This document addresses the changes in Sri Lanka’s Transfer Pricing (TP) landscape due to the new Income Tax Act (Inland Revenue Act No. 24 of 2017) and the accompanying TP Regulations. These new rules have been in effect since April 1, 2018. They are designed to manage related-party transactions and ensure tax fairness.
Sri Lanka has undergone significant changes in its Transfer Pricing (TP) framework, driven by the Inland Revenue Act No. 24 of 2017 and the TP Regulations. These regulations took effect on April 1, 2018, reshaping the country’s approach to related-party transactions.
Sri Lanka’s TP framework is guided by the Inland Revenue Act and specific regulations regarding TP documentation and pricing methodologies. The rules apply when there is a degree of control between parties, and the total value of international transactions exceeds 100 million Sri Lankan rupees (LKR).
The definition of related parties in Sri Lanka is extensive and encompasses various scenarios, including shareholding, control, loans, and shared business interests.
Companies engaging in TP transactions must submit a disclosure form with their tax returns. This form includes information about the type of transaction, associated enterprises, transfer pricing methodology, and comparable arm’s length prices.
Sri Lanka offers unilateral and bilateral Advance Pricing Agreements (APAs). The choice between these methods depends on the particular context and circumstances. The tax authority follows a risk-based assessment technique to select cases for TP evaluation, aiming to focus on situations with higher risks of tax revenue loss.
The prescribed TP documentation includes details about the ownership structure, the company’s profile and industry, business descriptions, transaction nature, and pricing methods. The economic analysis, benchmark studies, functional analysis, and financial statements are also required.
Sri Lanka adheres to the OECD Transfer Pricing standards, with no specific method prioritized. However, the best method should be selected based on generally accepted TP practice. Regional comparables are permitted, but adjustments and analysis are required to minimize discrepancies.
Penalties in Sri Lanka are imposed for various TP violations, with fines related to non-disclosure, document maintenance, and late submissions. There are penalties for concealing income particulars and providing false or misleading statements, resulting in underpayment or higher refunds.