laws

According to Ameen, the Port City Act attempts to limit some of the provisions in the labour law in a very unique way. One of the labour laws that is specifically restricted is the Termination of Employment of Workmen Act.

He said generally, according to the Act, for a business in Sri Lanka to terminate the employment of an employee, it needs to get the consent of the Commission of Labour and there is criteria prescribed in the gazette form that sets out compensation that’s payable.

But according to the Port City Act, the employer within the Port City can terminate an employee without having to pay compensation. “However, the scope of exemption needs to be decided, after we see that the regulations are enacted,” Ameen added.

In the case of the foreign labour force, he said Section 33 of the Act grants permission to the Department of Immigration and Emigration to grant a visa, but is only applicable if it is in the national interest or the advancement of the national economy. “That will not be an easy threshold for the Commission to meet for every type of employee,” he said.

Moreover, in the event foreign labour is employed, in terms of Section 35 of the Act, their remuneration can be paid in foreign currency, which also applies to local employees.

While local employees are exempted from income tax for their earnings within the Port City, foreign employees will be exempted from income tax for what they earn within the Port City as well as overseas.

Further, Section 62 of the Act mentions the arbitration between the employer and the employee within Port City limits.

“If there is termination, arbitration is the remedy; if there is arbitration as prescribed by the Act, it is likely the labour tribunal assumes jurisdiction. There are provisions in the Industrial Disputes Act that prevent the labour tribunal into matters that are pending in other forums. Those provisions are likely to be used in the event there is a termination and the employee decides to go to the labour tribunal, and the employer will object to the labour tribunal exercising jurisdiction on the basis that arbitration is the proper forum for it,” Ameen said.

However, some of the labour laws will still apply to the Port City, as for the rest of Sri Lanka. These include the Employees’ Provident Fund (EPF) Act, the Employees’ Trust Fund (ETF) Act, the Payment of Gratuity Act, Shop and Office Employees Act that prescribe the working hours and overtime, and the Wages Boards Ordinance.

Are professionals allowed to practise in Port City?

Ameen said that the Port City Act has not mentioned about how local professionals play a part in the Port City. According to him, this will create issues with certain professionals in Sri Lanka. For example, he said, in the legal profession, not everyone can practise the profession.

“There is an old ordinance, which is more than 100 years old, that restricts the type of people that can practise in the legal profession,” he said.

But that being said, Ameen added: “The Bar Association of Sri Lanka (BASL) has not been very assertive when it comes to foreign lawyers travelling to Sri Lanka when it comes to arbitration, which is the main type of dispute that is contemplating in the Port City.”

Although there can be some sort of debate whether foreign lawyers will be allowed to participate in arbitrations, he said the BASL has allowed that to happen over a period of time. He pointed out that there have been arbitrations where the Attorney General has participated with foreign lawyers in Sri Lanka.

“But I think it is better from the perspective of the Government to have laws in placed, particularly looking at some of these old laws that apply to the legal profession, the accountancy profession, and the medical profession which is governed by the Sri Lanka Medical Ordinance; there are provisions that stipulates as to what circumstances doctors are allowed to practise medicine in the territory of Sri Lanka. The Port City is a territory of Sri Lanka which is made clear by the determination of the Supreme Court, and I don’t think they will be given a free hand to walk in and practise their profession in Sri Lanka,” Ameen said.

There is a plan to establish hospitals with international standards within the Port City with foreign doctors and nurses. As such, Ameen said the Government needs to look at carving out some sort of facilitation to enable those professionals to come in across territories and practise in the Port City.

“For lawyers, in order to avoid the embarrassment down the line, although the objections have been never really taken, one may need to look at the profession and consult the Bar Association and make accommodations and express them,” he added.

In relation to the accountancy profession, he said Port City law deals extensively with the primary businesses that are going to be of strategic importance, which will get tax exemptions. There is also reference to an authorised person who will not necessarily get tax exemptions but is allowed to operate within Port City limits. 

If there is a Sri Lankan audit firm that wants to set up an office within Port City limits, that might debatably be constituted as a business trying to operate within Port City limits. Moreover, Sri Lankan resident employees are allowed to work within Port City limits, but there will also be service providers who might have to operate within Port City limits.

“The Port City law contemplates an authorised person who is also sort of like a business but doesn’t sort of cater to professionals. I think the Commission may have to look at provisions in Sections 26 and 27 to see whether those sections adequately cover Sri Lankan service providers and professionals as businesses that provide service and are allowed to operate within Port City limits,” he added.

Responding to this, Aluwihare of CHEC Port City Colombo said that there are two ways in which Sri Lankans can provide goods and services to the Port City.

One way, he said, is that they can be a Sri Lankan company as they are now and provide services to the Port City, which would be as a deemed export because the business will be paid in foreign currency and will not be required to become an authorised person to provide any goods and services for the Port City.

“The second option is, a Sri Lankan company, a professional, or a partner can register their business within the Port City; the moment you become an authorised person, you are only allowed to do business within Port City and outside the Port City, but not with Sri Lankans,” Aluwihare said.

According to him, the requirement for an authorised person is that a business needs to demonstrate that you do offshore business or have a foreign source of income.

“So, if you become an authorised person, whether Sri Lankan or not, there are some restrictions in providing services in Sri Lanka. But there is a provision in the law that says with the special approval of the Commission, they will be permitted,” he added. He said the objective of this special provision is to attract regional HQ businesses to Sri Lanka.

Closing the gap of skills within Port City

Aluwihare said that there is definitely a gap between what the Commission is planning to do in the Port City and the required skills.

“We can look at it in two ways: One is that the Port City position is not really to cater for Sri Lanka but to look at the region, and we expect a certain amount of mobility. It is through expats and diaspora who may be given the opportunity to work for a similar multinational company with an ecosystem created wherever they are. Obviously, we think they may look to return to Sri Lanka,” he said.

The other point, he said, was that the Commission is going to be working with the Ministry of Skills Development and Vocational Training to map out what would be the immediately required set of skills for the Port City.

He said that although the Port City is a 25-year-old plan, there is an immediate short-term, five-year plan that identifies these matters.

“Based on that, we might have dialogues with the Government to try and see how we can really upskill some of our graduates coming out of the university system, and also some of our existing employees to make sure there is adequate supply once the Port City is operational,” Aluwihare noted.