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Sri Lanka: New Tax Law Designed to Facilitate Investment

(July 20, 2017) Sri Lanka’s parliament recently adopted new tax legislation. Sri Lanka’s Minister of Finance and Media, Mangala Samaraweera, described the new Inland Revenue Act as designed to make the country attractive to investors. Provisions that will broaden the tax base and simplify the system, he says, will create an investor-friendly atmosphere.  (Sri Lanka’s New Inland Revenue Act Aims to Broad Base and Simplify the Tax System for an Investor Friendly Atmosphere, COLOMBO PAGE (July 11, 2017).)  Samaraweera added that in the past investors have found the tax system overly complex and that the new Act will incorporate international principles of taxation to handle cross-border relations.  (Id.; Inland Revenue Act (last updated July 19, 2017), LAWS OF SRI LANKA.)  The view that the tax system was too complicated and needed reform was also expressed by Moody’s Investors Service, which stated in June that the system was not sufficiently transparent to entice investors, made the local tax officials’ efforts at supervision inefficient, and contributed to a “very low tax-to-GDP ratio.” (Sri Lanka’s New Inland Revenue Act Aims to Broad Base and Simplify the Tax System For an Investor Friendly Atmosphere, supra.)

The new law includes:

  • a capital gains tax on the sale of immovable property;
  • new tax administration rules;
  • a fine of up to LKR10 million (about US$64,585) and/or imprisonment for up to two years for those convicted of tax evasion; and
  • a penalty of up to 2% of the total transaction value for any Sri Lankan company that violates transfer pricing rules by not disclosing any information required for transactions between related parties. (Janice Locke, Sri Lanka: New Income Tax Law, TAX NEWS SERVICE (July 6, 2017), International Bureau of Fiscal Documentation online subscription database.)

The International Monetary Fund (IMF) helped in the drafting of the Act, using a model it developed for Ghana. (Bandula Sirimanna, Govt. Moves Fast with New Inland Revenue Bill, SUNDAY TIMES (Apr. 2, 2017).)  Late last year, the IMF predicted that the new legislation would increase tax revenues in Sri Lanka by 1.4% of gross domestic product. (Lorys Charalambous, IMF Welcomes Sri Lanka’s New Inland Revenue Act, TAX-NEWS (Dec. 19, 2016).)