Economists and tax specialists said the immediate impact of the Trump tax reforms on smaller economies such as Sri Lanka cannot be determined and that it is a little too early to ascertain the real outcome of it in this part of the world.
However, they reiterated the need for Sri Lanka to focus on improving its business environment, competitiveness, productivity and make the country a trading, logistics and financial hub to gain from the reforms in the US.
The revision in corporate income tax would help boost exports to the US as envisaged by economists and trade experts.
The US Senators passed a sweeping tax cuts Bill, a few weeks ago, paving the way for the first major legislative victory for Donald Trump, a pledge he made during his election campaign. The bill is expected to set the US corporate income tax rate at 21 percent, effective this year, a plan aimed at moving profits and jobs back to the US from foreign territories. The US Federal tax rate for corporations is 35 percent and is considered as the highest in the OECD.
Chief Economist of the Ceylon Chamber of Commerce Shiran Fernando said it is too early to determine the impact for Sri Lanka but possible ramifications could be derived based on what goes in some of the Asian economies. Tax is one part of the investment case that will need to be looked at by businesses in addition to the operating environment and other incentives. Overall, it could be a positive move if it boosts competitiveness in the region as well as countries such as Sri Lanka.
US Corporations have been subjected to one of the highest statutory rates in the world since the 1990s which compelled them to seek off-shore tax heavens.
Professor of Economics, University of Colombo Sirimal Abeyratne said Income tax cuts and the elimination of all tax exemptions in the US seems to have been aimed at stimulating the economy through which even tax revenue is expected to rise. Improving growth, enhancing industrial production, and job creation all appear to have been the policy priorities of the US, especially during the Trump administration. In spite of widespread criticism against Trump policies, the US economy has improved its quarterly growth and employment during the year.
Growth stimulation and improved aggregate spending as anticipated by the tax revision should be beneficial to the countries that are dependent on US market for exports. This is equally important for Sri Lanka too, as US is an important market for Sri Lanka’s major exports. The more important issue for Sri Lanka is, however, not on the demand side; even if demand rises, the country should be able to expand the export supply.
CEO, Shippers Academy Colombo, Rohan Masakorala said it is not easy to predict the immediate impact for a smaller economy as Sri Lanka. However, global financial markets will begin to react in the coming weeks to various situations. There will be an impact on developing countries including Sri Lanka which will need to reconsider its strategy and tax structure to lure in foreign direct investments and boost exports as the US is also expected to increase interest rates during the coming 12 months.
Opportunities to boost exports from Sri Lanka will be higher if the US GDP growth accelerates. However, we need to pull up our socks on improving the business environment and competitiveness to face the new environment in the US and keep pace with the global response to the new developments.
The policy makers must be focused on a clear vision to make the country an attractive trading, logistics and a financial hub that could add value to the international supply chains and be part of the global value chain.
At the same time while we are negotiating many Free Trade Agreements, that would help the country’s market access, it is essential that we work out some preferential arrangements similar to EU GSP+ with the US for better market access that will help increase exports from the present level to a higher rate.
Partner Gajma and Co. and tax consultant N.R. Gajendran said the Trump tax reform policy will urge corporations that have stashed their money in off-shore tax heavens to bring it back to the US where they will have to pay corporate income tax of only 21percent. If not the profits of off-shore investments will be taxed at the original statutory rate.
Base Erosion and Profits Shifting (BEPS) strategy was used by multinational companies to artificially shift profits to low or no tax locations where there is little or no economic activity. FATCA - Foreign Account Tax Compliance Act, a US legislation prevents tax evasion by US taxpayers by using non US financial institutions and off-shore investment instruments.
Country by country reporting reveals that around US$ 275 billion in Indonesian funds are in Singapore since Chinese Indonesians who were alienated in Indonesia stashed the money in Singapore for safety. This money has to be brought back to Indonesia if not, it would be taxed.
With the changes in the US opportunities will be opened up for other countries.
Sri Lanka will need to be competitive, boost efficiency and productivity to keep pace wit the changes. Disruption is taking place at a rapid pace. There is exponential change taking place in the globe today which makes it all the more important that Sri Lanka realises the need to move with such developments to boost economic growth.