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  • Service: Tax, Global Mobility Services
  • Type: Regulatory update, Survey report
  • Date: 5/1/2013

Sri Lanka - Income Tax 

Taxation of international executives
Tax returns and compliance
Tax rates
Residence rules
Termination of residence
Economic employer approach
Types of taxable compensation
Tax-exempt income
Expatriate concessions
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation


Source: Inland Revenue Act No. 10 of 2006, and its amendments thereto.


Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?


Tax returns should be filed by 30 November following the relevant year of assessment.


What is the tax year-end?


31 March.


What are the compliance requirements for tax returns in Sri Lanka?


Residents


All taxpayers are required to pay their taxes by self-assessment on a current year basis in quarterly installments on 15 August, 15 November, and 15 February during the year of assessment and 15 May in the next year of assessment. The final payment date is 30 September following the end of the year of assessment (commencing from Y/A 2006/07 a 10 percent discount available on the quarterly taxes due if tax is settled that is, payments made 30 days prior to the statutory due date). A Pay-As-You-Earn (PAYE) scheme applies for employees on their employment income. The employer makes deductions of tax at source.


PAYE withholdings are calculated according to tables provided by the revenue authorities. If any individual’s only source of income consist of employment income the PAYE tax so deducted will be the final tax as of Y/A 2011/12 and thereafter. Provision for application of directions and refunds will not be available.


There will be no requirement to file an income tax return nor open a tax file if the taxpayer’s sources of income are confined to one or more of the following.


  • Profits from only one employment and subject to PAYE.
  • Dividend or interest income subject to withholding tax.

Spouses are taxed separately and must file separate tax returns. Income received by one spouse for services rendered in any trade, business, profession, or vocation carried on or exercised by the other spouse or by a partnership of which that spouse is a partner is deemed to be income of that other spouse.


The total statutory income of a child (under 18 and unmarried) of a resident individual is aggregated with the total statutory income of the father.


Non-residents


With effect from 1 April 2008, expatriates employees are taxed at progressive income tax rates applicable to residents but however, taxed only on their Sri Lankan-sourced income.


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Tax rates

What are the current income tax rates for residents and non-residents in Sri Lanka?


Residents


Income tax is calculated by applying a progressive tax rate schedule to taxable income as follows.


Income tax slabs for the Year of Assessment 2010/2011 are as follows.


Income tax table for 2010/2011


Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From LKR To LKR LKR Percent
0 400,000 0 5
400,001 800,000 20,000 10
800,001 1,200,000 60,000 15
1,200,001 1,700,000 120,000 20
1,700,001 2,200,000 220,000 25
2,200,001 2,700,000 345,000 30
2,700,001 Over 495,000 35

Income tax slabs for the Year of Assessment 2011/2012 are as follows:


Income tax table for 2011/2012


Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From LKR To LKR LKR Percent
0 500,000 0 4
500,001 1,000,000 20,000 8
1,000,001 1,500,000 60,000 12
1,500,001 2,000,000 120,000 16
2,000,001 3,000,000 200,000 20
3,000,001 Over 400,000 24

Non-residents


With effect from 1 April 2008 all expatriate employees (other than certain experts with effect from 1 April 2008) will be taxed at the same tax rates applicable to resident employees of Sri Lanka.


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Residence rules

For the purposes of taxation, how is an individual defined as a resident of Sri Lanka?


A resident is a person who is physically present in Sri Lanka for 183 days or more during a year of assessment.


Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.


Yes, 183 days in a year of assessment.


An assignee cannot be considered a resident/non-resident for tax purposes in a particular year of assessment.


What if the assignee enters the country before their assignment begins?


Number of days present in Sri Lanka will be considered in counting the 183 days in a year of assessment in considering the residency status.


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Termination of residence

Are there any tax compliance requirements when leaving Sri Lanka?


There are no special requirements.


What if the assignee comes back for a trip after residency has terminated?


As explained earlier, when a person returns to Sri Lanka then the 183-day rule would reapply.


Communication between immigration and taxation authorities


Do the immigration authorities in Sri Lanka provide information to the local taxation authorities regarding when a person enters or leaves Sri Lanka?


Possibly, revenue authorities could call for copies of relevant pages in the passport to verify.


Filing requirements


Will an assignee have a filing requirement in the host country after they leave the country and repatriate?


The ideal situation would be to file all returns before leaving the country.


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Economic employer approach1

Do the taxation authorities in Sri Lanka adopt the economic employer approach to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Sri Lanka considering the adoption of this interpretation of economic employer in the future?


Yes.


De minimus number of days2


Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?


No.


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Types of taxable compensation

What categories are subject to income tax in general situations?


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. Types of compensation included as taxable income is as follows:


  • salary
  • bonuses
  • commission
  • leave pay
  • cost-of-living allowances
  • accommodation allowances
  • value of accommodation provided
  • provision of household furnishings
  • company car
  • traveling allowances
  • education allowance for children
  • employer provided domestic assistance
  • contributions to medical, dental sickness, and disability plans
  • employee share options
  • compensation for loss of office.

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Tax-exempt income

Are there any areas of income that are exempt from taxation in Sri Lanka? If so, please provide a general definition of these areas.


The following are not taxed in Sri Lanka:


  • use of a chauffeur
  • home leave
  • reimbursement of substantiated moving expenses
  • pensions contributions, if approved by the inland revenue department
  • services rendered outside Sri Lanka
  • excess of regular remuneration over LKR500,000/- subject to a maximum of LKR100,000 per annum for non-citizen tax residents and citizen non-resident taxpayers
  • official emoluments up to LKR100,000 per annum arising in Sri Lanka to any non-citizen nonresident individual
  • official emoluments of non-citizens participating in international events
  • value of benefit from a private use of one vehicle provided by the employer or an allowance paid in lieu thereof up to a maximum of LKR50,000/- per month (valuation of the above benefit will vary on the engine capacity and the other benefits attached thereto)
  • release of approved or regulated provident fund balance on retirement (except to a superannuation fund)
  • profits from employment of Noncitizen sports trainer brought to Sri Lanka is tax exempt effective 1 April 2012
  • commencing 1 April 2013, profits from employment arising in Sri Lanka to any non citizen individual who is an expert and brought to Sri Lanka by a BOI registered company enjoying a tax holiday will be exempt on meeting the following preconditions;
    • the total investment should be out of foreign direct investment exceeding USD50 million
    • the number of experts not exceeding five
    • services of the experts are essential to carry out the activities of the company.

Use of a chauffeur


Reimbursement of the wages of a chauffeur on the production of bills is tax-exempt.


Home leave


The value of travel warrant or passage granted to an expatriate and his/her family to visit his/her home abroad is tax-exempt.


Reimbursement of substantiated moving expenses


Moving expenses that form part of relocation expenses are tax-exempt.


Pensions contributions


Employer’s contributions to local funds approved by the revenue authority are tax-exempt.


Services rendered outside Sri Lanka


Non-resident individuals rendering services outside Sri Lanka are tax-exempt.


A time-bound exemption for a period of two years commencing 1 April 2009 is available for foreign currency earned from professional or vocational services rendered by a resident individual in or outside Sri Lanka to a person outside Sri Lanka. This exemption was rescinded effective 1 April 2011.


Effective 1 April 2013 offshore income of any tax resident and citizen of Sri Lanka will be exempt from income tax provided such income is remitted to Sri Lanka through a bank in Sri Lanka.


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Expatriate concessions

Are there any concessions made for expatriates in Sri Lanka?


Non-citizens in Sri Lanka under the Resident Guest Scheme are excluded from liability to Sri Lanka tax on income arising outside Sri Lanka. However, with effect from 1 April 2008, expatriates will be taxed at the same tax rates applicable to residents.


Effective 1 April 2009, taxable income of a qualified individual which includes any profits earned in foreign currency from employment (relevant profits) under any qualified person would be taxable at a maximum of 20 percent. This maximum is reduced to 16 percent effective 1 April 2013.


Any individual who returns from foreign employment and invests savings to commence new business is exempt on the turnover and profits from such business for a period of five years effective from year of assessment 2013/14.


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Salary earned from working abroad

Is salary earned from working abroad taxed in Sri Lanka? If so, how?


Residents are taxed on overseas earnings. While non-residents are liable for tax on income arising or derived from Sri Lanka only. However as per the statutory provisions non-citizens irrespective of whether or not tax resident, are exempt in respect of any income earned outside Sri Lanka.


Offshore income of a citizen of Sri Lanka who holds a permanent residency status in a foreign country is tax exempt effective from 1 April 2013.


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Taxation of investment income and capital gains

Are investment income and capital gains taxed in Sri Lanka? If so, how?


Non-residents are not subject to tax on non-Sri Lankan investment income. Withholding tax may not apply if the interest payable to non-residents is exempt from income tax in terms of the domestic statutory provisions.


From the year of assessment 2002/03, capital gains are not taxed.


Dividends, Interest, and Rental Income


Dividend


If 10 percent taxes have been withheld, that is considered final tax to an individual.


Interest


With effect from 1 April 2009, the withholding tax rates on interest from moneys deposited by individuals in banks or financial institutions will be as follows:


Accessible income Rate of WHT
From LKR To LKR Percent
0 300,000 0.0
300,001 1,000,000 2.5
1,000,001 Over 10.0

With effect from 1 April 2011, the amended withholding tax rates on interest from moneys deposited by individuals in banks or financial institutions are as follows:


Accessible income Rate of WHT
From LKR To LKR Percent
0 500,000 0.0
500,001 1,500,000 2.5
1,500,001 Over 8.0

Corporate debt instruments


Interest payable on the investment in Sri Lanka corporate debt instruments and government securities are subject to a 10 percent withholding tax which is a final tax. Withholding will be made at time of issue of such instrument. Withholding on corporate debt securities that carry a floating interest rate will be made at the point interest is paid ,with effect from 1 April, 2013.


Commencing from 1 April 2013 interest income on investments in bonds, debentures and corporate debt securities (after January 1, 2013) listed in the Sri Lanka stock exchange are exempt from income tax in Sri Lanka.


Other Interest Income /Royalty Income


Commencing 1 April 2012, interest on foreign loans granted to persons in Sri Lanka is exempt from income tax in Sri Lanka.


Commencing 1 April 2013, interest income on municipal bonds issued with the approval of the General Treasury will also be exempt from Income tax in Sri Lanka.


Commencing 1 April 2012, offshore royalty received by a resident and remitted to Sri Lanka through a bank is exempt from income tax in Sri Lanka.


Rental income


The profits and income derived from rent of property would be determined by reference to gross rent less rates and less 25 percent of cost of repair.


Rental on residential property is exempt for five years from construction (subject to pre-conditions).


Gains from stock option exercises


Residency status Taxable at:
Grant Vest Exercise
Resident N N Y*
Non-resident N N Y*
Other (if applicable) N N Y*

* Excess of market value over option price unless uniform scheme with effect from1 April 2007. With effect from 1 April 2008, the excess of market value over option price unless considered reasonable by the Commissioner General. With effect from 1 April 2011 and thereafter the benefit value assessed would be the excess of market value over option price.


Foreign exchange gains and losses


Not taxed.


Principal residence gains and losses


Not taxed - no tax on capital gains.


Capital losses


Since capital gains is out of scope, no availability for offset.


Personal use items


Not taxed. However, if provided by employer then taxed at a nominal rate.


Gifts


No gifts tax.


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Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Sri Lanka? If so, please discuss?


No additional CGT.


Are there capital gains tax exceptions in Sri Lanka? If so, please discuss?


As capital gains are out of scope, question of exceptions does not arise.


Pre-CGT assets


Capital gains are out of scope.


Deemed disposal and acquisition


Capital gains are out of scope.


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General deductions from income

What are the general deductions from income allowed in Sri Lanka?


For the years commencing prior to 1 April 2011, the following items of expenditure may be collectively deducted from assessable income and are limited to either one-third of the assessable income of the individual or LKR75,000, whichever is lower. This relief has been withdrawn effective 1 April 2011.


  • Contributions to approved provident or pension funds
  • Donations to approved charities.

However on or after 1 April 2011 deductions are allowed against the following.


  • Premia paid on special health insurance policy covering incurable disease. This is fully claimable no carry forward provision.
  • Donation to a charity which is established for the provision of institutionalized care for the sick or the needy.
  • A deduction of not less than LKR1 million in respect of expenditure on a community development project carried on in areas identified by the Government of Sri Lanka. Effective 1 April 2012.

Furthermore, Sri Lanka citizens and /or resident taxpayers are entitled to a personal allowance. Upto 2010/11 the tax free allowance was LKR300,000, and for 2011/12 and thereafter the allowance is LKR500,000.


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Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Sri Lanka?


Employer bears tax on employee income subject to gross up (tax on tax).


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Calculation of estimates/prepayments/withholding

How are estimates/prepayments/withholding of tax handled in Sri Lanka? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.


Pay-As-You-Earn (PAYE)


The employer makes deduction of taxes at source based on tables provided by the revenue authorities.


Self-assessment


If not within the PAYE scheme, tax for a given year of assessment is payable direct to the Inland Revenue in quarterly instalments.


Pay-As-You-Go (PAYG) withholding


Withholding requirement under the PAYE scheme apply on terminal benefits such as, gratuity, EPF/ETF, and so on.


PAYG installments


There is no instalment mechanism for payment of terminal benefits tax in Sri Lanka.


When are estimates/prepayments/withholding of tax due in Sri Lanka? For example, monthly, annually, both, and so on.


  • PAYE: monthly
  • Self-assessment: quarterly

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Relief for foreign taxes

Is there any Relief for Foreign Taxes in Sri Lanka? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?


A foreign tax credit is available where Sri Lanka taxes foreign-source income if it is provided for in the relevant double tax treaty. In the absence of a treaty, income net of tax is subject to Sri Lankan tax.


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General tax credits

What are the general tax credits that may be claimed in Sri Lanka? Please list below.


There are no general tax credits available. However the following specific tax credits may be claimed against the taxpayer’s regular (or alternative minimum) tax liability:


  • pay-as-you-earn (PAYE)
  • withholding tax (WHT) on specified fees prior to 1 April 2011
    1. The tax was rescinded effective 1 April 2011.
  • income tax paid on a self-assessment basis
  • relief under double tax treaties (DTA).

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Sample tax calculation3

This calculation assumes a married taxpayer resident in Sri Lanka with two children whose three-year assignment begins 1 January 2010 and ends 31 December 2012. The taxpayer’s annual base salary is USD100,000 and the calculation covers three years.


2010
USD
2011
USD
2012
USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Rented accommodation 12,000 12,000 12,000
Company car (engine capacity above 1,500 c.c.) 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = LKR110.00.


Other assumptions


  • All earned income is attributable to local sources. All information is based on an annual basis.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • Interest income is not remitted to Sri Lanka.
  • The company car is used for business and private purposes and originally cost USD50,000. The vehicle was provided with fuel and a chauffeur.
  • The employer has provided rented accommodation to the employee, and the rent agreement is between the employer and the landlord.
  • All taxes are borne by the employee. The employee is deemed resident throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Calculation of taxable income


2010/11
LKR
2011/12
LKR
2012/13
LKR
Days in Sri Lanka during year 365 365 275
Earned income subject to income tax
Salary 11,000,000 11,000,000 11,000,000
Bonus 2,200,000 2,200,000 2,200,000
Cost-of-living allowance 1,100,000 1,100,000 1,100,000
Rented accommodation 180,000 180,000 135,000
Company car (over 1,500 c.c.) 180,000 0 0
Moving expense reimbursement 0 0 0
Home leave 0 0 0
Education allowance 330,000 330,000 330,000
Total earned income 14,990,000 14,810,000 14,765,000
Add: Other income 0 0 0
Total income 14,990,000 14,810,000 14,765,000
Less:
Tax free allowance 300,000* 500,000* 500,000*
Special exemption**   100,000 100,000
Total taxable income 14,690,000 14,210,000 14,165,000

Calculation of tax liability


2010/11
LKR
2011/12
LKR
2012/13
LKR
Total income as above 14,690,000 14,210,000 14,165,000
Sri Lankan tax thereon 4,691,500 3,090,400 3,079,600
Less:
Domestic tax rebates (dependent spouse rebate) 0 0 0
Foreign tax credits 0 0 0
Social responsibility levy*** 0 0 0
Total Sri Lankan tax 4,691,500 3,090,400 3,079,600

Notes


* The expatriate employee is physically present in Sri Lanka for more than 183 days in each of the years, and is therefore treated in the same way as a resident. Hence that employee is entitled to a tax-free allowance of LKR300,000 for years of assessment ending prior to 31 March 2011, and LKR500,000 for any year of assessment thereafter.


** Every resident non citizen employee is additionally given a special exemption of LKR100,000 per annum.


*** Social Responsibility Levy of 1 percent was rescinded with effect from 1 April 2008.




1Certain tax authorities adopt an ‘economic employer’ approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.


2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.


3Sample calculation generated by KPMG Ford, Rhodes, Thornton & Co., the Sri Lankan member firm of KPMG International, based on the Inland Revenue Statute.



© 2013 KPMG Ford, Rhodes, Thornton & Co., a Sri Lanka partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

 

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 Sri Lanka

Taxation of international executives