LAW MANTRATHINK BEYOND OTHERS

(National Monthly Journal, I.S.S.N 2321 6417)

Legal Regime Governing Tax Residence in Sri Lanka

Introduction
The importance of tax varies and it goes beyond providing income to support
financially the public sector, investments and the basic needs of citizens. The
development of a state has been closely connected to the development of tax system.
However, the tax system has not only contributed to establishing states, but also to
promoting the states legitimacy and strengthening democracy, as well as to creating
economic well-being for the general population. The well known concept of fiscal
social contract explains the development of representative states and western countries
democracy. The Pretoria-communiqu concludes that more effective tax systems are
central for a sustainable development because they can; mobilize the domestic tax base
as a key mechanism for developing countries to escape aid or single resource
dependency; reinforce government legitimacy through promoting accountability of the
government to tax-paying citizens, effective state administration and good public
financial management; and achieve a fairer sharing of the costs and benefits of
globalization. This discussion concentrates with special focus to the concept of tax
residence in Sri Lanka and whether it is unclear and complicated. A person who is a
resident in Sri Lanka is assessable to tax on his two main contents which is profits and
income where ever arising in or derived from Sri Lanka. The Act provides in Section
79 a conclusive seven (7) different categories which could help to constitute a
residence. This discussion will move forward to discuss on those seven different
requirements in depth.
Tax Residence for Individuals:
The test of residence for individual plays a very important place in the statute for
residence test. The section regarding to this is 79(2) and it is stated simply with a
description of presence of 183 days or more. The simplicity is a feature of imposing
tax, but the simplicity itself has made the individual residence concept narrow down too
much and made it more unclear. The section 79(3) which refers to an individual
residence have been stated in the Budget Speech 2013, under Taxation that this section


to be removed and that only the 183 days rule will apply in deciding an individuals
residence status. Thereby with the change of Section 79(3) the Section 79(4) is also
influenced and will be take into count as, which has no effect. To prove substantially
why the Sri Lankan single statutory definition is complicated and unclear, I will extend
my discussion to elaborate on few jurisdictions which has put some effort to make the
tax residence definition clearer and less complicated.
In United Kingdom they have made changes to Statutory Residence Test (SRT) based
on Draft Finance Bill 2013. The intention behind is that a SRT should always consist a
simple process and certainty for tax payers with their residence status. Their SRT is in
3 parts named as Part A Conclusive non - residence , Part B- Conclusive residence
and Part C- Other connection factors and day counting. Referring to the reference that
is provided, it shows how in detail the provision is and they have been able to state the
requirements of each of their aspects providing the tax payer less complicity. Making a
distinct clarification on those in my opinion stands a very high level of standard in their
new SRT provision. They have looked in to depth of this SRT that there have been
criticisms too regarding this newly introduced SRT. It has been stated that those
definitions could adversely reflect on any individual who bares UK property or has any
UK resident family members. It has been also stated that the proposed new rules may
also affect individuals accepting work abroad, either coming to the UK or going
overseas. At the same time it is very important to note that to work out such a
comprehensive standard scheme that the technology should be much advanced.
Developing countries such as Sri Lanka should concentrate on technology
improvements too while reforming the necessary statutory definitions to make it more
effective. As an example New Zealand has created an online facility where you could
talk to your tax agent and solve any issue that could arise. In my opinion the newly
introduced residence test by UK is a good example for Sri Lanka too because UK too
had similar statutory provision previously. With the Budget Proposal of 2013 it seems
Sri Lanka has identified that there needs to be some reform in tax residence statutory
definitions, but in my opinion it needs to be more comprehensive and extend the
reforms to a higher level of standard which is equivalent to the UK newly introduced
SRT. Another jurisdiction statute that I would relate in my discussion is South Africa
Income Tax Act 1962. With regard to individual tax residence it has two main tests
which are ordinary residence test or the physical presence test. Though this piece of
legislation is not comprehensive as in UK, it still does provide you with list of
clarifications which is useful to determine whether an individual is a tax resident or not.


Also it is important to note that Under South African law, an individual who is a tax
resident in another country cannot be considered tax resident in South Africa. Another
jurisdiction that I saw with a comprehensive, clear tax residence statutory law definition
is the Australian jurisdiction. They have four main tests of residency within the
definition of resident in subsection 6(1) of the Income Tax Assessment Act 1936.
They are named as the Resides Test , the Domicile Test , the 183 day rule and
the Superannuation Test. In my conclusion regarding an individual tax residence
status my suggestion is that Sri Lanka should look forward to those jurisdictions who
have reformed their statutes with regard to this aspect and try formalizing a
comprehensive, simple and clear statutory provision for tax residence, because as I
have explained to you the current status of Sri Lanka though gives a simplicity by
surface, it is complex when it goes into depth of it.
Tax Residence for Companies or body of persons:
The next important factor regarding a place of residence can be attributed to a company
or body of persons. This has been revolved around whether the company resides where
the control and management of its business is exercised. Therefore under Sri Lankan
law there will be only two requirements which need to fulfill and they are;
company/body of persons has registered/principal office in Sri Lanka or where the
control and management of its business are exercised in Sri Lanka. Though this
statutory provision fulfill a wide range of the concept, that itself has made it be more
complicated by the difficulty of defining the term control and management. A
finding expressed in words which have the same meaning as the words in the section is
sufficient to bring the company within the definition. Past case law decisions has been
used to signify this definition in the control and management of the affairs of the
company, the head and seat of the affairs of the company, and the control of the affairs
of the company. It has been also decided that a company may have several places of
business & only place where the powers of control and management are exercised will
be a place of residence.
E. Gooneratne has also made reference to state that where there are two Boards with
separate functions it is necessary to distinguish between acts done by the Directors in
performing their duties under the Companies Act and acts done in earning the profits
from the business of the Company. It is important to note that the control and
management of business may be removed from one country to another without any
change in the place of business and the residence of a company is changed when the
control and management is removed from one country to another too. Referring to the


registration of a Company under Section 113(1) and (2) of Companies Act No. 07 of
2007 every company shall have registered. Therefore with the above discussion that I
have made, it is evident that there are two (2) kinds of reforms that Sri Lanka should
look forward to. Firstly, there should be a clear interpretation from the judiciary to
define this context of company been a resident or not and secondly, if it is a company
locally reside to use the control and management test and if it is a unit based foreign
company to use the place of effective management test. In my opinion those two
reforms could lead the statutory provision of tax residence of companies to a clear and
less complex statutory definition of identifying company tax residency. Accordingly I
have discussed in this report the areas that in my opinion which do not have a full
statutory definition in Tax residence and also the areas which are complicated and
unclear in Sri Lankan jurisdiction. The discussion is extended with reference to other
jurisdictions and suggested the reforms that Sri Lankan regime could have, for a clear
and less complicated tax residence statutory definition.


By:- Jayani De Silva
LL.B. (Hons) (Colombo)