Worldwide transfer pricing reference guide 2014

Sri Lanka
Taxing authority and tax law
Taxing authority: The Department of Inland Revenue (IRD).
Tax law: Section 104 of the Inland Revenue Act, No. 10 of 2006 (IRA).
Relevant regulations and rulings
Transfer pricing regulations contained in Extra Ordinary Gazette No. 1823/5 issued on 12 August 2013 under and in terms of Section
104 and 104A of the IRA.
OECD guidelines treatment
Although Sri Lanka is not a member of the OECD, the IRD broadly accepts the OECD Guidelines and has largely based its practice on
them. Also, the IRD recognizes the five methods accepted by the OECD Guidelines.
Priorities/pricing methods
The IRD recognizes the methods outlined in the OECD Guidelines, which include the traditional transaction methods (CUP, Resale Price
and cost plus) and profit methods (Profit Split and TNMM). The process of selecting a method should be aimed at finding the most
appropriate method. Although the traditional transaction methods may be preferred by the IRD, as they are seen to be the most direct
means of establishing the arm’s length price, the Profit Split method is accepted as an appropriate method in circumstances where
unique intangibles or interrelated transactions exist.
Transfer pricing penalties
The IRA does not impute penalties targeted specifically at transfer pricing, and there are no provisions for applying penalties for a lack
of transfer pricing documentation by itself. However, the IRD is empowered to take punitive action under the IRA on any person who
without a reasonable cause files an incorrect tax return, furnishes any incorrect information, fails to furnish the return on time, fails to
inform chargeability to tax, or makes an incorrect statement. Further, the Assessor can disregard a transaction if he is of the opinion that
it may reduce or would have the effect of reducing the amount of tax payable and hence is artificial or fictitious or does not reflect its
substance. Offenses can be subject to a fine or imprisonment of either description or both fine and imprisonment.
Penalty relief
Where taxpayers have made conscientious efforts to establish transfer prices that comply with the arm’s length principle, and have
prepared documentation to evidence such compliance, the IRD is likely to take the view that the taxpayer’s transfer pricing practices
represent a lower tax risk.
Documentation requirements
Transfer pricing regulations require extensive contemporaneous documentation. Taxpayers are required to keep all the documents in
English evidencing that related party transactions are established on an arm’s length basis. However, such documentation is required
only if the transaction value exceeds LKR100 million for any year of assessment.
Documentation deadlines
Documentation is generally required upon request. The regulations require taxpayers to retain documents for a period of five years.
Statute of limitations on transfer pricing assessments
The statute of limitations is of two years if the return is duly filed within the deadline of 30 November. However, the statute of limitation
will not apply in case of fraud or willful evasion.
Worldwide transfer pricing reference guide
282