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TRANSFER

PRICING
Presentation Overview

Why did Sri Lanka Introduce Transfer Pricing ?


Progress of transfer pricing in Sri Lanka
Transfer pricing provisions
Key Principles in Transfer Pricing
Associated Enterprise

Transactions

Arms Length Price and Methodologies

Advance Pricing Agreement


Documentation Requirements
Certification Rules
Tax Payer Perspective
Why did Sri Lanka introduce transfer pricing ?

To protect tax base

Equitable sharing of tax revenues between


the countries

To prevent use of special relationships to


reduce tax incidence
Progress of transfer pricing in Sri Lanka

2006
Introduction of legislation

2013
Law Revised
2008
Regulation Revised
Issue of regulation
Transfer pricing Unit
established

2015
Requiring transactions
details along with an audit
certification at the time of
filing tax returns
Purpose of transfer pricing provisions

Transactions between associated


persons should be one arms length
terms

So as not to reduce tax exposure


Transfer pricing provisions
Section 104
Any profits and income arising, derived or
accruing from, or any loss incurred in any
international transactions entered between
two associated undertakings shall be
ascertained having regard to the arms
length price.
Transfer pricing provisions
Section 104 A
Any profits and income arising, derived or

accruing from, or any loss incurred in any


transaction, other than transactions referred to in
subsection (1) of section 104, entered between
two associated undertakings shall be ascertained
having regard to the arms length price.
Section 104 (3) & Section 104 A (3)
Arms length price is determined on the basis of

any one or more of the methods prescribed for


that purpose. (Gazette Notification No.1823/5)
Arms Length Price
Price which is applied in uncontrolled
conditions in a transaction between persons,
other than associated undertakings.
Sri Lanka regulations have prescribed five methods.

Traditional Transactional
Transaction Profit Method
Method
Comparable Profit Split Method
Uncontrolled Price
Method
Resale Price Method Transactional Net
margin Method
Cost Plus Method
Most Appropriate Method
Determination of ALP using one of the
prescribed methods

Best suited to the facts and circumstances of each


transaction

Provides the most reliable measure of an arms


length price in relation to the transaction shall be
Most Appropriate Method
Most Appropriate Method Cont.

Factors considered for selection of the most


appropriate method:
Nature of the transaction
Class of associated enterprise and functions
performed
Availability, coverage and reliability of data
Degree of comparability between the controlled
transactions and uncontrolled transactions
Extent to which reliable and accurate adjustments
can be made
The nature, extent and reliability of assumptions
for application of the method
Associated Enterprise
As per the Section 104 (4) of the Inland
Revenue Act:

An undertaking shall be deemed to be an associated


undertaking of an other undertaking, if the first
mentioned undertaking participates directly or
indirectly or through one or more intermediaries, in
the control of the second mentioned undertaking in
such manner or to such extent as may be prescribed.

Regulations prescribed specific


circumstances.....................
Associated Enterprises Cont.

50% shareholding (Direct on indirect)


Common person holding more than 50% of shares
Loans granted in excess of 51% of book value of total
assets
Guarantee for more than 25% of total borrowings
Appointment of more than half of the board of directors
Common entity appointing more than half of the board
of directors
Manufacturing process dependent on know how
Supply of more than 90% of raw materials
Control by common individual
10% investment in firm, association or person etc.
Relationship of mutual interest prescribed
Transactions
Scope covers both cross border and domestic
intercompany transactions
International transaction is defined to mean.....
A transaction between two or more associated
undertakings, either one or both of whom being non
residents and the nature of the transaction being:
Purchase
Sale or lease of tangible or intangible property
Provision of services
Lending or borrowing of money
Any other transaction having a bearing on the profits,
income, losses or assets of such undertakings...etc
Deemed international transactions
Documentation Requirements
Tax payers are required to maintain documentation
prescribed by the regulation to justify the pricing.
Documentation Requirements Cont.

Tax payers are required to maintain documentation


prescribed by the regulation to justify the pricing.
Documentation Requirements Cont.

Tax payers are required to maintain documentation


prescribed by the regulation to justify the pricing.

Threshold Rs.100Mn. for international transactions


Threshold Rs.50Mn. For domestic transactions
Compliance Requirements Cont.

Disclosures in the Directors report in relation to transfer


pricing
The disclosures required under these guidelines and such
disclosures required under any other law or under accounting
standards would appear together in the annual report to enhance
ease of understanding.
A certificate to be issued by the directors.

Prescribing additional information to be submitted the


certificate under Section 107 (2) (a) when filing the
Return of income for the Y/A 2015/2016.
A certificate to be issued by the approved
accountant/auditor
Failure to furnish such information will affect to the return
being incomplete affecting the time bar provisions
Advanced Pricing Agreement (APA)
APAs refers to an agreement that determine in
advance of control transactions, an appropriated set
of criteria for the determination of the transfer
pricing for those transactions over a fixed period of
time.
Tax Payer Perspective
Thank You

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