Head start for new developments
Transfer pricing rules were introduced in Sri Lanka in 2006 and became enforceable from 2008, writes Shamila Jayasekara of KPMG. The revenue authorities did not administratively enforce the rules, giving time for taxpayers to conform to requirements.
Release of new administrative guidance by the local tax administration
Tax rulings are issued by the revenue authorities from time to time, providing administrative guidance on issues raised by taxpayers. 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 taxpayers 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, under the new Income Tax Law, the revenue authorities are required to make public all rulings, unless specifically requested by taxpayers.
The Institute of Chartered Accountants of Sri Lanka has issued a guideline recommending the work methodology that should be followed by independent accountants when issuing certification.
The government has not initiated a policy decision to implement the BEPS Action Plan, except for Action 13. With the tax reforms in progress via the adoption of a new income tax law, it has been intimated that double tax agreements (DTAs) would be revised. It is not clear at this stage whether the proposed revisions would entail the implementation of the BEPS Action Plan.
Developments in relation to country-by-country reporting
The revenue authorities have intimated their intentions to implement the three-tiered documentation approach under Action 13, but the relevant regulations are yet to be issued. However, as intimated by the revenue authorities, these regulations would be issued with retroactive effect from April 2018.
Transfer pricing compliance activities by local tax administration
The TP unit within the Inland Revenue Department was formed in 2015 and officers have been trained by the Indian tax authorities and the OECD.
Certification relating to international transactions was submitted to the revenue authorities for the first time in 2015. Revenue authorities have now commenced carrying out TP audits, focusing on companies that have recorded tax losses in relation to this year.
The regulations require that any TP audit on international transactions should be routed via a TP 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.
The local law provides for a company to enter into unilateral or bilateral advance pricing agreements (APAs). However, no APAs have so far been concluded by the revenue authorities and they have stated that they do not intend to enter into any APAs for a couple of years.
According to the TP regulations, the revenue authorities could initiate a TP audit within five years from the end of the relevant year of assessment. Since enforcement of TP is new to Sri Lanka, the revenue authorities have not raised many assessments and are in the process of conducting audits and collating information.
Certificates and disclosures filed for the year of assessment 2015 to 2016 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 upon and be influenced by precedent case law in India.
Revenue authorities have now commenced auditing international transactions and prescribed documentation. Hence, it is advisable for multinational enterprises (MNEs) to be compliant with local TP requirements and be able to justify pricing. Further, domestic groups also are required to be prepared with documentation.
KPMG in Sri Lanka
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Shamila Jayasekara is the gead 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 Lanka.
Shamila leads the transfer pricing unit of KPMG in Sri Lanka. KPMG in Sri Lanka is a market leader in transfer pricing and has won engagements in fast-moving consumer goods, apparel, IT service and industrial sectors. Shamila also works very closely with the Department of Inland Revenue and has 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.