Transfer pricing rules were introduced in Sri Lanka in 2006
and became enforceable from 2008. The revenue authorities did
not administratively enforce rules, allowing tax payers more
time to conform to requirements.
From the year of assessment 2015/16, it became mandatory for
companies to submit an independent accountant's certificate and
director's certificate to the revenue authorities, in relation
to international transactions. The certificate broadly confirms
compliance with regulations.
The regulations require the maintenance of specified
documentation to justify the arm's length nature of
international and domestic transactions between associated
Changes to (or introduction of) local transfer pricing
legislation (including regulations)
Currently transfer pricing regulations governing
international transactions, do not apply to transactions
between a permanent establishment in Sri Lanka and its head
office. However the revenue authorities have intimated their
intention to revise the regulations to cover same.
The revenue authorities have also intimated that the
certification requirements would be extended to cover domestic
transactions, where it leads to a loss of tax revenue. Hence it
is likely that from 2018, transactions between domestic group
companies where one of the entities derive exempt profits or
the entity is liable to tax at concessionary rates or has a tax
loss for claim, would be covered for transfer pricing
Release of new administrative guidance by local tax
administration (e.g., tax rulings, practice statements)
Tax rulings are issued by the revenue authorities from time
to time, providing administrative guidance on issues raised by
tax payers. For example, presently there is no database of
companies available in Sri Lanka to perform a comparability
analysis. Therefore it was recently confirmed by the revenue
authorities that tax payers are free to use a reliable database
for this purpose.
These rulings are issued on a case-by-case basis and not
made public. However, from 2018, Sri Lanka is to adopt a new
tax code, in terms of which, the revenue authorities are
required to make public all rulings.
The Institute of Chartered Accountants of Sri Lanka, is to
issue a guideline recommending the work methodology that should
be followed by independent accountants when issuing
BEPS-related developments (other than CbCR – which
is addressed below)
The government has not initiated a policy decision to
implement BEPS action plans. With tax reforms in progress via
the adoption of a new income tax law, it has been intimated
that double tax treaties (DTT) would be revised. It is not
clear at this stage whether the proposed revisions would entail
implementation of BEPS action plans.
Developments in relation to country-by-country reporting
(including local file and master file)
Since Sri Lanka is in its early stage of implementing
transfer pricing, no steps so far have been taken by the
revenue authorities to adopt CbCR requirements.
Transfer pricing compliance activities by local tax
The transfer pricing unit within the Inland Revenue
Department was formed in 2015 and officers have been trained by
the Indian Tax Authorities and the OECD.
2015 was also the first year in which certification relating
to international transactions was submitted to the revenue
authorities and it is anticipated that in the coming years,
same would be subject to audit.
The regulations require that any TP audit on international
transactions should be routed via a transfer pricing officer.
Therefore tax officers in charge of corporate tax files, are
required to refer any TP issues to the TP unit. Assessments
relating to domestic transactions could be raised by tax
officers handling the corporate tax files.
Dispute resolution (including APAs)
The local law provides for a company to enter into
unilateral or bilateral APAs. However, no APAs have so far been
concluded by the revenue authorities and they have intimated
that they do not intend to enter into any APAs for a couple of
According to the TP regulations, the revenue authorities
could initiate a transfer pricing audit within five years from
the end of the relevant year of assessment. Since enforcement
of transfer pricing is new to Sri Lanka, the revenue
authorities have not raised many assessments and are in the
process of collating information. Certificates and disclosures
filed for the year of assessment 2015/16, may be used by the
revenue authorities as a filter to identify TP issues, to
initiate the audit process.
Since the TP regulations in Sri Lanka are very similar to
the regulations in India, indications are that Sri Lankan
authorities would rely on and be influenced by precedent case
law in India.
Sri Lanka is in the early stages of enforcing transfer
pricing provisions. It is expected that in the next two to
three years, the revenue authorities would commence auditing
international transactions and prescribed documentation. Hence
it is advisable for MNEs to be compliant with local transfer
KPMG in Sri Lanka
32A, Sir Mohamed Macan Markar Mawatha
P O Box 186
Tel: +94 11 5426 503
Shamila is the head of the tax division at KPMG in
Sri Lanka. She also serves as the alternate chairperson
of the faculty of taxation of the Institute of
Chartered Accountants of Sri Lanka and is a member of
the tax sub-committee of the chamber of commerce.
Shamila counts experience in direct and indirect tax
across a number of sectors and has been closely
involved in advising on inbound investments into Sri
Shamila set up and now leads the transfer pricing
unit of KPMG in Sri Lanka. At present, KPMG in Sri
Lanka is a market leader in transfer pricing and has
won engagements in FMCG, apparel, IT service &
industrial sectors. Shamila has also been working very
closely with the Department of Inland Revenue and
assisted them in implementing transfer pricing in Sri
Lanka. She has also been assisting the Institute of
Chartered Accountants in preparing a framework for
practitioners and has been an active speaker at public
forums on the subject.