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By Shamila Jayasekara of KPMG in Sri Lanka.

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 undertakings.

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 certifications.

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 certification.

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 administration

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 years.


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 pricing requirements.

Shamila Jayasekara

KPMG in Sri Lanka

32A, Sir Mohamed Macan Markar Mawatha
P O Box 186
Colombo 00300
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 Lanka.

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.

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