Sri Lanka must urgently redesign its foreign investment strategy to keep pace with sweeping international tax reforms, according to leading tax expert Suresh Perera, who warns that failure to adapt could drive away both existing and prospective multinational investors.
Speaking at the CA Sri Lanka 5th Annual Economic and Tax Symposium, the KPMG Sri Lanka Principal and Head of Tax and Regulatory called for a comprehensive review of the country’s tax incentive framework in light of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Pillar Two global minimum tax regime.
Perera argued that the responsibility for responding to these global changes lies squarely with the Ministry of Finance rather than the Inland Revenue Department (IRD). While the IRD administers tax laws, he said broader fiscal policy decisions require strategic leadership from the Finance Ministry.
He proposed that the Government establish dedicated committees to identify multinational companies operating within Sri Lanka that fall under the OECD’s global minimum tax rules. These committees should quantify how much tax revenue is currently being collected by other jurisdictions through top-up taxes and assess the financial impact of existing investment agreements.
Without this analysis, policymakers would have little understanding of the scale of revenue leakage or the reforms needed to restore Sri Lanka’s competitiveness.
Perera also recommended replacing traditional tax holidays with modern investment incentives that comply with international tax standards. Among the alternatives he highlighted were Qualified Refundable Tax Credits and substance-based incentives that reward genuine business activities such as employment generation, research, innovation and capital investment.
He further suggested renegotiating existing tax holiday agreements with multinational investors. However, he acknowledged that such negotiations would only succeed if Sri Lanka can offer attractive alternative incentive packages that remain effective under the OECD framework.
Failure to provide competitive replacement incentives, he warned, could encourage some existing investors to reconsider their presence in Sri Lanka and potentially relocate operations to countries with more modern investment regimes.
Another issue raised was Sri Lanka’s delayed response to the OECD reforms. Perera questioned why the Government has yet to formally endorse BEPS Pillar Two despite its significant implications for investment policy and tax competitiveness. Whether the delay stems from limited awareness, insufficient understanding or a deliberate policy decision remains unclear, he noted.
Regional competitors including Singapore, Malaysia, Vietnam and Indonesia have already begun reshaping their investment frameworks to accommodate the new global tax landscape. Their proactive approach has strengthened their ability to compete for multinational investment despite the limitations imposed on traditional tax incentives.
For decades, successive Sri Lankan governments relied heavily on tax holidays offered through the Board of Investment and more recently Port City Colombo to attract foreign investors. However, many economists now argue that in the post-BEPS era, investor confidence depends far more on economic stability, transparent regulation, efficient institutions and consistent policymaking than on generous tax concessions alone.
As global tax rules continue to transform international investment decisions, experts believe Sri Lanka faces a narrowing window to modernise its investment framework before it loses further ground in an increasingly competitive regional marketplace.