Sri Lanka TP regulations - FAQ - PwC

Transfer Pricing in Sri Lanka: Your Questions Answered!

Transfer Pricing in Sri Lanka: Your Questions Answered!

The advent of globalisation and the digital economy has changed our economic landscape. A product may be conceptualised in New York, designed in Germany, manufactured in Sri Lanka and ultimately marketed in Singapore. Businesses truly pervades across economies more than ever before!

To regulate the growing cross border intercompany trade, transfer pricing regulations has been introduced in various parts of the world and has gathered frequent attention of Multi-National Enterprises (MNEs) in their board rooms. One needs to understand and appreciate that the exercise of transfer pricing has direct and significant bearing on the tax revenue of a country. Therefore, transfer pricing is the focal point for revenue authorities around the world, which has led to onerous documentation requirements, in-depth examinations and the resultant litigation.

The Inland Revenue Department (IRD) of Sri Lanka, in March 2015, issued a notification prescribing a certificate, to be obtained by the taxpayer from an approved Accountant. The certificate is to confirm that the taxpayer has maintained proper information and documentation in support of its transactions with associated undertakings, as prescribed under the Sri Lankan Transfer Pricing (TP) regulations. Thus, it highlights IRD's focus on this area of tax and revenue.

As the MNEs operating in Sri Lanka get their arms around transfer pricing posture, PwC is pleased to launch first of its kind compilation of Frequently Asked Questions - Transfer pricing in Sri Lanka: Your Questions Answered!

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Transfer Pricing in Sri Lanka: Your Questions Answered!

Frequently Asked Questions

Contents 1. TP regulations 2. Compliance requirements 3. Transfer pricing methods and benchmarking analysis 4. IRD's considerations 5. Best practices

I. TP regulations

a. What types of transactions are required to be reported?

All transactions with associated undertakings, having a bearing on profit, income, loss or assets of the taxpayer are to be reported. This includes but is not limited to purchase, sale of tangible or intangible property, provision or receipt of services, lending or borrowing of money, etc. Further, transactions with third parties (not associated undertakings) are also to be reported in case there exists a prior agreement between the associated undertakings and the third parties, based on which the taxpayer transacts with such other third party if it results in the reduction of taxable profit in Sri Lanka. It is worthwhile to mention that only upon completion of the comparability analysis, the taxpayer would be able to assert whether such deemed transactions result in reduction of taxable profits in Sri Lanka or not. Hence, for every deemed transaction the comparability analysis would be necessary.

b. Under what circumstances any two entities would be considered as associated undertakings?

Two entities will be deemed to be associated undertakings if at any time during the year any of the following conditions are satisfied.

Voting power - An entity holding directly or indirectly shares with not less than 50 per cent voting power

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