Multinational corporations (MNCs) have become more powerful over the years and their

potential to develop effective approaches to global issues, of which social responsibility is at

the forefront, has also increased dramatically In effect, MNCs are viewed as an
important force in resolving global challenges . Conversely, however, MNCs have always
been at the receiving end of a wide range of criticism ranging from the negative effects of
globalism to exploitation of cheap labor and natural resources. They have especially been
accused of relocating to developing countries, where environment, health and safety,
governance and employee welfare standards are deficient or non-existent . Just like many
other countries , MNCs are facing challanges in case of conducting their business in Srilanka.
High tax rate , economical and political barriers are causing great problem for MNCs in Srilanka

Country Profile
SRI LANKA has often been described as a tropical paradise. The vegetation of the coastal belt is
lush and dramatic, and the mountainous areas of the interior are spectacular. Pleasant sea breezes
temper the coast's tropical climate through most of the year; the hills and mountains in the
island's center are cool at night. Arab traders of long ago knew the island as Serendib, which is
the origin of the word serendipity, reflecting the unexpected pleasures of the land.
Sri Lanka, once known as the British Crown Colony of Ceylon, became independent in 1948,
although it remained under dominion status. Its 1972 constitution proclaimed it an independent
republic, and changed the country's name. Finally, in 1978, a new constitution officially declared
the island the Democratic Socialist Republic of Sri Lanka.

Sri Lanka is focusing on long-term strategic and structural development challenges as it strives to
transition to an upper middle-income country. Key challenges include boosting investment,
including in human capital, realigning public spending and policy with the needs of a middleincome country, enhancing the role of the private sector, including the provision of an
appropriate environment for increasing productivity and exports, and ensuring that growth is
inclusive.
Economic growth in Sri Lanka has been among the fastest in South Asia in recent years. Growth
averaged 6.3 percent between 2002 and 2013, with Gross Domestic Product (GDP) per capita
rising from US$859 in 2000 to US$3,256 in 2013. Preliminary indications are that GDP further
increased by 7.8 percent in 2014.
For most of the past decade, growth has been pro-poor, with consumption per capita of the
bottom 40 percent growing at 3.3 percent a year, compared to 2.8 percent for the total
population. Other human development indicators are also impressive by regional and lower
middle income standards. Sri Lanka has surpassed most of the Millennium Development Goal
(MDG) targets set for 2015, outperforming nearby country comparators on most MDGs.

Notwithstanding declining poverty, 13 districts comprising 36 percent of the total population

remain below the national poverty headcount. In four conflict-affected border districts, poverty
rates are at or above 20 percent. While the national unemployment level is low at 4.4 percent, 14
districts report unemployment rates higher than the national average. According to Department
of Census and Statistics survey data of 2011, 76 percent of total unemployed are below 29 years
of age.
Growth during the past five years has been in form of a peace dividend resulting from
reconstruction efforts and increased consumption. Sustaining broad-based economic growth into
the future will require determined structural reforms that stimulate productivity growth and
economic diversification across sectors, driven by technology and innovation, and new market
development domestically and internationally. As part of Sri Lankas structural economic
transformation, employment in primary agriculture will likely continue to decline from its
present share of 30 percent of the labor force as other sectors of higher productivity absorb rural
surplus labor. At the same, along with productivity increases, agriculture is likely to become
more capital intensive and technology-driven as labor shortages emerge.
Improving the quality of human capital through effective education and skills development is
central to Sri Lankas economic growth and competitiveness. Continued growth will also depend
largely on fostering private sector development and private investment, especially increased
foreign direct investment (FDI). Sri Lankas economy depends on FDI to bring in innovation.
The import of FDI is further underscored by the countrys limited domestic savings rate, brought
about largely by its demographic trends. Contrary to most economies in South Asia, Sri Lanka
does not have a demographic dividend: by 2036, more than 22 percent of the population will be
over 60, and there will be 61 dependents per 100 adults. Increases in the labor force, employment
rates and productivity will be central to growth. Against the background of an aging society,
efficient and well-targeted social assistance will also become more important.
Against this backdrop, Sri Lanka is in the midst of fundamental political change, following the
election of Maithripala Sirisena as President of the country in January 2015. President Sirisena
and his Government have committed to a rapid 100 day program focused largely on restructuring
government after which Parliament is to be dissolved and general elections held. The winning
coalition in these elections would be expected to form a long-term government with a
corresponding economic policy direction.
Corporates in Srilaka
In early 1970s almost all enterprises in Sri Lanka were State Owned Enterprises (SOEs). The
open economy policy was introduced in 1977 and privatization system was incorporated. This
open economy policy leads to market oriented economy and impact on corporate
governance mechanism. In this period state owned companies and central planning shifted to
market oriented companies. As a result, the SOEs ownership has transferred to private
ownership. Though, state ownership handed over to a few concentrated families, individuals and
political leaders.
To attract new business and more investments Sri Lankan Government introduced free
trade zones in 1970s; it leads to invite foreign investments. In the late 1990s, the Sri Lankan

Government introduced up to LKR 20 million interest free loans to start business in the rural free
trade zone. Resulted on these activities were the multinational companies in Sri Lanka
and foreign ownership.
The corporate governance initiatives are commenced in Sri Lanka in 1990s with the
introduction of the voluntary code of best practices on matters relating to the financial aspect of
corporate governance.

Challenges
Despite the plethora of positives Sri Lanka offers to foreign entities, it comes with its own
challenges. According to research conducted by the World Economic Forum, the nations tax
rates are significantly higher than neighboring nations. According to data supplied by the
International Finance Corporation, Sri Lankas total tax rate stands at 105.2%, compared to the
South Asian average of 44.4% and that of OECD nations of 42.7%.
In addition, inflation is also very high: between 2004 and 2011, the nations inflation rate
averaged over 10% annually, according to Tradingeconomics.com. In a bid to counter such high
tax rates, the Sri Lankan government rolled out in early 2012 the concept of tax holidays that
can be anywhere between four and 12 years depending on the nature of the business to be
conducted. For more information, visit the Board of Investment of Sri Lankas website at
Investsrilanka.com.
Government inefficiencies and bureaucracy, policy instability and corruption are frequently cited
as major barriers to doing business in Sri Lanka. A recent white paper published by Standard
Chartered Bank, entitled Sri Lanka Improving the climate for investment and trade, claimed the
states strong presence particularly in the large-corporate space via the nations multitude of
state-owned enterprises has proved to be more of a hindrance than a vehicle of economic
growth. In addition, despite the nations acclaim of access to electricity 24/7, blackouts are
becoming more frequent due to a burgeoning demand for power, grid inefficiencies, and faulty
power plants.
Financing has traditionally also been an Achilles heel for Sri Lankan businesses, particularly in
the private sector. However, in an attempt to counter this, the World Bank recently approved a
US$57.4 million credit facility aimed at strengthening the nations SME sector.
It is also worth noting that Internet charges are high when compared to other Asian nations and
are linked to high licence fees currently imposed by the Sri Lankan government. Plus, getting
connected can take anywhere between two weeks and two months, as oppose to two days as
found in many other Asian countries.

Political and Economic

Sri Lankas economy has remained relatively buoyant during the global economic crisis. Since
the end of the Civil War in 2009, post-conflict GDP growth figures have averaged around 7.5%
with 7.3% in 2013 and 7.4% in 2014. The economy is expected to slow to 7.0% in 2015 as
growth will be affected by political transition following the election of a new President in
January 2015 and parliamentary elections in August.
The macro-economic background is reasonably stable though challenges arising from high debt
and debt repayment need to be addressed in the short term. Against a reasonably positive macroeconomic background, significant areas of weakness are that the perceived environment for
inward investment remains unstable, due to arbitrary political interventions in the market, such
as the Alien Property Act of 2014 and the Retrospective Corporation Taxes of 2015. The labour
market is both lacking in capacity and constrained by restrictive labour laws. Looking to the
medium-longer future, political and economic risk is tied to how successfully the government
can ensure stability through reconciliation and political settlement and upholding the rule of law.

Alien Property Act of 2014

Whereas in furtherance of the development policies being promoted by the Government in the
backdrop of a globally integrated environment, it is deemed expedient and necessary to ensure
the prudent use of land which is a limited resource, in a manner that preserves the national
interest

This is the opening section of Land Restrictions on Alienation Bill that the government presented
to Parliament this month. There has been a lot of debate on this piece of legislation for some
months then. It was first mentioned as far back as November 2012, in the Budget 2013 speech.
Most did not dispute that land is a matter of strategic national interest and that having stronger
controls can be justified. But not seeing beyond this, to the implications for business and
investment, is what was troubling. Yet, despite best efforts by many, it was passed early in 2014

Features
1. Foreigners are no longer be permitted to buy land in Sri Lanka. Prior to this,
foreigners (individuals or companies with foreign shareholding of 50% or more) could
purchase land but with a huge transfer tax (100%). Under the new Act, this too will be
prohibited. Foreigners can only lease land for up to even 99 years, but paying a lease tax
(more on that in a bit)
2. A company with less than 50% foreign shareholding may buy some land in Srilanka but
the shareholding mix of that particular company cannot change for at least the next
20 years. If and when it does (and foreign ownership edges up above 50%) the land
purchase becomes null and void.
3. Some persons/institutions are exempt from the new law. Diplomatic missions;
International, Multilateral, Bilateral organisations; and Condominium parcels situation on
or above the 4th floor. Additionally, based on complete discretion by certain subject
Ministers and the Cabinet, certain projects deemed as Strategic Development Projects
(under the SDP Act of 2008) particularly in sectors like banking, financial, insurance,
maritime, aviation, advanced technology, infrastructure development, or relocating of
global and regional commercial HQs. It also exempts land transfers made to next of kin
who are foreigners, gifts, etc, and also land bought by dual citizens.
4. Foreigners cant buy land, but they can lease it.with a hefty new lease tax. The lease
tax is 15% on the total rent payable for the entire duration of the lease (1 year, 33
years, 99 years, whatever). (There are some exemptions for instance a lower 7.5% rate
if one is located in a BOI zone, a designation Tourism Development Area, etc). But the
real whopper is that it is payable up front for the entire duration of the lease period.
5. If a domestic company buys some land, and subsequently sees an increase in foreign
shareholding above 50%, then a new clause kicks in. If that company is listed on the
Colombo Stock Exchange, the company has to take steps to reduce its foreign
shareholding to less than 50% within a period of 12 months. If not listed on the CSE,
it has just 6 months in which to do it.
6. If a company that has been in active operation for a period of more than 10 consecutive
years in Sri Lanka, the new Act would not becomes applicable on 1st January 2013 but
on the date the speaker endorses the Act. Although there is no expressed clause on the
reverse of this, it is implicit then that if one have been around for less than 10 years,
then the Act becomes effective on 1st January 2013.

At the heart of it, the new Act is aimed at restricting the access to land for foreigners, first by
prohibiting the sale of land to foreigners and secondly by making the payable tax on leases
prohibitively expensive. But it provides for a fair amount of discretion by politicians and
government officials as to which projects can gain exemption from the Act, because the

provision for such discretion is expressly written out in the Act. That allowing for so much
discretion is at the heart of what economists call rent-seeking (i.e., corruption/unofficial
payments/graft/campaign contributions etc)
The feature of the new Act that forces companies to reduce their foreign shareholding to below
50% in the event they have bought land and see an increase in foreign ownership is an extremely
intrusive imposition on an enterprise. It could lead to substantial distortion of investment
behaviour in the stock market. If a listed company that had bought land saw an increase in
foreign purchases of its shares (which is often beyond their control) and it tips over 50%, it will
be forced to go around asking domestic shareholders to up their ownership, and go around asking
the foreign shareholders to sell their shares. It will skew pricing in the market, with the foreign
shareholder then able to command an artificially much higher price from domestic shareholders
in return for selling off. It then raises some important strategic questions. For instance, would
people be encouraged to open an off-shore company purely for the sake of buying shares of a
listed company, trigger the 50% clause, and then command an artificially high price from
domestic shareholders, because the company is compelled to reduce the foreign shareholding
within 12 months as stipulated by the Act?
High tax rates
In Sri Lanka, the Corporate Income tax rate is a tax collected from companies. Its amount is
based on the net income companies obtain while exercising their business activity, normally
during one business year.
The Corporate Tax Rate in Sri Lanka stands at 28 percent. Corporate Tax Rate in Sri Lanka
averaged 33.26 percent from 1997 until 2015, reaching an all time high of 42 percent in 2002
and a record low of 28 percent in 2011. Corporate Tax Rate in Sri Lanka is reported by the Sri
Lanka Inland Revenue Department.

Business and Human Rights

Sri Lanka has a predominately male work force despite an established framework of equality for
women in the labor force. Legislation exists to protect the rights of women and children. While
child labor occurs, it isnt as wide-spread in Sri Lanka as other regional countries.
There is concern for minority rights including those of ethnic groups, LGBT and disabled
groups.
Unions
The law allows workers to form and join unions of their choice without previous authorization,
with the exception of members of the armed forces and police officers, who may not unionize. A
union must represent 40 percent of workers at a given enterprise before the employer is legally
obligated to bargain with it.
The Department of Labour is authorized to cancel a unions registration if the union fails to
submit an annual report for three years. Approximately 122,000 persons are employed within the
countrys 12 export processing zones (EPZs), where the Board of Investment (BOI) sets
minimum wages and working conditions. Forming trade unions is more difficult in the zones;
union representatives seeking to organize workers and other outsiders could enter only at the
invitation of factory owners or the BOI.
All workers, other than police, armed forces, prison service, and those in essential services, have
the right to strike. However, the President has broad discretion to declare sectors essential, as
these can include any service which is of public utility or is essential for national security or for
the preservation of public order or to the life of the community and includes any Department of
the Government or branch thereof.
The law prohibits retribution against strikers in nonessential sectors; in practice, however,
employees sometimes are reportedly fired for striking. The law allows unions to conduct their
activities without interference, but there are reports union activists and officials remain subject to
harassment, intimidation, and other retaliatory practices. There are also reports that employers
arbitrarily transfer union members, and numerous reports of unfair dismissals of union members.

Bribery and Corruption

Bribery is illegal. It is an offence for most of the British and western nationals or someone who is
ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe
anywhere in the world.
In addition, a commercial organization carrying on a business in the UK can be liable for the
conduct of a person who is neither a UK national or resident in the UK or a body incorporated or
formed in the UK. In this case it does not matter whether the acts or omissions which form part
of the offence take place in the UK or elsewhere.
Although Sri Lanka has a moderate level of corruption compared to some other South and
Southeast Asian countries, the level of corruption is perceived to be high in public procurement.
Allegations of corruption plague many government deals, the police, the inland revenue, customs
- indeed almost every public body that businesses rely on to function fairly.
Transparency Internationals corruption perception index (CPI), measures the perceived levels of
public-sector corruption in a given country. From 175 countries worldwide Sri Lanka was ranked
joint 85 with India in 2014. In the South Asia Region, Sri Lanka ranks much higher than Pakistan
at 124 and Bangladesh at 145.
The public sector is perceived to be plagued by political appointments and overstaffing. In State
Owned Enterprises, under-qualified senior management is a common allegation. A Public
Service Commission does exist to oversee the public sector but its powers are limited and its
independence questionable. Public officials are not required to declare their assets and conflict
of interest guidance is sketchy and unenforceable.
Intellectual Property
The National Intellectual Property Office of Sri Lanka was established under the Intellectual
Property Act No 36 of 2003 and is mandated with the administration of the Intellectual Property
System in Sri Lanka. It was first established on January 1, 1982 with the same mandate under the
provisions of Code of Intellectual Property Act no 52 of 1979.
The National Intellectual Property Office (NIPO) is mandated with the administration of
intellectual property including the activities relating to registration and post registration of
marks, patents, industrial designs, layout designs of integrated circuits and collective societies.
NIPO also has the remit of facilitating the enforcement of IP rights. However, infringement of IP
Laws is prevalent extensively. Most DVD / CD shops sell pirated copies in the open market and
counterfeiting of other consumer items such as clothing and accessories is rife. Enforcement of
IP laws is not considered a priority by the authorities.

When entering into contracts businesses need to ensure that their IP rights are protected and
written out in the contract. Big and foreign owned companies might find that the threat of legal
action is enough to stop plagiarism.

Conclusion
With its plethora of future opportunities that span multiple business sectors, the economic future
of Sri Lanka looks extremely bright. Added to this, the nations workforce, by virtue of being
highly literate and displaying a continued enthusiasm to learn, makes Sri Lanka greatly attractive
to companies looking to set up a business on the island. As the nations rural areas become
increasingly interconnected and as transport systems become more modern both the World
Bank and Asian Development Bank are planning multiple infrastructure projects over the coming
decade the attractiveness of Sri Lanka to foreign players will gain equity.
However, what is also clear is that the nations tax structure needs to be modernised and to
become more in line with not only competing Asian nations, but with the rest of the world at
large. Admittedly, the Sri Lankan government has introduced short-term incentives in order to
encourage foreign investment; however, from a mid- to long-term perspective, the nations tax
regime still appears unattractive.
As with other South Asian states, the Sri Lankan government must push through reforms that cut
state bureaucracy and tackle corruption. Without such moves, the nation will always fall short of
attracting the necessary levels of both private and foreign investment needed to make the nation
a real force on the global stage.
These facts point towards the use of local partners when doing business in Sri Lanka at least at
present rather than the incorporation of a foreign-owned subsidy.