Thinking beyond borders
Residents are taxed on worldwide income, whereas non-residents are taxed on income arising or derived from Sri Lanka. Effective from 1st April 2018, a new Inland Revenue Act (the New Act) will be introduced and according to same, nonresidents will be liable to tax in Sri Lanka on their income from employment, business, investment or other source for that year to the extent that such income arises in or derived from a source in Sri Lanka.
The extent of an individual’s liability for Sri Lankan tax on the individual’s earnings depends on the individual’s residence status in Sri Lanka. Profits and income derived from outside Sri Lanka by a dual citizen or a non-citizen employed in Sri Lanka will be exempt from income tax in Sri Lanka. The exemption is available to any citizen of Sri Lanka who holds a permanent residency status in a foreign country effective year of assessment 2013/14. The New Act, which is scheduled to come into force on the 1st April 2018 has not listed the above as an exemption. Therefore, the tax position will differ and dual citizens and non –citizen employees will be liable to income tax on profits and income derived outside Sri Lanka subject to the applicable Double Taxation provisions.
Commencing April 1, 2013, profits from employment arising in Sri Lanka to any non-citizen expert brought to Sri Lanka by a Board of Investment of Srii Lanka (BOI) are exempt from income tax during the tax holiday period of such company if the following conditions are met:
The New Act has not made any express mention in relation to tax holidays, but the exemptions already conferred in relation to tax holidays will continue to apply even under the New Act.
Taxable Income of an individual is taxed at progressive rates from 4% - 24%.The maximum rate on employment income in Sri Lanka is 16 percent effective from the year of assessment 2015/16 (i.e., April 1, 2015) The New Act envisage to withdraw this concession and accordingly, employment income will also be taxed upto 24%
Chargeability of income tax in Sri Lanka on expatriate employees is generally limited to Sri Lanka–source income. However, this position will be changed effective from 1st April 2018 and expatriate employees would be subject to Income Tax on their global income, subject to provisions of the Double Tax Avoidance Treaties(DTAs).
A person’s liability for Sri Lankan tax is determined by residency status. An individual who is physically present in Sri Lanka for 183 days or more during any year of assessment is deemed to be resident in Sri Lanka throughout that year of assessment.
The New Act states that if an individual is present in Sri Lanka during the year and that presence falls within a period or periods amounting in aggregate to 183 days or more in any twelve months period that commences and ends during a year is considered as resident.
Residents are assessable on their worldwide income, whereas non-residents are liable only on their income arising in or derived from Sri Lanka. A non-citizen employed in Sri Lanka whether or not resident is exempt from income tax on income arising in/derived from outside Sri Lanka. This exemption will be removed with operation of the New Act effective from 1.4.2018.
Commencing April 1, 2008, foreign currency earned by a resident individual for any service rendered to a person outside Sri Lanka, whether the service itself was performed in or outside of Sri Lanka, is exempt from income tax (Such exemption does not apply if the income is received in the form of commission, discount or similar receipt, in the event the service is performed in Sri Lanka). This exemption too will be removed with operation of the New Act effective from 1.4.2018.
Effective April 1, 2009, any profits earned in foreign currency from employment under any “qualified person” (relevant profits) and included in the taxable income of a “qualified individual” are taxable at a maximum of 20 percent. This maximum is reduced to 16 percent effective from year of assessment 2013/14. The New Act does not provide any segregation in relation to qualified individuals. All the employees regardless of the qualifications/ social strata will be taxed at progressive rates from 4% to the maximum rate of 24%.
Employment income is generally treated as Sri Lankan-sourced compensation where the individual performs the services while physically located in Sri Lanka.
Technically, there is no threshold/minimum number of days that exempts the employee from the requirements to file and pay tax in Sri Lanka. To the extent that the individual qualifies for relief in terms of the dependent personal services article of the applicable double tax treaty, there will be no tax liability.
Tax rates for residents and non-residents are the same.
In general, all remuneration and benefits received by an employee who is resident in Sri Lanka or for services rendered in Sri Lanka are taxable. Taxable remuneration and benefits includes salary, bonuses, commissions, accommodation allowances, education, and allowances for children, employer-provided domestic assistance, and contributions to medical, dental sickness, and disability plans. However, in comparison to the prevailing law, the New Act has made provisions to extinguish the recognition of the discharge or re-imbursement of person’s dental, medical, health insurance where the benefit is available to full time employees on equal term basis as profits from employment.
The New Act also has identified other payments including gifts as forming part of profits from employment.
Effective April 1, 2015, net taxable income is taxed based on progressive income tax rates ranging from 4 percent to 24 percent. This widens the slabs and reduces income liable for tax at the higher rates significantly.
Effective from 2015/16, employment income is to be taxed at the maximum rate of 16%.
Effective from 2018/19 period under the new regime will be taxed at the maximum rate of 24%.
The Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) provide superannuation benefits to employees. Both employers and employees are required to contribute to the EPF. Employees are not required to contribute to the ETF.
The regulations regarding the EPF, which provide for the payment of superannuation benefits to employees, prescribes that employers make a minimum contribution of 12 percent of an employee’s total earnings to the EPF. Employees are also required to contribute a minimum of 8 percent of their total earnings to the EPF.
The regulations for the ETF, which also provide for the payment of superannuation benefits to employees, require employers (but not employees) to contribute 3 percent of their employees' total earnings to the Fund.
Tax returns are due by November 30 following the tax year-end, which is March 31. Under the New Act also the requirement to file tax returns will continue and the due dates would be same.
The requirement for individuals to file tax returns would be withdrawn if the individual’s income consists solely of one or more of the following income sources and tax from each has been deducted at source:
Under the PAYE scheme, every employer is required to withhold income tax from the remuneration paid to its employees. Annual returns of employee income and taxes paid in the tax year to March 31 must be filed with the Department of Inland Revenue (DIR) on or before April 30 of that year
Under the New Regime, it is anticipated that the same will continue to be in force
A visa must be applied for before the individual enters Sri Lanka. The type of visa required will depend on the purpose of the individual’s entry into Sri Lanka.
Two categories of work permits are available in Sri Lanka .One is applicable for BOI approved companies with specified approved cadre of expatriates, and obtaining work permit clearance for such expatriate employees is less hazardous. The other is for companies other than BOI companies who hire the expatriate. They are required to establish the expertise of the expatriate sent to Sri Lanka in order to obtain clearance.
Sri Lanka has entered into double taxation treaties with certain countries. A foreign tax credit is available where Sri Lanka taxes foreign-sourced income if it is provided for in the relevant double tax treaty.
A new provision will be introduced under the New Act, where a resident person except for partnership and trust may claim foreign tax credit for a year of assessment for any foreign income tax paid by the person and to the extent to which the foreign income tax is paid with respect to the person’s assessable foreign income of the year. As a result, a resident person will be able to claim a tax credit even without a DTA.
There is the potential that a permanent establishment (PE) could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
The New law has introduced the concept of PE. A distinction have been drawn between Foreign Permanent Establishment and a Sri Lankan Permanent Establishments, listing out the instances in which a respective PE could be created.
There are two tiers of value-added tax (VAT) rates. VAT is levied on the importation of goods into Sri Lanka and the making of taxable supplies in the course of carrying out a taxable activity. The VAT rate levied would be at the standard rate of 15 percent or 0 percent, depending on the nature of the taxable supply. In addition to this certain supplies /imports have been granted exempt status.
Commencing April 1, 2012, a deduction is available with respect to an expenditure on a community development project carried out in areas identified by the Government of Sri Lanka, Subject to conditions specified in the law.
Commencing from 1 April 2014, capital repayment of a housing loan obtained from a licensed bank or a financial institution by a “professional” as defined in the Inland Revenue Act is entitled to deduct up to LKR 600,000/- as a qualifying payment relief from his assessable income. The condition to claim this relief is that the individual should file a tax return.
The abovementioned deductions are not addressed in the New Act.
Residents and citizen nonresident individuals are entitled for a tax free allowance of LKR 500,000/- in ascertaining total taxable income and a qualifying payment relief of LKR 250,000/- on employment income. Non-citizen - nonresident employees are entitled for a qualifying payment relief of LKR 250,000/- On employment income. Under the new regime, the qualifying payments
As per the New Act residents and citizen non residents will be entitled for a tax relief of LKR 500,000/ - against taxable income from any source. Residents are entitled for a further relief upto LKR 700,000/- against employment income.
Sri Lanka has a transfer pricing regime. Sri Lanka’s transfer pricing regulations, however, do not cover employment benefits.
Sri Lanka does not currently have data privacy laws.
Sri Lanka has introduced a new Foreign Exchange Regulations, by repealing the previous exchange control regime. The Foreign Exchange Control Act, No. 12 of 2017 came into effect from 20th November 2017. Under the new Act, the permission to maintain resident accounts by the foreign personals will continue to benefit the expatriate employees, like before. Expatriate employees can remit money off-shore without the permission of the exchange control department through the Personal Foreign Currency Account.
Non-deductible costs for both an assignee and an employer will include contributions by an employer to pension funds that are not approved by the Commissioner General of Inland Revenue and insurance premium paid for policies (with any excluded medical condition for incurable diseases) issued outside Sri Lanka.
Commencing April 1, 2012, interest on foreign loans granted to persons in Sri Lanka by a person outside Sri Lanka is exempt from income tax in Sri Lanka. Effective April 1, 2013, interest income on investments in bonds, debentures and corporate debt securities (after 1.1.2013) listed in the Sri Lanka stock exchange are exempt from income tax in Sri Lanka. Effective April 1, 2013, interest income on municipal bonds issued by the Municipal Council will also be exempt from income tax in Sri Lanka.
Under the new IR Act the above exemptions have been withdrawn. However interest from Sri Lanka Development Bonds will continue to be exempt.
Commencing April 1, 2012, offshore royalty received by a resident to Sri Lanka through a bank is exempt from income tax in Sri Lanka. This exemption has been withdrawn under the New Act.
Effective April 1, 2015 interest income accruing to any individual is to be subject to withholding tax at 2.5%.This withholding tax will serve as a final tax. Furthermore interest income of senior citizens is to be exempt from tax. In terms of the new IR Act, withholding tax on interest has been increased to 5% (other than for Senior Citizens). Interest paid to Senior Citizens will be exempt upto LKR 1,500,000/-
Tax on Capital Gains
Under the New Act, tax on capital gains has been reintroduced. Accordingly, gains arising from realization of an investment asset would be considered as a capital gain. The gain will be calculated as the difference between selling price and the cost of the asset. For this purpose, the cost of the asset would be deemed to be the market value of such asset as at 30.09.2017.