New Sri Lanka tax law tightens transfer pricing loopholes
ECONOMYNEXT – Sri Lanka’s new tax law has provisions that more effectively block companies from trying to dodge taxes by using techniques like transfer pricing, an expert said.
The Commissioner-General of Inland Revenue (CGIR) has been given the power to re-examine sch transactions if they are seen to have been structured for tax purposes, said Shamila Jayasekera, Partner-Tax at KPMG.
Transfer pricing is a tool used by companies show profits in tax havens or jurisdictions with lower taxes while allocating expenses to higher-tax countries and is being fought worldwide by governments trying to prevent revenue erosion.
“A lot of power has been given to Inland Revenue to strengthen revenue enforcement,” Jayasekera told a forum organized by the Ceylon Chamber of Commerce on Sri Lanka’s new ‘Inland Revenue Act’ debated and passed by parliament last week.
The CGIR is allowed to redefine the recipient and payer in certain circumstances.
Transactions must be at market rates and the CGIR can bring in the concept of the ‘arm’s length’ principle if it is decided that the transaction is dominantly for tax purposes, Jayasekera said.
The new law can affect lots of export firms which have been shifting profits to a new company to get tax benefits.
Transfer pricing rules are now applied to related parties and international and local transactions with branches of foreign firms also covered under transfer pricing provisions with the proposed law viewing a permanent establishment separate from its head office.
