Sri Lanka’s tax holidays losing edge as global rules rewrite investment game

Sri Lanka’s long-standing strategy of using tax holidays to attract foreign investment is rapidly losing relevance as sweeping global tax reforms reshape how countries compete for multinational capital, according to a new policy paper by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). The institute warned that the OECD’s Global Minimum Tax (GMT) framework is fundamentally altering the international investment landscape, forcing countries to move away from generous tax concessions towards incentive regimes tied to real economic activity, policy certainty and administrative efficiency.

“Global investment competition has fundamentally changed. Sri Lanka must move beyond legacy tax incentives and adopt modern, internationally compliant policies that attract genuine investment, create jobs, and protect national revenue,” the report said.

For years, Sri Lanka has relied on tax holidays and concessionary tax rates to lure investors through the Board of Investment. However, CA Sri Lanka said those incentives are becoming increasingly ineffective under the OECD-led reforms, which require large multinational enterprises to pay a minimum effective tax rate regardless of where profits are booked.

The paper warned that unless Sri Lanka modernises its tax and investment framework, taxes that would otherwise accrue domestically could instead be collected by foreign jurisdictions implementing the Global Minimum Tax, eroding government revenues while weakening one of the country’s traditional investment tools.

Instead of blanket tax holidays, the institute recommended introducing OECD-compliant incentives such as a Qualified Domestic Minimum Top-Up Tax (QDMTT), replacing outdated concessions with Qualified Refundable Tax Credits and linking incentives to measurable economic outcomes including employment creation, research and development, technology transfer and capital investment.

It also called for a differentiated investment strategy, arguing that large multinational corporations and smaller growth-oriented investors require different policy approaches.

The paper noted that investment competitors such as Ireland, Singapore and Thailand have already begun redesigning their tax frameworks to remain competitive under the new global tax regime. Drawing on Singapore’s recently introduced Refundable Investment Credit framework, CA Sri Lanka urged policymakers to prioritise structured, spend-based incentives over ad hoc tax concessions. It identified technology and digital services, renewable energy, export-oriented manufacturing, research and innovation, regional headquarters and green economy investments as priority sectors capable of delivering stronger long-term economic benefits. Beyond tax policy, the institute argued that improving the ease of doing business would be equally critical to attracting investment. 

Foreign investors continue to face administrative bottlenecks, particularly in obtaining investor and employment visas, with approvals often requiring multiple layers of clearance across different agencies.

The report recommended streamlining visa procedures, issuing clearer guidance for investor visa holders and establishing transparent rules for investment amendments and secondary investments to improve regulatory certainty.

CA Sri Lanka also called for broad reforms to tax administration, including risk-based audit systems, stronger digitalisation, more consistent interpretation of tax laws and the establishment of an independent Tax Ombudsman to provide investors with an impartial mechanism for resolving administrative disputes.

The paper further identified legislative gaps in Sri Lanka’s Beneficial Ownership framework, warning that certain offshore structures, including some operating within the Colombo Port City, may fall outside the scope of the country’s recently established register because of inconsistencies in existing legislation. It urged an early legislative review to strengthen transparency and investor confidence.

The institute also recommended modernising Sri Lanka’s Advance Pricing Agreement programme by expanding its scope, simplifying compliance requirements and aligning procedures with international standards to provide multinational companies with greater tax certainty.

“Foreign Direct Investment remains one of the most important drivers of economic growth, employment generation, technology transfer and long-term national prosperity,” CA Sri Lanka said, adding that the reforms are intended to strengthen investor confidence and improve Sri Lanka’s competitiveness in an increasingly complex global investment environment.