The introduction of the new Income tax law (The Inland Revenue Act No. 24 of 2017) has revised the Transfer Pricing (TP) landscape in Sri Lanka. In addition to the provisions set out in the Statute, the Minister of Finance (by Gazette extraordinary No. 2104/4 dated 31 December 2018) recently published regulations relating to transfer pricing (TP Regulations), effective from 1 April 2018. In this article, we cover the salient changes made to the disclosure and documentation requirements of the revised TP Regulations
The TP regulations require enterprises that carry out controlled transactions or categories of controlled transactions with associated enterprises (AEs) to prepare and file an annual transfer pricing disclosure form along with the Return of Income for each year of assessment. This requirement is applicable from the year of assessment 2018/19, and therefore the TP disclosure form will have to be submitted with the Income Tax Return for the year of assessment 2018/19 (due by 30 November 2019).
The TP regulations under the previous law Inland Revenue Act (IRA No. 10 of 2006) required an Approved Accountant to provide a certification on whether the transactions of the entity with its Associated Enterprises are done at arm’s length price. However, the new Regulations with effect from year of assessment 2018/19 do not require such certification from an Approved Accountant. The reporting obligation in each year of assessment relating to Transfer Pricing will be based solely on the Transfer Pricing Disclosure Form submitted by the taxpayer.
In line with TP practices globally, the documentation requirements have also been revised. The documentation has broadly been classed into three: Local File, Master File and the Country-by-Country Report. The thresholds have been set as follows:
|
Document name |
Threshold to prepare (LKR) |
|---|---|
|
Local File |
Categories of controlled transactions exceeds 200 million from each year of assessment.
|
|
Master File |
Enterprises whose revenue exceeds 7.5 billion for each year of assessment in the books of account. |
|
Country-by-Country Report |
Each Ultimate Parent of the MNE group that is resident for tax purposes in Sri Lanka must file this if the total consolidated group revenue exceeds 115 billion during the financial year immediately preceding the Reporting Fiscal Year. |
The TP regulations contain the following penalty provisions for non-compliance with the TP regulations:
|
Non-compliance with TP regulation |
Penalty |
|---|---|
|
Required documents have not been maintained |
1% of aggregate value of transactions with AEs |
|
Required documents have not been submitted |
A sum not exceeding LKR 250,000 |
|
Non-disclosure of any required information |
2% of aggregate value of transaction with its AEs |
|
Required documents have not been submitted on the specified date |
A sum not exceeding LKR 100,000 |
|
The taxpayer has concealed the particulars of his income, or furnished inaccurate particulars of such income; and sought to evade by reason of concealment of particulars of his income or the furnishing of inaccurate particulars of such income |
200% of the value of additional tax |
Sarah Afker
saraha@bdo.lk
Dinusha Rajapakse
dinushar@bdo.lk