Sri Lanka faces tax incentive overhaul under global minimum tax rules

Sri Lanka's existing tax incentive structure faces significant revision as the country moves to comply with international tax standards emerging from the OECD's Pillar Two framework, which establishes a global minimum corporate tax rate of 15 percent.

The Pillar Two initiative, agreed upon by over 140 countries, seeks to prevent multinational enterprises from shifting profits to low-tax jurisdictions. For Sri Lanka, this means reassessing tax holidays, exemptions, and other incentive mechanisms that have traditionally been used to encourage investment in priority sectors including manufacturing, technology, and export-oriented industries.

Policy makers are now tasked with balancing compliance with international tax rules against the need to maintain Sri Lanka's competitiveness as an investment destination. The challenge is particularly acute given the country's ongoing economic recovery and reliance on foreign direct investment to support growth and employment creation.

Experts suggest that rather than eliminating tax incentives entirely, Sri Lanka could redirect them toward outcomes-based mechanisms that reward measurable economic contributions such as job creation, technology transfer, and export performance. Such an approach would allow the country to remain attractive to investors while meeting its international obligations under Pillar Two.

The transition is expected to require legislative amendments and consultations with key stakeholders including the Board of Investment, domestic industries, and international business chambers. Implementation timelines will depend on Sri Lanka's ratification schedule and the technical capacity of revenue authorities to administer revised incentive schemes.