SRI LANKA Law and Practice Contributed by: Ayanthi Abeyawickrama, Varners
5.6 Transfer Pricing Sri Lanka has implemented a comprehensive transfer pricing regime under the Inland Rev - enue Act, No 24 of 2017 (as amended). These provisions require that transactions between associated persons, whether domestic or cross- border, be conducted on an arm’s length basis – that is, under terms and conditions comparable to those that would apply between independent parties dealing at arm’s length. Transfer pricing rules are designed to prevent profit shifting and erosion of the tax base, and they apply not only to foreign multinational enterprises but also to domestic groups and BOI-approved entities, where transactions occur between associated persons. The transfer pricing rules apply to transactions involving: • the sale or purchase of goods; • provision of services; • licensing of intellectual property or other intangible assets; • financing arrangements; and • any other transactions that may affect taxable income. Taxpayers are required to: • maintain contemporaneous documentation to justify the method used to determine the arm’s length price; • disclose related-party transactions in the pre - scribed transfer pricing disclosure form, filed together with the annual income tax return; and • submit a transfer pricing certificate confirm - ing compliance, if the value of transactions exceeds specified thresholds.
The Commissioner General of Inland Revenue is empowered to adjust the taxpayer’s income where the actual pricing is not consistent with the arm’s length principle. Such adjustments may result in additional tax assessments, inter - est and penalties. 5.7 Anti-Evasion Rules There is a comprehensive set of anti-evasion and anti-avoidance rules set out in the Inland Reve - nue Act, No 24 of 2017 (as amended), including: • Section 35 – empowers the Commissioner General to disregard or re-characterise any arrangement entered into primarily to gain a tax advantage, ensuring that tax outcomes reflect the substance over the form; • Section 33 – permits the Commissioner Gen - eral to recalculate income to align related- party transactions with arm’s length stand - ards, thus preventing profit shifting through pricing manipulation; and • Section 34 – enables the Commissioner General to reallocate profits or income among associated persons to prevent artifi - cial income shifting designed to reduce tax liabilities. These rules empower the tax authorities to counteract artificial arrangements, misstate - ments and schemes designed to avoid or evade tax liability, whether through deliberate misrep - resentation or aggressive tax planning. Together, these rules form a powerful multi-layered system aimed at curbing tax avoidance. Taxpayers should be aware that every arrange - ment lacking commercial substance, involving non-arm’s length pricing or resulting in artifi - cial income transfers may be challenged by the Commissioner General under these provisions,
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