Sri LankaSri Lanka

Legal ReferenceSection 76 & 77 of the Inland Revenue Act, No. 24 of 2017.

The domestic legislation has been prepared in line with OECD Transfer Pricing Guidelines as well as UN TP Manual.

Legal ReferenceRegulation 8 of Extraordinary Gazette Notification No. 2217/7 dated March 02, 2021 (TP Gazette).

TP Gazette and Inland Revenue (IR) Act does not contain a definition for related parties. Regulation 8 of the TP Gazette specifies the conditions to be met that consider to be deemed as an associated enterprise. Associated Enterprises - For the purposes of Sections 76 and 77 of the Inland Revenue Act and for these regulations, two enterprises shall be deemed to be associated enterprises, if, at any time during the year of assessment, any of the following conditions is met. (a) any person or enterprise holds, directly or indirectly, shares or otherwise carrying the majority of the voting power in the other enterprise; (b) any person or enterprise holds, directly or indirectly, shares carrying not less than fifty percent of the voting power in each of such enterprise; (c) loans advanced by one enterprise to another enterprise constitute not less than fifty-one percent of the book value of the total assets of the other enterprise provided that it is not given by a financial institution which is not considered as an associated enterprise under any other item of this regulation; (d) Loans and equity provided by one enterprise to another enterprise constitute not less than fifty-one percent of the book value of the total assets of the other enterprise provided that it is not given by a financial institution which is not considered as an associated enterprise under any other item of this regulation; (e) one enterprise guarantees not less than twenty five percent of the total borrowings of the other enterprise; (f) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; (g) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board, of each of the two enterprises are appointed by the same person or persons; (h) ninety percent or more of the raw materials, semi-finished goods and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, or of purchases required for the sale, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; (i) the goods or articles manufactured or processed by one enterprise are sold/ transferred to another enterprise or to persons specified by the enterprise, and the prices and other conditions relating thereto are influenced by such enterprise or vice versa; (j) where one enterprise is controlled by an individual or jointly by such individual and his relative, and the other enterprise is controlled by such individual or his relative or jointly by such individual and his relative or jointly by relatives of such individual; (k) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten percent interest in such firm, association of persons or body of individuals, or (l) where the controlled transaction differs from the transactions that would have been made or imposed by any person not directly participating in the management, control or capital as mentioned in section 76 or 77, but confers a potential advantage to the enterprise.

Legal ReferenceRegulation 2 (I) of TP Gazette Notification No. 2217/7 dated March 02, 2021

Regulation 2 of the TP Gazette stipulates how the arm’s length price is determined by the application of the most appropriate method to the facts and circumstances of the case from any of the methods specified.

• CUP (provided)
• Resale Price (provided)
• Cost Plus (provided)
• TNMM (provided)
• Profit Split (provided)
• Other (not provided)

Legal ReferenceRegulation 5 of TP Gazette Notification No. 2217/7 dated March 02, 2021

As per regulation 5 of the TP Gazette, the transfer pricing method to be used is the “Most Appropriate Method” which is arrived at after considering the nature and class of international transactions, the functions, assets and risks (FAR) analysis of the related parties and the availability and reliability of comparable data. Accordingly, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular controlled transaction between associated enterprises, and which provides the most reliable measure of an arm’s length price in relation to such transaction.

• Hierarchy of methods (not selected)
• Most appropriate method (selected)

Sri Lanka does not have specific Guidance on commodity transactions.

• For controlled transactions involving commodities, the guidance contained in paragraphs 2.18-2.22 of the TPG is followed. (selected)
• Domestic legislation mandates the use of a specific method for controlled transactions involving commodities (not selected)
• Other (not selected)

Sri Lanka tax administration largely follows the OECD guidance (and the relevant guidance under the UN TP Manual) in practice.

Sri Lanka does not have an explicit preference for domestic comparables over foreign comparables in accordance of the guidance and IR Act. Subject to the selection of the tested party appropriate comparables (domestic or foreign) are carefully chosen by the transfer pricing officer.

TP audits mostly rely on publicly available data and information to arrive at comparable data.

Legal ReferenceRegulation 2 (II) of TP Gazette Notification No. 2217/7 dated March 02, 2021

Regulation 2(II) of the TP Gazette, Sri Lanka considered the interquartile range as the arm’s length range. Minimum/lower limit would be the 25th percentile of the arm’s length range and maximum/upper limit would be the 75th percentile of the arm’s length range. Where the actual price of a controlled transaction is not within the arm’s length range, the median in the arm’s length range shall be treated as the arm’s length price for such transaction. For the purposes of this, the median of the arm’s length range shall be the 50th percentile of the financial indicator figures derived from the comparable uncontrolled transactions within the arm’s length range. Detailed method for considering the arm’s length range has been prescribed.

Legal ReferenceRegulation 4 of TP Gazette Notification No. 2217/7 dated March 02, 2021

Sri Lanka allows necessary adjustments in comparability analysis. Reliable and accurate adjustments can be done, if any, between the uncontrolled transactions and controlled transactions being compared.

Sri Lanka does not have specific guidance on pricing of controlled transactions involving intangibles.

Sri Lanka does not have such rules or special measures regarding HTVI.

Legal ReferenceItem 4, 5 and 8 of “Guidance and examples on the completion of Transfer Pricing Disclosure Form” in Annexure V and Expense Transactions categories in Annexure VI (ii) of TP Gazette Notification No. 2217/7 dated March 02, 2021

Sri Lanka does not have specific guidance for intra-group services. However, taxpayers should disclose information of intra-group service transactions with associated enterprises under expense transactions of associated enterprises in the Transfer Pricing Disclosure Form (TPDF) according to TP Regulation 6 (d).

There is no specific approach in Sri Lanka. Sections 76 (Profits and income or loss from international transactions between associates) and 77 (Profits and income or loss from transactions between associates) of the Inland Revenue Act require to ascertain the income, gains and profits arising from or any loss incurred by any person in Sri Lanka engaged in any international transactions entered into with its associated enterprises, having regards to the arm’s length price. However, the determination of the arm’s length price referred to in sections 76 and 77 may be subject to safe harbor rules specified by the Commissioner-General. Further, though the Inland Revenue Act provides the legal basis, no guideline has been issued yet on safe harbor rules.

Legal ReferenceExpense Transactions species in Annexure VI (ii) of TP Gazette Notification No. 2217/7 dated March 02, 2021

Sri Lanka does not have any specific guidance for financial transactions. However, in the TPDF, taxpayers should disclose the information of financial instruments and other financial services under expenses transactions of associated enterprises.

Legal ReferenceSection 18 of the Inland Revenue Act, No. 24 of 2017.

In order to limit the interest deductions, Sri Lanka has introduced provisions in section 18 of the IR Act. The amount of financial costs deducted in calculating the income of a company (other than a financial institution) which is incorporated in or outside Sri Lanka and having an issued share capital as at the date on which the year of assessment ends, from conducting a business or investment for a year of assessment, shall not exceed the limit of four times of total of the issued share capital and reserves of the company as at the end of the year.

Regulation 6 of the TP Gazette requires that enterprises having “international transactions”, or “transactions other than international transactions” made between associated enterprises who fulfil the requirements of Regulation 1 and that carry out during an assessment year aggregate controlled transactions that exceed Sri Lanka Rupees (LKR) 200 million must submit a TPDF along with the Income Tax Return.

• Master file consistent with Annex I to Chapter V of the TPG (selected)
• Local file consistent with Annex II to Chapter V of the TPG (selected)
• Country-by-country report consistent with Annex III to Chapter V of the TPG (selected)
• Specific transfer pricing returns (separate or annexed to the tax return) (selected)
• Other (specify): Transfer Pricing Disclosure Form (TPDF) (selected)

Legal ReferenceRegulation 6 of TP Gazette Notification No. 2217/7 dated March 02, 2021

Transfer pricing documentation as stipulated in Regulation 6 of the TP Gazette, should be prepared, which requires (i) a Local File referring specifically to material controlled transactions of the local taxpayer, (ii) a Master File containing standardized information relevant for all the members of a multinational group and (iii) a Country-by-Country Report (CbCR) containing certain information relating to the global allocation of the multinational group’s income and taxes paid together with certain indicators of the location of economic activity within the group that meets the monetary thresholds prescribed under the respective rules. The transfer pricing documentation (Local File and Master File) shall be submitted by the taxpayer within 60 calendar days of the written request being duly issued by the Commissioner General of Inland Revenue. The CbCR shall be filed not later than 12 months after the last day of the Reporting Fiscal Year of the MNE Group. TPDF should be submitted along with the Income Tax Return.

Legal ReferenceSection 184 of the Inland Revenue Act, No. 24 of 2017.

Section 184 states specific transfer pricing penalties, where any person fails to comply with the requirements of section 76 or 77 in relation to transactions with associated enterprises. There is no specific compliance incentives regarding transfer pricing documentation.

Legal ReferenceRegulation 6 of TP Gazette Notification No. 2217/7 dated March 02, 2021

Regulation 6 of the TP Gazette provides the threshold for maintenance of transfer pricing documentation, as follows: (1) The local file is to be prepared and maintained by those enterprises that carry out aggregate controlled transactions which exceeds LKR 200 million for each year of assessment as recorded in the books of account. (2) The Master File is to be prepared and maintained by those enterprises that have declared group revenue whose value exceeds EUR 50 million or its equivalent in Sri Lanka Rupees for each year of assessment as recorded in the books of account commencing from year of assessment 2020/2021. (3) The CbCR with respect to any Fiscal Year of the Group, a Group having total consolidated group revenue of not less than EUR 750 million or its equivalent in LKR during the Fiscal Year immediately preceding the Reporting Fiscal Year as reflected in its Consolidated Financial Statements for such preceding Fiscal Year.

Legal ReferenceSri Lanka's OECD MAP Profile

In terms of section 75 of the Inland Revenue Act, where Parliament by resolution approves any double taxation agreement or mutual administrative assistance agreement entered into between the Government of Sri Lanka and the Government of any other territory, or such agreement entered into by the Government of Sri Lanka with the Governments of any other territories, such agreement shall, notwithstanding anything in any other written law, have the force of law in Sri Lanka. Every such resolution which is so approved by Parliament shall be published in the Gazette. In terms of section 199 of the Inland Revenue Act, the Minister may, on behalf of the Government, enter into, amend, or terminate a mutual administrative assistance agreement with a foreign government or governments. For further information, please refer to the OECD MAP Profile of Sri Lanka.

• Rulings (selected)
• Enhanced engagement programs (not selected)
• Advance Pricing Agreements (APA) (not selected)
• Mutual Agreement Procedures (selected)
• Other (not selected)

Legal ReferenceSection 76 and 77 of the Inland Revenue Act, No. 24 of 2017.

However, in terms of sections 76 and 77 of the Inland Revenue Act, the determination of the arm’s length price may be subject to safe harbor rules specified by the Commissioner-General. However, no guidelines have been issued yet on safe harbor rules.

TP Regulation 10 provides for secondary adjustments for International Transactions.

Sri Lanka does not follow the AOA for the attribution of profits to PEs.

Sri Lanka approaches for the attribution of profits to PEs are done in accordance of the DTA and Provisions of the IR Act.

Legal ReferenceSection 76, 77 and 78 of the Inland Revenue Act, No. 24 of 2017.

In terms of section 78 of the Inland Revenue Act, there shall be a Dispute Resolution Panel (DRP) for the purpose of resolution of disputes on interim order. Where a taxpayer has communicated his dissatisfaction with the interim order referred in the sections 76 and 77 of the Inland Revenue Act to the Commissioner-General, the DRP shall, within six months of the date of such communication of dissatisfaction on such interim order, make a final order and shall transmit such order in writing or by electronic mean to such person. However, the taxpayer has the right to appeal against the decision of the DRP.

Legal Referencewww.ird.gov.lk

All the relevant Act and regulations mentioned in this profile can be accessed at the websites mentioned in the “References” column.