New Impulses In Transfer Pricing Laws & Practices Sri Lanka NAOMAL GOONEWARDENA

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Alexia McGee
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1 New Impulses In Transfer Pricing Laws & Practices Sri Lanka NAOMAL GOONEWARDENA PARTNER NITHYA PARTNERS 29 th Lawasia Conference Golden Jubilee, Colombo, August 2016

2 Transfer pricing: Still early days in Sri Lanka Introduced to Sri Lanka s income tax law in 2006 Based on OECD Guidelines Significant amendments in 2013, 2015 Implementation impetus in 2015 to present. Other than international transactions (ie domestic transactions) also covered from 2013.

3 Recent developments- Legislation and Regulations Amendments to the main transfer pricing provisions in 2013 (Section 104/104A of IRA) Replacement of Transfer Pricing Regulations in 2013 (Extraordinary Gazette No. 1823/5 dated 12 August 2013, further amended by Extraordinary Gazette No. 1960/39 dated 31 March 2016) Introduction of Accountant s Certification requirement in relation to International Transactions (Section 107 of IRA with Extraordinary Gazette No. 1907/26 dated 25 March 2015, further amended by Extraordinary Gazette No. 1960/42 dated 31 March 2016) Time bar period extended for transfer pricing related matters (Section 163(5) of IRA amended in 2015)

4 Recent developments- Administrative practice Establishment of Transfer Pricing Regulations Unit (TPRU) and Commissioner of Transfer Pricing Transfer pricing audits Emphasis currently on holding companies and chargeouts for centralized services General agreement by IRD that documentation requirements would not be strictly enforced in respect of transactions between associated undertakings which have similar marginal tax rates

5 Main transfer pricing provisions (Section 104/104A IRA) Amendments brought in by Inland Revenue (Amendment) Act, No.18 of 2013, effective as of 1 April 2013 Separation between international transactions (s.104) and other transactions (s.104a)

6 International transactions vs. Other (domestic) transactions SECTION International transactions Transactions between associated undertakings, at least one of which is non-resident in Sri Lanka [Discussed later] SECITON 104A - Other transactions Transactions other than international transactions (i.e. covers domestic transactions) between associated undertakings No provision for Advance Pricing Agreements No role for Transfer Pricing Officer; Tax Payer to adduce evidence directly to the Commissioner/ Asst Commissioner

7 Why is domestic transfer pricing required? Differential tax rates between group companies Tax holidays Concessional tax rates Losses Taxable expenses / Deductions

8 Associated Undertakings The definition covers aspects such as the following to establish the 2 enterprises to be associated undertakings voting power; granting of loans; provision of guarantees; controlling number of Board members; dependency of manufacturing processes or for raw materials and consummables; Common control by an individual and/or relatives

9 Transfer Pricing Regulations (2013) - overview New regulations published Extraordinary Gazette No. 1823/5 dated 12 August 2013 rescinded the old regulations published in the Gazette Extraordinary No. 1546/10 dated 22 April 2008 Part I covers International Transactions (discussed later) and Part II covers Other Transactions. Part II is less rigorous, no requirement for Disclosures/Certificates by a Director/Principal Officer/Precedent Partner re: Other Transactions. Maintains the same methods for determining the arms length price as in the old regulations (based on OECD Guidelines) for both types of transactions. Introduces significant documentation requirements for both types of transactions

10 Methods of determining arm s length price Same methods as in the OECD guidelines to determine arms length price: comparable uncontrolled price (CUP) method, resale price method (RPM), cost plus method (CPM), profit split method (PSM), transactional net margin method (TNMM). However there is mention that PSM would apply mainly to international transactions. No guidelines for complicated calculations; regulations give very basic overview of how the methods are applied New amendment to TNMM method in 2013: where more than one price is determined as the most appropriate method, the arm's length price shall be taken to be the arithmetical means of such prices if the variation between the determined arm's length price and price at which the transaction has actually been undertaken does not exceed 3%, actual price can be used

11 Documentation requirements Other Transactions Comprehensive transfer pricing documentation in English to be maintained in Sri Lanka for a minimum period of 5 years from relevant year of assessment (YoA), where total Other Transactions with associated undertakings for a YoA exceeds LKR50 Mn Examples of required documentation: Details of ownership and group structures, description of business and industry Nature and terms of transactions with associated undertakings Record of economic and market analysis, forecasts, budgets etc performed in relation to such transactions Record of uncontrolled transactions used for comparison in pricing decision Record of analysis performed to evaluate comparability Description of methods used to determine arm s length price including record of actual working carried out to determine such price Assumptions, policies, other supporting documents used

12 Points to Note The documentation requirements impose substantial duties on companies to maintain and implement transfer pricing policies and practices in Sri Lanka. Operationally companies are required to document matters which they may not otherwise document. Significant burden on domestic groups of companies, especially where there may be no tax arbitrage between group companies. Significant uncertainty as to whether the Government would standardize tax rates in general in which event most transfer pricing issues may not be applicable.

13 Extension of time bar (Section 163(5)) General rule: No assessment can be made after the expiry of a period of 18 months from the 30 th day of November of the immediately succeeding year of assessment New exception to general rule (enacted in Inland Revenue (Amendment) Act, No. 9 of 2015, applies to YoA after 1 April 2013): Where any profits and income or loss are ascertained in accordance with sections 104/104A, no assessment can be made until the expiry of 5 years from the receipt of the return, where the CGIR is in the opinion that the profits and income or loss has not been ascertained having regard to the arm s length price.

14 Thank you

Sri Lankan tax authorities implement transfer pricing regulations

Sri Lankan tax authorities implement transfer pricing regulations 30 June 2015 Global Tax Alert News from Transfer Pricing EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: http://www.ey.com/gl/en/