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RUEHGV/USMISSION GENEVA 1106
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 03 COLOMBO 000534 
 
SIPDIS 
 
STATE FOR EB, SA/INS; COMMERCE FOR E.YESIN; TREASURY FOR 
S.CHUN 
 
SENSITIVE, SIPDIS 
 
E.O 12958: N/A 
TAGS: ECON ETRD CE
SUBJECT: SRI LANKAN TAX ON FOREIGN PROGRAMMING COULD HARM 
US FILM EXPORTS 
 
 
¶1.  (SBU) Summary:  In a move to resuscitate the ailing 
local movie industry and protect the local TV production 
industry, Sri Lanka has announced plans to impose a tax on 
most foreign television series and movie broadcasts.  While 
the tax was slated to go into effect April 1, no 
implementing regulations have yet appeared.  Sri Lankas 
movie industry is failing due to a decline in theatre 
attendance and the increasing popularity of foreign TV 
programs (in particular Hindi and Tamil films from India). 
The government expects the new tax to raise funds to aid 
the local industry and free up air time and theater slots 
for local productions.  TV stations have complained, that, 
at projected rates (the final rates have not been 
determined yet, though the Finance Ministry has suggested 
some figures), the tax will force them to drop foreign 
programming, including popular US television shows.  There 
has been no consumer reaction so far.  Government officials 
and the local movie lobby do not appear interested in 
consumer choice and trade implications, as they focus on 
the twilight of their film industry and play to an 
increasingly vocal cultural elite.  End Summary. 
 
GOVERNMENT TO TAX FOREIGN TELECASTS 
 
¶2.  (SBU) The government is preparing to impose a tax on 
foreign movies and television series broadcasts in Sri 
Lanka.  April 1 was initially set as the implementation 
date, but Ministry of Finance sources suggested this date 
would not hold and, indeed, no published regulations have 
yet appeared.  The tax was proposed by President Rajapakse 
(in his capacity as Finance Minister) in his 2006 budget 
speech last December.  In order to impose the tax, a new 
Finance Bill was passed by Parliament on March 23. 
According to the Bill, the tax aims to ensure propagation 
of Sri Lankan values and is to be charged not only on 
films but on advertisements as well.  However, implementing 
regulations giving actual rates, details and mode of the 
tax are yet to be announced. 
 
TAX SCHEME:  THE POSSIBLE DETAILS 
 
¶3.  (SBU) While proposing the tax, the President said it 
would promote the local film and teledrama (television 
series) industry.  According to Mr. R.T.L.  Weerasinghe, 
tax consultant to the Finance Ministry, movies will be 
taxed at Rs 75,000 (USD750) per film.  For a television 
series, the tax will be imposed on blocks of five episodes. 
But much remains unclear including whether this will 
l 
actually be the charge, and how the funds will be used to 
directly benefit the local industry. 
 
¶4.  (SBU) Although the exact nature of the tax has not yet 
been defined, some categories such as classics, 
documentaries, childrens movie and educational films are 
to be exempted.  While satellite transmissions (cable TV) 
are not expected to be charged this tax initially, we 
understand that the Finance Ministry is studying these 
broadcasts as a possible revenue source as well. 
Additionally, the Finance Ministry has yet to decide 
whether reruns will be taxed. 
 
¶5.  (SBU) Some stations say that the proposed tax is 
approximately as costly as the royalty fees they must pay 
for broadcasting.  In Sri Lanka, foreign programming 
generally leads to higher ratings, which in turn lead to 
greater advertising revenue.  Nonetheless, it will not be 
possible to pass this entire tax burden on to advertisers. 
Sri Lankan advertisers are more price sensitive than their 
counterparts in other countries, since advertising 
expenditures are not fully tax deductible.  The increased 
fees may make various films and television series too 
expensive, resulting in the cancellation of foreign 
programming in favor of cheaper (and less desired) local 
programming, leading to a decrease in consumer choice. 
 
PROTECTING A SHRINKING INDUSTRY 
 
 
COLOMBO 00000534  002 OF 003 
 
 
¶6.  (SBU) The local film industry is happy with this 
taxation scheme for two reasons:  the revenue will help the 
ailing industry, and excessively high costs of foreign 
programming could free up air time for local programming. 
According to some government sources, since the main 
competitors are Hindi and Tamil movies, the government is 
also considering the possibility of excluding English-only 
channels from the tax. 
 
¶7.  (SBU) The ever-shrinking Sinhalese movie industry 
produces a handful of movies and several television series 
for broadcast each year.  Sinhalese is the language spoken 
by the majority Sinhala community in Sri Lanka (as opposed 
to Tamil, the primary language of the minority Muslim and 
Tamil communities).  The Sri Lankan film industry does not 
usually produce Tamil films. 
 
¶8.  (SBU) According to local movie industry sources, the 
industry faces a decrease in already low theatre attendance 
(Note: theater attendance has reportedly not picked up 
following the 2002 ceasefire.  End Note) due to high ticket 
costs and the increasing prevalence of free television 
with increasingly greater program choices.  There are 11 
television channels in Sri Lanka, with two dedicated to 
English programming and one channel broadcasting only Tamil 
programs.  The other eight broadcast an assortment of 
programs in all three languages.  While the audience for 
English language programs is small, several English 
language movies and dramas are broadcast every week. 
 
¶9.  (SBU) The local movie industry is also plagued by a 
lack of investment and technology, and most of the films 
cannot compete with Hindi and Tamil productions imported 
d 
from India (and popular with all Sri Lankan ethnic 
communities).  Some Hindi and Tamil programs come with 
subtitles or are dubbed in Sinhalese.  Ravindra Randeniya, 
a leading actor and a key player in the industry, told 
EconOff that foreign movies broadcast in Sri Lanka are 
threatening to close the only channel currently providing 
airtime for the Sri Lankan industry.  According to him, the 
prime time slots in most of the TV channels have been taken 
up by Tamil and Hindi programs from India.  While Randeniya 
admits that the Tamil and Hindi movies from India are 
superior to local productions in terms of technology and 
cinematography, he argues that the local industry needs to 
be sustained in order to preserve Sinhalese culture. 
 
¶10. (SBU) In addition to preserving local culture, another 
argument used by tax proponents is the adverse cultural 
impact of foreign programming. According to Mr. Asoka 
Serasinghe, Chairman of the state-owned National Film 
Corporation, Indian films are having a profound impact on 
Sri Lankan culture.  Serasinghe said that the North Indian 
Hindi culture and the South Indian Tamil culture are 
different from the Sri Lankan Tamil and Sinhalese cultures. 
According to him, addiction to Tamil and Hindi movies has 
increased tremendously and some sections of the local 
industry are considering advocating a prohibition on 
dubbing. 
 
INDIA NOT HAPPY 
 
¶11. (SBU) According to Sri Lankan Department of Commerce 
(DOC) sources, the Indian government has already 
communicated its concerns on possible adverse effects on 
Tamil and Hindi movies produced in India.  India would like 
to liberalize audio visual services under the Indo-Lanka 
Comprehensive Economic Partnership Agreement (CEPA), a 
pending expansion of the Indo-Lanka Free Trade Agreement. 
However, the DOC does not expect the Finance Ministry to 
immediately address Indias concerns, preferring to impose 
the tax first and negotiate the issue later. 
 
US INDUSTRY CONCERNS 
 
S 
 
 
COLOMBO 00000534  003 OF 003 
 
 
¶12. (SBU) The US exports approximately USD 1 million in 
television programs and films to Sri Lanka each year.  Post 
has been in contact with representatives from Time Warner 
and the Motion Picture Association of America (MPAA).  Both 
have written to the GSL to voice their concerns, which are 
primarily couched in terms questioning the validity of the 
new tax under WTO national treatment rules.  Post is 
working with both organizations, their local counterparts 
and local television stations to 1) discourage 
implementation of this tax; or 2) minimize its impact on 
American programs.  The Ambassador has written to the 
Finance Minister requesting suspension of this tax 
provision.  We have also been told that English language 
films may be exempted, an unsatisfying, but American- 
friendly, compromise that we will encourage as a second 
best option. 
 
COMMENT 
 
¶13.  (SBU) This tax is one of a series of recent trade 
liberalization reversals in Sri Lanka (including a fee on 
 on 
certain imported items and luxury goods) and has garnered 
the interest of the US film and television industry.  It 
remains unclear to what extent this tax is permissible 
under Sri Lankas bilateral trade agreements or WTO 
obligations.  Post has suggested to the GSL that this tax 
may be contrary to WTO national treatment provisions and 
that we are looking at it as a possible issue to raise 
during upcoming Trade and Investment Framework Agreement 
talks in May.  Beyond trade issues, the tax will be a drag 
on Sri Lankas efforts to popularize English usage if 
English programming significantly declines.  Additionally, 
while no public reaction has yet occurred, viewer 
complaints could arise once favorite programs are cut, 
since television is the main entertainment available for 
most middle- and lower-income groups.  Government officials 
and the local movie lobby do not appear interested in 
consumer choice and trade implications, however, as they 
focus on saving the local industry and bow to an 
 an 
increasingly vocal cultural elite.  Apart from the threat 
from films, it will be interesting to see how Sri Lanka 
decides to meet other economic pressures, especially from 
India, as it opens to increased economic ties under the 
Indo-Lanka Free Trade agreement and an expanded CEPA. End 
Comment. 
 
LUNSTEAD