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FM AMEMBASSY COLOMBO
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INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0144
RUEHKA/AMEMBASSY DHAKA 9547
RUEHIL/AMEMBASSY ISLAMABAD 6464
RUEHKT/AMEMBASSY KATHMANDU 4518
RUEHKP/AMCONSUL KARACHI 2046
RUEHCG/AMCONSUL CHENNAI 7016
RUEHGV/USMISSION GENEVA 1470
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 09 COLOMBO 001837 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
 
DOL/ILAB FOR TINA MCCARTER 
 
DRL/IL FOR LAUREN HOLT 
 
STATE FOR EB/TPP/BTA AND SCA/INS 
 
MCC FOR D NASSIRY AND E BURKE 
 
GENEVA PASS USTR/GBLUE 
 
E.O 12958: N/A 
TAGS: ECON ELAB EIND ETRD PHUM SOCI EAID CE
 
SUBJECT:  SRI LANKA - 2007 NATIONAL TRADE ESTIMATE REPORT 
 
REF: STATE 136302 
 
¶1. The following report has been submitted per reftel instructions 
in Microsoft Word format to the US Trade Representative.  With the 
exception of format changes for dissemination and readability via 
cable, the language remains the same: 
 
SRI LANKA:  TRADE SUMMARY 
------------------------- 
 
¶2. The U.S. goods trade deficit with Sri Lanka was $1.9 billion in 
2005, an increase of $95 million from $1.8 billion in 2004.  U.S. 
goods exports in 2005 were $179 million, up 18.5 percent from the 
previous year. Corresponding U.S. imports from Sri Lanka were $2.1 
billion, up 6.3 percent.  US exports in 2005 included tsunami 
related exports of approximately $20 million.  Sri Lanka is 
currently the 104th largest export market for U.S. goods. 
 
 
IMPORT POLICIES 
--------------- 
 
¶3.  In 1978, Sri Lanka shifted away from a socialist orientation and 
opened its economy to foreign investment.  But the pace of reform 
has been uneven.  A period of aggressive economic reform under the 
UNP-led government that ruled from 2002 to 2004 was followed by a 
more statist approach under former President Chandrika Kumaratunga 
and current President Mahinda Rajapaksa.  President Rajapaksa's 
broad economic strategy was outlined in his election manifesto 
"Mahinda Chintana" (Mahinda's Thoughts), which now guides government 
economic policy.  Mahinda Chintana policies focus on poverty 
alleviation and steering investment to disadvantaged areas; 
developing the small and medium enterprise sector (SME); promotion 
of agriculture; and expanding the already enormous civil service. 
The current government has backtracked on trade liberalization 
strategies followed by previous governments. 
The Trade, Tariff and Investment Policy Division of the Ministry of 
Finance and Planning is charged with the formulation and 
implementation of policies in thise areas.  In addition, the Trade 
and Tariff cluster of the National Council of Economic Development 
(NCED) also examines trade and tariff issues and sends 
recommendations to the Ministry of Finance and Planning.  The NCED 
consists of 22 clusters representing both private and public sector 
officials which examine various sectors of the economy. 
 
¶4.  Sri Lanka has entered into several bilateral and regional trade 
agreements, such as the Indo-Lanka Free Trade Agreement, Sri 
Lanka-Pakistan Free Trade Agreement, South Asia Free Trade Agreement 
(SAFTA), and the Asia Pacific Free Trade Agreement (AFTA).  Import 
tariffs on imports from member countries to these agreements have 
been reduced. 
 
Import Charges 
 
¶5.  Sri Lanka's main trade policy instrument has been the import 
tariff. The tariff structure is subject to frequent changes.  Over 
the past couple of years, Sri Lanka's tariff structure has moved 
steeply upwards.  The U. S. Embassy has received complaints from 
affected U.S. exporters and U.S. companies in Sri Lanka regarding 
the "prohibitive" tariff regime. 
 
¶6.  Import tariffs:  Currently, there are 5 tariff bands (reduced 
from 6 in November 2005) of 0 percent, 2.5 percent, 6 percent, 15 
percent, and 28 percent. The highest tariff band was increased from 
25 percent in 2002 to 27.5 percent in January 2004, and to 28 
percent in November 2004. Textiles, pharmaceuticals, and medical 
equipment are free of duty. Basic raw materials are generally 
assessed a 2.5 percent duty. Semi-processed raw material tariffs are 
6 percent, while intermediate product tariffs are 15 percent. Most 
finished products are at 28 percent. There are also a number of 
deviations from the five-band tariff policy. Tobacco and cigarette 
 
COLOMBO 00001837  002 OF 009 
 
 
tariffs range from 75 percent to 250 percent. In addition, there are 
specific duties on certain items, including footwear, ceramic 
products and agricultural products. These specific duties are 
designed to protect domestic producers. Some items are subject to an 
ad valorem or a specific duty, whichever is higher, and there is 
intermittent use of exemptions and waivers. Imports for export 
industries enter duty free. 
 
¶7.  Export Development Board (EDB) Levy:  In November 2004, the Sri 
Lankan government introduced a new additional tax on a range of 
imports identified as "non-essential." This new tax was a response 
to a decline in Sri Lanka's foreign reserves and was intended to 
protect domestic agriculture and industry. The EDB levy is applied 
on the Cost plus Insurance plus Freight (C.I.F.) value, and ranges 
from 1 percent to 25 percent, with most goods at rates at or above 
10 percent. The highest rate band was increased from 20 percent to 
25 percent in September 2006.  Some items carry a specific duty. 
Together with import tariffs, the EDB levy effectively increases 
charges on most finished good imports to over 50 percent of the 
import value, with the highest charges on goods subject to specific 
duties.  Despite an improvement in the foreign reserve position, the 
government has not revoked the tax. 
 
¶8.  Other charges on imports include: 
1) a 10 percent import duty surcharge on all dutiable imports; 
2) a 2.5 percent ports and airports development levy (PAL) on 
imports (increased from 1.5 percent from January 1, 2006); 
3) a Value Added Tax (VAT) of 0 percent, 5 percent, 15 percent and 
20 percent (import prices are increased by 7 percent, adding an 
imputed profit margin, when calculating the VAT and excise duty); 
4) excise fees on some products such as aerated water, liquor, beer, 
motor vehicles (motor vehicle excise fees increased sharply in 2004) 
and cigarettes; 
5) a port handling charge that varies by container size; and 
6) a surcharge of 1 percent assessed on the import duty for Social 
Responsibility Levy (to fund the National Action Plan for Children). 
This tax was increased from 0.25 percent from January 1, 2006. 
 
¶9.  As of October 2006, importers are required to keep a 50 percent 
deposit on letters of credit on non-essential imports.  The 
requirement was introduced to discourage imports of over 40 
categories of consumer items including confectionary, liquor, 
personal care products, footwear and tableware. 
 
Import Licensing 
 
¶10.  Sri Lanka requires import licenses for over 300 items at the 
6-digit level of the Harmonized System (HS) code, mostly for health, 
environment, and national security reasons. Importers must pay a fee 
equal to 0.1 percent of the import price to receive an import 
license. 
 
Customs Barriers 
 
¶11. The Government of Sri Lanka implemented the WTO Customs 
Valuation Agreement in January 2003 and follows the transaction 
value method to determine the C.I.F. value. The scheme has operated 
quite successfully, and major companies have not faced problems. 
Customs is also in the process of installing an Electronic Data 
Interchange (EDI) system to support an automated cargo clearing 
facility. When implemented, this system should improve customs 
administration and facilitate trade. 
 
 
STANDARDS, TESTING, LABELING AND CERTIFICATION 
--------------------------------------------- - 
 
¶12.  At present, there are 102 items that come under the Sri Lanka 
Standards Institution (SLSI) mandatory import inspection scheme. 
Importers of these items have to obtain a clearance certificate from 
the SLSI to sell their goods. SLSI accepts letters of conformity 
 
COLOMBO 00001837  003 OF 009 
 
 
from foreign laboratories, but retains the discretion to take 
samples and perform tests. 
 
¶13.  The Ministry of Health has drawn up a regulation for mandatory 
labeling of genetically modified food that is due to be implemented 
in January 2007.  Some large U.S. food exporters have expressed 
concern about this proposed regulation, which in addition to not 
appearing to be science-based in its rationale, is thought to be 
excessive and could hinder exports of U.S. food brands to Sri 
Lanka. 
 
¶14.  A new labeling and advertising regulation came into effect from 
April 01, 2004.  These regulations have been issued under the Food 
Act No. 26 of 1980 and govern the information that should appear on 
a label of any pre-packaged food product offered for sale, 
transported or advertised for sale in Sri Lanka.  This includes all 
imported food items as well.  New features of the latest regulations 
include the date of manufacture, names of the food additives, claims 
that are allowed and disallowed, etc. 
 
¶15.  A few food items are banned completely.  There is a ban on 
chicken in order to protect the domestic industry.  Imports of beef 
from the United States are banned due to fears of Bovine Spongiform 
Encephalopathy (BSE).  Sri Lanka does not allow imports of seed 
potato from the US due to unfounded fears of the Colorado Beetle 
being introduced to the country. 
 
 
GOVERNMENT PROCUREMENT 
---------------------- 
 
¶16.  Sri Lanka is not a member of the WTO Agreement on Government 
Procurement. Government procurement of goods and services is mostly 
done through a public tender process. The Government of Sri Lanka 
publicly subscribes to principles of international competitive 
bidding, but charges of corruption and unfair awards continue. Some 
tenders are open only to registered providers. There are no 
professional evaluation experts in Sri Lanka. In 2004, the 
Government created a National Procurement Agency (NPA) to introduce 
an improved system of procurement. 
 
¶17.  Recent examples of procurement outside the normal tender 
process include an agreement in 2006 with the Government of China to 
build a coal power plant, negotiations with India to build an 
additional coal power plant, a memorandum of understanding in 2006 
with a Chinese consortium for detailed design works for a port in 
Hambantota without calling for competitive bidding, and  the 
decision to grant oil exploration rights off the western coast of 
Sri Lanka to India and China without a competitive tender process. 
 
 
EXPORT SUBSIDIES 
---------------- 
 
¶18.  Exporting companies approved by the Board of Investment (BOI) 
are generally entitled to corporate tax holidays and concessions. 
Exporters receive institutional support from the Export Development 
Board in marketing. Imports for exporting industries and 
BOI-approved projects usually are exempted from payment of VAT. For 
others, the VAT is refunded. The airports and ports' levy on imports 
for export processing is 0.25 percent of the CIF value. 
 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
--------------------------------------------- 
 
¶19.  Sri Lanka is a party to major intellectual property agreements, 
including the Berne Convention for the Protection of Literary and 
Artistic Works, the Paris Convention for the Protection of 
Industrial Property, the Madrid Agreement for the Elimination of 
False or Deceptive Indication of Source on Goods, the Nairobi 
 
COLOMBO 00001837  004 OF 009 
 
 
Treaty, the Patent Cooperation Treaty, the Universal Copyright 
Convention and the convention establishing the World Intellectual 
Property Organization (WIPO). Sri Lanka and the United States signed 
a Bilateral Agreement for the Protection of Intellectual Property 
Rights in 1991, and Sri Lanka is a party to the WTO Trade-Related 
Intellectual Property Rights (TRIPS) Agreement.  Sri Lanka needs to 
ratify and conform to the WIPO Performances and Phonograms Treaty 
(WPPT) and the WIPO Copyright Treaty (WCT).  Sri Lanka has not 
acceded to the WTO Information Technology Agreement. 
 
¶20.  In November 2003, a new intellectual property law came into 
force that was intended to meet both the U.S.-Sri Lanka bilateral 
IPR agreement and TRIPS obligations to a great extent. The law 
governs copyrights and related rights, industrial designs, patents 
for inventions, trademarks and service marks, trade names, layout 
designs of integrated circuits, geographical indications, unfair 
competition and undisclosed information. All trademarks, designs, 
industrial designs and patents must be registered with the Director 
General of Intellectual Property.  Infringement of IPR is a 
punishable offense under the new law, and IPR violations are subject 
to both criminal and civil jurisdiction. Relief available to owners 
under the new law includes injunctive relief, seizure and 
destruction of infringing goods and plates or implements used for 
the making of infringing copies, and a prohibition of imports and 
exports. Penalties for the first offense include a prison sentence 
of 6 months or a fine of up to $5,000. The penalties could double 
for a second offense. 
 
¶21.  Enforcement, however, against piracy and counterfeiting is a 
serious problem, as is public awareness of IPR protection. Aggrieved 
parties must seek redress of any IPR violation through the courts, a 
frustrating and time-consuming process.  As a sign of limited 
progress, during 2004-2006, Sri Lanka began enforcing its new IPR 
law, although the minimal damages and suspended sentence imposed 
suggests that the court system fails to recognize the significance 
of IPR.  The Sri Lankan police uncovered a Malaysian-owned CD/VCD 
production facility in a Colombo suburb in October 2004. It was 
found to have produced pirated copies of music, movies and software, 
violating rights of several U.S. companies.  The courts imposed a 
fine of Rs 40,000 ($ 400) and issued a suspended prison sentence of 
24 months.  The police have also conducted a few other raids of 
stores selling pirated movie and music CDs as well as counterfeit 
apparel.  Several offenders have been charged or convicted by 
courts. 
 
¶22.  Counterfeit goods continue to be freely available.  Local 
agents of the U.S. and other international companies representing 
recording, software, movie, and consumer product industries continue 
to complain that the lack of IPR protection is damaging their 
business. Piracy levels are very high for sound recordings and 
software, making it difficult for the legitimate industries to 
protect their market and realize their potential in Sri Lanka. 
Software companies complain of the lack of IPR enforcement within 
government institutions. Government agencies are not proactively 
taking steps to regularise their existing unlicensed software, and 
in some instances continue to procure hardware without specifying 
licensed software as a requirement. 
 
¶23.  The government's Director of Intellectual Property and 
international experts have begun IPR legal and enforcement training 
for customs and police officials.  An IPR working group of adversely 
affected industries led by the U.S. Embassy and American Chamber of 
Commerce of Sri Lanka is also working closely with the Sri Lankan 
government to pursue more aggressive enforcement and enhance public 
awareness. It will take time before new procedures and significant 
court precedents are established under the new law. 
 
 
SERVICES BARRIERS 
----------------- 
 
 
COLOMBO 00001837  005 OF 009 
 
 
¶24.  Sri Lanka has opened its services sector to foreign investment. 
Foreign ownership of 100 percent equity is allowed in a range of 
service sectors such as banking, insurance, telecommunications, 
tourism, stock brokerage, the construction of residential buildings 
and roads, the supply of water, mass transportation, production and 
distribution of energy, professional services and the establishment 
of liaison offices or local branches of foreign companies. These 
services are regulated and subject to approval by various government 
agencies. The screening mechanism is non-discriminatory and, for the 
most part, routine. 
 
Banking 
 
¶25.  Foreign commercial banks are allowed to open branch offices in 
Sri Lanka, subject to an economic needs test and approval by the 
Central Bank. Foreign investors are allowed to hold 100 percent 
equity in local banks, subject to limits on individual share 
ownership. Currently, there are twelve foreign commercial banks 
operating in Sri Lanka, including one U.S. bank. Listed below are 
the main constraints faced in the commercial banking sector: 
1) government ministries and departments must use only state-owned 
banks for their banking business; 
2) restriction on speculative foreign exchange trading by commercial 
banks (banks are allowed to buy or sell foreign exchange for 
commercial transactions only); 
3) restriction on total lending by foreign banks to a single name 
limited to 30% of capital funds in Sri Lanka. (The option of a 
guarantee from the head office in lieu of capital was withdrawn by 
the Central Bank in 2006.); 
3) a VAT on profit before tax and salaries; 
4) a mandatory lending requirement to the agricultural sector 
(applicable to both local and foreign banks).  The Central Bank 
requires banks to increase lending to the agricultural sector to 10% 
of total advances by December 2009. 
 
Insurance 
 
¶26.  One hundred percent foreign ownership is allowed in insurance. 
Foreign insurance companies are required to incorporate in Sri Lanka 
to conduct insurance business. The government has recently 
privatized the state-owned insurance companies. Resident Sri Lankans 
are prohibited from obtaining foreign insurance policies except for 
health and travel.  Sri Lanka's insurance regulatory body retains 
powers to introduce minimum and maximum premiums for various 
insurance products. 
 
Telecommunications 
 
¶27.  The telecommunications sector is the most dynamic service 
industry in Sri Lanka. There is one fixed wire line operator, Sri 
Lanka Telecom (SLT), two wireless local loop operators and four 
mobile phone operators. Several private operators also provide radio 
paging, data communication, internet service and satellite link-ups. 
The government of Sri Lanka sold a 35 percent stake in SLT to NTT of 
Japan in 1997. The government sold a further 12.5 percent stake of 
SLT in 2003 to the public. SLT has recently acquired a mobile phone 
operator. Due to the past monopoly status under government control, 
SLT continues to own most of the national telephone infrastructure 
(including main switches and the only two international cable 
landing stations) and continues to dominate the sector, affecting 
the competitiveness of other operators. All other operators are 
privately owned.  In early 2003, the government liberalized 
international telecommunications and issued 33 non-facilities-based 
gateway licenses, ending the SLT monopoly over international 
telephony. Since then, international outgoing call rates have 
dropped sharply. 
 
¶28.  A key problem facing the telecommunications sector is 
restriction on interconnection. The Regulatory Authority has failed 
to enforce regulations provided under the Telecommunications Act to 
establish an efficient and transparent interconnection regime. As a 
 
COLOMBO 00001837  006 OF 009 
 
 
result, SLT, the wireless operators and the mobile operators have 
effectively restricted interconnection for other operators. This has 
adversely affected the operations of most of the other operators and 
new international gateway licensees who are unable to make use of 
their licenses due to lack of interconnection by the local exchange 
operators. This situation has resulted in illegal bypassing by some 
operators. Spectrum management is also weak and frequencies are not 
properly allocated, thereby negatively affecting telecommunication 
operators. 
 
Tax on foreign TV programs and commercials 
 
¶29.  Following a proposal contained in the 2006 government budget, 
the government has imposed a tax on foreign movies and television 
programs as follows: 
-- Imported English language movies shown on television are taxed at 
Rs 25,000 (approximately $250).  Movies in other languages are taxed 
at Rs 200,000 ($2,000). 
-- English language television programs are taxed at Rs 10,000 
($100) per half hour episode.    Programs in other languages are 
taxed at Rs 75,000 ($750) per half hour episode. 
-- Any foreign film or program dubbed in the local language Sinhala 
is taxed at Rs 90,000 ($900) per half hour. 
-- Documentaries of educational interest are exempted.  Imported 
Tamil language programs are also exempted. 
--  Foreign television commercials are taxed at Rs 500,000 ($5,000) 
per year. 
-- Government approval is required for all foreign films and 
programs shown on TV. 
 
¶30.  Copies of movies and programs need to be submitted to the 
Ministry of Media and Information for prior approval.  However, the 
Ministry does not ask for copies of each and every episode of long 
running television serials.  Approval is usually given within 24 
hours. 
 
¶31.  President Rajapaksa, who is also the Finance Minister, 
proposing the tax on TV programs said the revenue will be used to 
assist the local film and teledrama industry. Sri Lankan television 
stations import English, Tamil and Hindi movies and programs in 
addition to locally made Sinhala and Tamil ones.  So far, no 
revenues have been allocated for this stated purpose. 
 
Closure of satellite TV stations 
 
¶32.  On a police complaint, courts imposed a clampdown in June 2006 
on two of the biggest companies offering pay TV services in Sri 
Lanka.  The initial reason for the closure of the first operator was 
an alleged connection to the Liberation Tigers of Tamil Eelam 
(LTTE), a US-designated foreign terrorist organization (on the basis 
that they used the same commercial satellite to receive data). 
Later it was announced that these operators did not have proper 
licenses.  In July 2006, the President ordered the regulators, the 
Ministry of Mass Media and Information and the Telecommunications 
Regulatory Commission of Sri Lanka, to license the operators and 
regulate the industry.  However, the regulators failed to take 
action to restart the operations until October 2006.  The four month 
closure of the two pay TV services has curtailed satellite 
broadcasts of foreign programs, including some U.S. programs. 
 
Professional Services 
 
¶33.  There is no formal national policy on professional services. In 
practice, many foreign doctors, nurses, engineers, architects, and 
accountants work in Sri Lanka. Most of them are employed by foreign 
companies. Sri Lanka has not made any WTO commitments on the 
presence of natural persons, and national treatment is not accorded 
to foreign nationals working in Sri Lanka. Most foreign nationals do 
not have statutory recognition in Sri Lanka and cannot sign 
documents presented to government institutions or regulatory 
bodies. 
 
COLOMBO 00001837  007 OF 009 
 
 
 
¶34.  The Immigration Department grants resident visas for 
expatriates and professionals whose services are required for 
projects or by companies approved by the Board of Investment (BOI). 
The Department also grants visas for expatriates required for 
projects approved by the government. Non-BOI companies, such as 
banks, can also recruit expatriate staff.  Sri Lanka also operates a 
resident guest visa program for foreign investors and professionals 
who are recommended by the relevant ministry. 
 
Legal Services 
 
¶35.  A person can provide legal consultancy services without being 
licensed to practice law in Sri Lanka. Foreigners are not allowed to 
practice law (i.e., appear in courts) and do not have statutory 
recognition in Sri Lanka. Sri Lankan citizens with foreign 
qualifications need to sit for exams conducted by the Sri Lanka Law 
College in order to practice and register in the Supreme Court. 
 
Doctors 
 
¶36.  The Sri Lanka Medical Council allows qualified foreign doctors 
and medical specialists to work in Sri Lanka. They have to be 
sponsored by a medical institution or a non-government organization, 
and are required to obtain temporary registration from the Sri Lanka 
Medical Council (SLMC). Many Indian doctors have been issued 
resident work visas recently to work in a hospital in Sri Lanka 
which was Indian-owned until purchase by a Sri Lankan company in 
mid-2006. 
 
Engineers and architectural services 
 
¶37.  Over the years, most foreign funded projects have used foreign 
consultants and contractors. 
 
 
INVESTMENT BARRIERS 
------------------- 
 
¶38.  Sri Lanka welcomes foreign investment. One hundred percent 
foreign investment is allowed in most manufacturing and services 
sectors.  Foreign investment is not permitted in the following 
businesses: non-bank money lending; pawn brokering; retail trade 
with a capital investment of less than $1 million (with one notable 
exception: the Board of Investment (BOI) permits retail and 
wholesale trading by reputable international brand names and 
franchises with an initial investment of not less than $150,000); 
coastal fishing; education of students under 14 years of age for 
local examinations; and the awarding of local university degrees 
(note that this does not limit the awarding of degrees from overseas 
institutions). Investment in the following sectors is restricted and 
subject to screening and approval on a case-by-case basis when 
foreign equity exceeds 40 percent: shipping and travel agencies; 
freight forwarding; higher education; mass communications; deep sea 
fishing; timber-based industries using local timber; mining and 
primary processing of non-renewable national resources; and the 
growing and primary processing of tea, rubber, coconut, rice, cocoa, 
sugar and spices. Foreign investment equity restrictions and 
government regulations also apply to air transportation, coastal 
shipping, lotteries, large-scale mechanized gem mining, and 
"sensitive" industries such as military hardware, dangerous drugs 
and currency. 
 
¶39.  The BOI offers a range of incentives to both local and foreign 
investors. To qualify for BOI incentives, investors need to meet 
minimum investment and minimum export requirements. In general, the 
treatment given to foreign investors is non-discriminatory. Even 
with incentives and BOI facilitation, however, foreign investors can 
face difficulties operating in Sri Lanka.  Problems range from 
difficulties in clearing equipment and supplies through customs to 
obtaining land for factories. The BOI encourages investors to locate 
 
COLOMBO 00001837  008 OF 009 
 
 
their factories in BOI-managed industrial processing zones to avoid 
land allocation problems. Investors locating in industrial zones 
also get access to relatively better infrastructure facilities such 
as improved power reliability, telecommunication and water 
supplies. 
 
¶40.  Government treatment of foreign investors in the privatization 
process has been largely non-discriminatory, with foreigners buying 
controlling interest in some companies. The privatization process 
has not always been transparent, however.  For instance, in 2003, 
the government sold part of the retail operations of state-owned 
Ceylon Petroleum Corporation (CPC) to a foreign entity without a 
formal tender process.  The current government rejects the 
privatization of state enterprises, including "strategic" 
enterprises such as state-owned banks, airports, and electrical 
utilities. 
 
¶41.  Government failure in paying, and delays in paying, agreed 
subsidy payments and other charges owed to foreign companies is 
acting as a clear barrier to foreign investment in Sri Lanka.  For 
example, a major US company has faced problems due to government 
failure to honor an agreement to pay for services rendered under an 
agreement signed between the US company and a government owned 
company.  As a result, $3 million was owed by the state-owned entity 
to the US company.  The US company has now reduced its claim 
substantially, although even this amount remains outstanding as of 
October 2006.   In another case, a foreign majority owned (not US) 
retailer has suffered heavy losses due to the government failure to 
honor agreements with regard to the payment of subsidies to the 
company resulting from price controls on the company's product.  The 
government has recently withdrawn this price control, and allows the 
foreign company to set its own price.  The company complains, 
however, that it is finding it difficult to compete with its 
competitor, a state-owned company which continues to sell at below 
cost. 
 
¶42.  Access to local credit markets by foreign-owned companies 
incorporated in Sri Lanka was liberalized in 2003 and such firms can 
now borrow rupee funds without the approval of the Central Bank. 
Foreign-owned companies, BOI-approved firms and exporters can access 
dollar denominated loans.  Applications for dollar denominated loans 
from local firms are considered on a case-by-case basis and are not 
encouraged. 
 
Capital Repatriation 
 
¶43.  Sri Lanka has accepted Article VIII status of the IMF and has 
liberalized exchange controls on current account transactions. 
However, on October 20, 2006, the Central Bank introduced 
restrictions on import financing. Banks are required to obtain a 
deposit of 50 percent of the invoice value at the time of opening 
letters of credit for imports of non-essential consumer items. 
There are no surrender requirements on export receipts, but 
exporters need to repatriate export proceeds within 120 days to 
settle export credit facilities.  Other export proceeds can be 
retained abroad. Currently, contracts for forward bookings of 
foreign exchange are permitted for a maximum period of 360 days for 
the purposes of payments in trade and 720 days for the repayment of 
loans. There are also no barriers, legal or otherwise, to the 
expeditious remitting of corporate profits and dividends for foreign 
enterprises doing business in Sri Lanka. Remittance of business fees 
(management fees, royalties and licensing fees) is also freely 
permitted. Funds for debt service and capital gains of BOI-approved 
companies exempted from exchange control regulations are freely 
permitted. Other foreign companies remitting funds for debt service 
and capital gains require Central Bank approval.  Prior to Central 
Bank approval they also need a tax clearance certificate. All stock 
market investments can be remitted without prior approval of the 
Central Bank. Investment returns can be remitted in any convertible 
currency at the legal market rate. 
 
 
COLOMBO 00001837  009 OF 009 
 
 
¶44.  Controls on capital account (investment) transactions usually 
prohibit foreigners from investing in debt and fixed income 
securities. One exception has been the Central Bank's local market 
dollar denominated bond issues which were opened to foreign 
investors.  Further relaxing capital controls, the Central Bank 
decided to permit foreign investors to purchase government (local 
currency denominated) bonds in October 2006.  Accordingly, foreign 
investors are allowed to hold up to 5 percent of government medium 
and long term bonds.  Local companies require Central Bank approval 
to invest abroad. The process of granting approval for such 
investments was streamlined in 2002, resulting in an increase in 
approvals. 
 
 
OTHER BARRIERS 
 
¶45.  Litigation delay is a serious problem. For example, a U.S. 
investor with a substantial investment in an export manufacturing 
company has faced lengthy delays in a court case over a large 
insurance claim. The company instituted legal action in June 1999 
and court proceedings are still on-going, resulting in additional 
financial losses for the company. The government has established a 
commercial court to hear business litigation, but delays are 
common. 
 
¶46.  In 2004, the government reintroduced a 100 percent transfer tax 
on property purchased by foreign nationals and companies. For this 
purpose, a "foreign company" is defined as an entity with at least 
25 percent foreign equity. Apartments above the third floor of 
condominium buildings, land for the development of factories, large 
housing schemes, hospitals, hotels, and large infrastructure 
projects are exempted from the tax. 
 
 
RANKING OF BARRIERS: 
 
¶47.  Key barriers to US trade and services are listed below. 
 
-- Import charges 
 
-- Intellectual Property Rights Protection 
 
-- Proposed labeling regulation on genetically modified goods 
 
-- Banking regulations 
 
-- Taxes on foreign TV programming and closure of cable TV stations 
 
BLAKE