Top Real Estate Broker Admits Dodging Taxes
By Michael Hardy
The Sunday Leader has uncovered shocking new evidence of how expatriate-owned real estate brokers help foreigners buy valuable property on the island without paying the mandatory 100 percent transfer tax that was enacted in 2005. Over the past decade, foreigners have bought up massive swaths of Sri Lankan beachfront property, displacing local inhabitants and inflating real estate prices to unprecedented levels.
Most foreigners buy the property as an investment, hoping to re-sell it later for a hefty profit. The most valuable and hotly-traded property is located around Galle, from Bentota to Matara, but numerous expat-owned real estate brokers also offer beachfront property around Trincomalee, Arugam Bay, Tangalle and Puttalam. With numerous real estate companies taking advantage of a tax loophole to quickly sell off land to outside investors, the government appears content to let foreigners buy up the island from under its very nose.
Posing as a wealthy American businessman, I met with well-known real estate agent Giles Scott to discuss buying property near Mirissa Beach in Weligama. Scott, a UK expatriate and founder of Lanka Real Estate (LRE), met me at the Galle Face Hotel in Colombo to tell me about the investment opportunities available to foreigners. As I secretly taped the conversation using a digital recorder hidden in my pocket, Scott explained exactly how he and his partner, fellow Englishman Ivan Robinson, would help me evade paying taxes on any property I might decide to purchase.
“It’s all possible, it’s all happening,” Scott told me when I inquired about buying land in the South. He told me that he had started LRE with Robinson in 2003 after learning that there weren’t any other expat real estate agents in the South. LRE quickly encountered a series of setbacks. “The government changed hands in 2004, not for the benefit of our investors,” Scott said. “Then the tsunami came, which sort of put a damper on things, but sales kept going up in 2005, 2006.” But since the war ended, Scott told me, the Sri Lankan real estate industry has been booming. He recommended that I buy land in the next six months, because by next winter’s tourist season land prices are projected to go sky-high.
“Everything we have on the books is selling off, and everything new is also selling off,” Scott said. “I think by the next winter season — January, February, March — if nothing else changes, the market is going to really take off. The South still has a long way to go. So from an investment point of view — yep, it’s a pretty good idea. Now, as a place to live, it’s a little harder to handle. It’s a developing country.”
Repeatedly characterizing Sri Lanka as backwards and politically volatile, Scott steered me towards purchasing land as an investment rather than as a second home. When I asked how he manages to live here, Scott claimed that he had mastered “the ways” of Sri Lanka. I then asked whether I would be faced with a lot of bureaucratic red tape from the government. “Don’t worry about it,” Scott confidently answered. “Sri Lanka isn’t like Europe — it’s not a nanny state. There are ways in which things are done here, which you would think ‘gosh, I wouldn’t do that in England.’ But if you don’t do it that way you aren’t going to get it done. I’m not talking about bribing officials or anything like that. It’s like driving — you think it’s anarchy, but there are rules. You haven’t really learned them yet. There are rules, but they’re rules made up by the private sector rather than the government.”
Although Scott denied bribing officials, he didn’t seem concerned about government interference. In fact, he brazenly boasted of never paying the 100 percent transfer tax on the purchase of land in Sri Lanka by foreigners. When I asked him directly about this tax, Scott explained that, because of the history behind the tax, it was never enforced by the Inland Revenue Department. (The Commissioner-General of Inland Revenue, E.M. Mahinda Medagoda, refused to comment for this story. Attempts to contact the Register General’s Department and the Ministry of Land and Land Development were also unsuccessful.)
“The JVP joined forces with the UPFA in 2004 to defeat the UNP,” Scott explained. “They were quite hard-line nationalists, and they didn’t like this idea of foreigners coming in and taking land that belongs to Sri Lankans. So the new government put a 100 percent tax on land. But even the leaders of the JVP knew that the country needs private investment, so they made a hole wide enough for a juggernaut to go through. That way they had something to say to the Sinhalese hard-liners in the South.”
Scott told me that three years after the tax was implemented he attempted to pay the transfer tax on a small piece of property he had purchased. According to Scott, the government quickly sent him back the money, saying that there was nobody to process it. Despite lax government oversight, however, Scott explained that legal sleight-of-hand is necessary to avoid the tax.
“So (the tax) is there, it’s in the law, and nobody pays it,” Scott admitted. “But in order to get around it it’s a little complex. There are lots of simple ways around it, but we at LRE make sure we go through the most sound way, which is a little bit more expensive and a little bit more complicated, but, if the government were to change hands to an even worse government, nothing really bad could happen with your land.”
The “most sound way” of cheating the government was first revealed by The Sunday Leader in a 2005 article by Frederica Jansz. As Jansz reported, and as Scott confirmed to me, LRE sets up two companies — call them Company A and Company B. Company A is owned by the foreign investor, and Company B, which holds the land, is co-owned by Company A and a local lawyer. The lawyer owns 76 percent of the shares in Company B, with Company A owning the other 24 percent, even though the investor has already paid in full for the property. (This arrangement is set up to meet the legal requirement that companies that have more than 75 percent of their shares owned by foreigners must pay the transfer tax.)
Before any money changes hands, the investor and the lawyer sign a contract in which the lawyer gives the investor a 99-year lease on the property. In case something goes wrong, the contract has a clause guaranteeing Company A the remaining shares in Company B. As Scott explained, “If something went wrong, then you would be able to get your land back, but for legality the land is owned by a local company.”
Who are the local lawyers helping foreigners to buy up their country’s patrimony? According to Scott, there are no more than half a dozen lawyers used by expatriates in Sri Lanka, with two lawyers in particular — Simon Seneratne of Colombo and Mansoor Marikar of Galle — being used in 80 percent of all transactions. When contacted by The Sunday Leader, Seneratne declined to comment. Marikar claimed that “the shell companies are not being set up by me. They’re being set up by chartered accountants in Colombo. I only do the material work. I do not know anything about these deals.” (Attempts to contact LRE’s accountants were unsuccessful.)
In my role as a wealthy investor, I asked Scott whether it would be difficult to set up my own company. “Well, it’s a shell company that’s sole asset is the land or the house,” he said. “In the future you can get Board of Investment (BOI) status on the company, which gives you a resident visa. Getting a resident visa is easy.”
Scott went on to explain how I could later sell my property and transfer the money to a foreign bank without paying a single rupee to the government.
He seemed to see nothing wrong with exploiting Sri Lankan law to make a fortune while contributing nothing to the island’s coffers. The principal beneficiary of LRE’s tax-evasion scheme is LRE, which charges a five percent commission on all sales that it brokers. The only other cost to investors is the approximately US $3,000 fee to set up the shell companies and an annual fee of US $200-$300 to keep the companies registered in Sri Lanka. Altogether, Scott estimated that the cost of purchasing land in Sri Lanka was about seven percent of the total price:
“That’s not super in London, but things are a lot simpler in London, or in the States,” Scott said. Nevertheless, he told me that he preferred doing business in Sri Lanka. “I like the freedom here. I like the fact that you have to be your own boss. You have to make your own moral code. It’s up to you.” Looking towards the future, Scott said that despite the current government’s nationalism he was optimistic that real estate prices would continue to climb.
“(The government is) too involved in their own problems (to interfere) — jailing Generals, or whatever,” Scott said. “This is not a great government, but I still hope for the best. What the country needs is someone like Lee Kuan Yew in Singapore. He didn’t stand for any nonsense from his own people.”
For the moment, however, the question is whether the Sri Lankan people with stand for any more nonsense from Giles Scott and the other real estate brokers who are quite literally selling the country to wealthy foreigners. Now that’s the real foreign conspiracy.
From: Ivan Robinson <email@example.com>
Date: Sat, Mar 20, 2010 at 8:05 AM
Subject: Re: Looking for house near Marissa
To: Michael Hardy <firstname.lastname@example.org>
Your Modus Operandi is definitely unethical and I actually feel sorry for you having to do your business in such a manner. If you had been straight and told me that you were a journalist from the outset I would have happily told you what we do and in great detail. Because of your despicable, immoral and deceptive approach I will let you find out for yourself. We have nothing to hide and have not broken any laws in this country so I expect that you will make up your own very imaginative story.
Good luck Michael and I wish you all the very best in life.