Repatriation of Export Proceeds – Taxes and Exchange control
File picture of a garment factory
This article sets out the legal framework and the tax policy attributable to exporters of goods and services who are the foreign currency earners to the national economy in relation to repatriation of the sales proceeds and fees. The value of foreign currencies to the national economy has gained much importance in the current economic environment than at any time. Past and the present policy makers, have taken cognizance of the value addition to the economy by the foreign exchange earners and formulated incentive policies and regulation focusing the foreign exchange earners. The foreign exchange remitted plays a pivotal role in managing the exchange rate of the Sri Lankan Rupee and the quantum of foreign reserves.
Exchange Control Rules regarding exports
The exchange control legal framework only deals with regulation of the export proceeds of the goods and does not extend to regulate the fees for the export of services. The relevant Section is the Section 22 (3) and 22 (4) of the Exchange Control Act of 1953 as amended. If a Minister makes an Order under Section 22 (3) by way of a Gazette, by default, the period for remittance provided by Law stipulated in 22 (4) is a maximum period of six months. However the proviso provided for such period to be varied by a direction issued by the bank which could be a period, less than or more than six months.
The Section 22 (3) of the Act states “the Minister may by Order published in the Gazette provide that no goods shall, except with the permission of the bank, be exported from Sri Lanka to any destination specified in the Order”. Section 22 (4) states “In granting permission under subsection (3) in respect of the exportation of goods for the purposes of sale, the bank shall satisfy itself— (a) that payment for the goods has been made to a person resident in Sri Lanka by such means and in such manner as may be prescribed in relation to goods of that class or description exported to the destination, or is to be so made not later than six months after the date of exportation; and (b) that the amount of the payment that has been made or is to be made represents such a return for the goods as is in all the circumstances satisfactory in the national interest:
Provided that the bank may direct that, in cases to which the direction applies, paragraph (a) of this subsection shall have effect as if for the reference to six months there were substituted a reference to such longer or shorter period as may be specified in the direction, or as if the words “or is to be so made not later than six months after the date of exportation” were omitted”. In the past, by way of Gazettes issued in 1973 which was in turn repealed by a subsequent Gazette in 1975, the Minister of Finance identified all destinations outside Sri Lanka as the relevant countries to be regulated with regard to export of goods.
By Gazette dated 26th March 1993, acting under Section 44 of the Act, which empowers the Minister to issue exemptions from any obligation imposed by the Act, an exemption was granted from the obligation to repatriate proceeds within six months as stipulated in Section 22 (4) of the Act. Subsequently, in 1994 the Gazette Order issued under Section 22 (3), the subsisting Gazette under the same order, which identified all countries as regulated countries was rescinded. The November 2015 Budget proposal contained a request to the exporters of goods to repatriate the export proceeds to help the Sri Lankan economy, however this was a mere request!
Last week, a measure has been, to convert the request to repatriate to a mandatory legal requirement by issuing a Gazette dated 1st of April 2016 under both Section 22 (3) and 22 (4) of the Exchange Control Act referring to the Gazette issued on 26th March 1993. If the intention of the policy maker is to make it legally mandatory for exporters of goods to repatriate proceeds from all countries within 90 days as reflected in the latest Gazette, in the context of the Section 22 (3) and 22 (4) of the Exchange Control Act, it must be executed by an Order published in the Gazette by the Minister of Finance under Section 22 (3), by identifying the countries to be regulated as in the case of the 1973 and 1975 Gazettes.
Hence any attempt to re-introduce the requirement for repatriation of export proceeds must be preceded by an Order by the Minister under Section 22 (3) identifying the countries which should read as follows. ”No goods shall, except with the permission of the Central Bank, be exported from Sri Lanka to any destination outside Sri Lanka” Hence a revision of the recent Gazette is warranted to include provisions similar to the aforesaid. In addition it may be appropriate for the bank to issue a direction to stipulate the time period within which the export proceeds to be repatriated rather than inclusion of a time framework in the Order published under Section 22 (3) of the Act as the legal framework does not warrant this.
BOI company
Any Gazette issued under the Exchange Control Act introducing a legal requirement for export proceeds of goods would not impact any Board of Investment (BOI) company that has entered into an agreement under Section 17 of the BOI Law where it has been granted an exemption from the application of the Exchange Control Act. Generally, such BOI agreements, do not make it a condition that the export proceeds be remitted via bank in order to be eligible for the tax holiday. A typical clause found in almost all the BOI agreements reads as “the provisions of Part I, IA, II, III, IV, V and VI of the exchange Control Act shall not apply to or in relation to the business of the enterprise. This exemption is applicable solely to the business of the enterprise”. Section 22 of the Act is included under Part IV of the Act, hence any Gazette notification issued thereunder will not be applicable to BOI companies.
Service exporters
As mentioned earlier though there is no express provision in the Act or power granted to the Minister to impose a mandatory obligation on the service providers to repatriate the fees for such services, the Central Bank may indirectly impact such transactions via Section 6 AA of the Exchange Control Act which requires prior approval from the Central Bank for any person in Sri Lanka who wishes to open and continue a bank account outside Sri Lanka. Among the service providers, only individuals, firms or companies registered in Sri Lanka providing professional or vocational services outside Sri Lanka are permitted to open, maintain and operate bank account outside Sri Lanka without prior permission as per the Gazette notification 1864/38 dated 28th May 2014.
For the interest of readers, the 28th May 2014 Gazette also allows, an exporter of goods, investor outside Sri Lanka with the Minister’s approval, a resident proceeding outside Sri Lanka temporarily for business, studies or for medical purposes, a dual citizen, person with valid permanent residency in another country to open, maintain and operate bank account outside Sri Lanka without prior permission.
Foreign Exchange Earners Account (FEEA)
In the context of the legal requirement introduced for repatriation of the proceeds, it is significant to note the impact of the Directions of the Exchange Control Department issued on 20th January 2016 pertaining to the debits and credit to the Foreign Exchange Earners Account (FEEA). The Direction permits inter alia; a resident company, an individuals, a sole proprietor, a partnership or a branch of a foreign company engaged in export of goods and service to open a FEEA. Export proceeds of goods and foreign currency fees for services rendered could be debited to such account. At the same time the FEEA direction permits any outward remittances to be made utilizing the foreign currencies lying in the FEEA.
Hence, the current exchange control regulatory framework would permit any exporter of goods who is mandated to repatriate the export proceeds as per the recent policy change, through FEEA to freely make any outward remittance of the same proceeds upon repatriation. If the objective of introducing the rule to repatriate the export proceeds is to increase the national reserves or stabilize the Rupee in the current context, the recent relaxations via the Direction issued dated 20th January 2016 would be at cross roads.
Tax treatment
There is a distinction of tax treatment with regard to requirement to repatriate export proceeds of goods and fees for services. Almost all the tax concessions and exemptions for foreign currency earners involved in the service sector are depended upon the repatriation of the fees via a bank account, though no time period are stipulated. This includes income tax exemption on any services rendered in or outside Sri Lanka to a person outside Sri Lanka, foreign royalties received from Intellectual Property, rendering of service offshore including construction services, foreign currency earnings by services rendered by National Institute of Sports, income from investments in securities etc. Further, for VAT purposes, the service provision where the service is consumed and utilized outside Sri Lanka is zero rated, and Nation Building Tax (NBT) exemption is applicable on services rendered in or outside Sri Lanka.
For both VAT and NBT exemption, the foreign currency proceeds should be remitted to Sri Lanka via a bank. A reduced rate of income tax of 12 per cent was available for qualified exporters of non-traditional goods (non-traditional goods includes anything other than the traditional goods specified in the Inland Revenue Act such as black tea in bulk, scrap rubber, sheet rubber, latex, fresh coconut, etc). The application of the concessionary rate or tax holiday for manufacture and export of goods was/is not depended upon money being remitted to Sri Lanka (Section 16C for manufacture of goods, Section 17A for manufacture, production or processing of non-traditional goods for export, Section 13 for Export of Gem & Jewelry)
Status in foreign jurisdictions
The practice followed in other countries in relation to foreign currency export proceeds is to either repatriate the exports proceeds or surrender the export proceeds within a specific time period. In India as per a regulation issued in 2014, all exporters were required to repatriate the export proceeds within nine months from the date of export while it was 12 months in 2013. Out of the countries in the Asian region, the time frame for repatriation of export proceeds in Pakistan is 180 days, Thailand (if export value exceeds $50,000) is 360 days, Indonesia – 90 days, Malaysia – six months, etc. Countries such as Argentina, Senegal, Solomon Islands, Honduras, etc enforce a requirement to surrender the export proceeds as well. When comparing with other countries, one must admit that most of the developing countries do have a policy for repatriation in place although the time frame may vary.