Sri Lanka – Transfer Pricing (2025)

Legal framework and scope

Sri Lanka’s transfer pricing framework is founded on Sections 76 and 77 of the Inland Revenue Act, No. 24 of 2017, which require that the profits, income or losses of a person in Sri Lanka arising from international transactions or transactions between associates be ascertained having regard to the arm’s length price. The administrative and procedural detail is provided in the TP Gazette, Extraordinary Gazette Notification No. 2217/7 dated March 02, 2021, which implements and supplements the statutory provisions.

Arm’s Length Principle and the role of the OECD Guidelines

Domestic law has been prepared in line with the OECD Transfer Pricing Guidelines and the UN Transfer Pricing Manual, and Sri Lankan tax authorities rely on this international guidance in practice. For commodity transactions, Sri Lanka follows the guidance set out in paragraphs 2.18–2.22 of the OECD TPG. Overall, OECD standards provide the technical framework for method selection, comparability analysis and documentation requirements.

Definition of related parties

Neither the TP Gazette nor the Inland Revenue Act contains a simple glossary definition of “related parties,” but Regulation 8 of the Extraordinary Gazette Notification No. 2217/7 dated March 02, 2021 sets out the conditions under which two enterprises are deemed to be “associated enterprises” for the purposes of Sections 76 and 77. The regulation lists several control and influence tests, including direct or indirect majority voting control; holding at least fifty percent of voting power in each enterprise; loans from one enterprise to another constituting not less than fifty-one percent of the recipient’s book value of total assets (excluding loans from financial institutions not otherwise considered associated); combined loans and equity comprising not less than fifty-one percent of total assets (with the same caveat about financial institutions); guarantees of at least twenty-five percent of the borrower’s total borrowings; appointment of more than half of the board or executive directors by the other enterprise; appointment of more than half of the board of both enterprises by the same person(s); supply relationships where ninety percent or more of raw materials, semi-finished goods or consumables are supplied by the other enterprise with influence over prices and conditions; sales or transfers where prices and conditions are influenced by the related enterprise; common control by an individual and relatives; ten percent interest in a firm, association of persons or body of individuals; and a residual clause covering controlled transactions that differ from transactions that would be made by an unrelated party but confer a potential advantage to the enterprise.

Methods and the criterion for application

Regulation 2(I) of the TP Gazette Notification No. 2217/7 dated March 02, 2021 explicitly recognises the following transfer pricing methods: Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin Method (TNMM) and Profit Split. The TP Gazette requires that the arm’s length price be determined by applying the most appropriate method. Sri Lanka does not impose a fixed hierarchy of methods. Regulation 5 of the TP Gazette stipulates that the “Most Appropriate Method” should be chosen after considering the nature and class of the international transactions, a functions–assets–risks (FAR) analysis of the associated enterprises and the availability and reliability of comparable data; the selected method is the one best suited to yield the most reliable measure of an arm’s length price for the particular controlled transaction.

Comparability and ranges

Sri Lanka follows the OECD guidance in Chapter III on comparability analysis. There is no statutory preference for domestic over foreign comparables; instead, tax officers select appropriate comparables (domestic or foreign) based on the characteristics of the tested party. The tax administration does not use secret comparables; audits rely mainly on publicly available data. Regulation 2(II) of the TP Gazette prescribes the use of the interquartile range as the arm’s length range: the lower limit is the 25th percentile and the upper limit is the 75th percentile. If the actual controlled price falls outside that interquartile range, the median (50th percentile) of the arm’s length range is to be treated as the arm’s length price for the transaction. Regulation 4 permits necessary and reliable comparability adjustments between uncontrolled and controlled transactions.

Documentation and reporting

Regulation 6 of the TP Gazette Notification No. 2217/7 dated March 02, 2021 requires taxpayers to prepare transfer pricing documentation consistent with the OECD framework: a Master File in line with Annex I to Chapter V of the OECD TPG, a Local File consistent with Annex II and a Country-by-Country Report (CbCR) consistent with Annex III. In addition, a Transfer Pricing Disclosure Form (TPDF) must be submitted with the Income Tax Return where enterprises have “international transactions” or other transactions between associated enterprises and the aggregate controlled transactions during a year of assessment exceed LKR 200 million. The Master File obligation applies to enterprises with declared group revenue exceeding EUR 50 million (or equivalent in LKR) for each year of assessment, effective from the 2020/2021 assessment year. The CbCR applies to MNE Groups with consolidated group revenue of at least EUR 750 million (or equivalent in LKR) in the fiscal year immediately preceding the Reporting Fiscal Year. The Local File and Master File must be provided within 60 calendar days of a written request duly issued by the Commissioner General of Inland Revenue. The CbCR must be filed no later than 12 months after the last day of the Reporting Fiscal Year of the MNE Group. The TPDF is to be filed along with the Income Tax Return. The profile does not specify language requirements for documentation; therefore, No se proporciona guía doméstica específica en el perfil regarding documentation language.

Safe harbours, exemptions and materiality

Sections 76 and 77 of the Inland Revenue Act allow the arm’s length determination to be subject to safe harbour rules specified by the Commissioner-General, but to date no safe harbour guidelines have been issued. The documentation thresholds in Regulation 6 serve as materiality-based exemptions: Local Files are required only where aggregate controlled transactions exceed LKR 200 million per year of assessment; Master Files where group revenue exceeds EUR 50 million; and CbCR where consolidated group revenue is at least EUR 750 million in the prior fiscal year. The profile does not identify other simplification measures.

APAs and MAP; procedures and timing

Sri Lanka offers rulings and participates in Mutual Agreement Procedures (MAP). Under Section 75 of the Inland Revenue Act, double taxation agreements or mutual administrative assistance agreements approved by Parliament have the force of law in Sri Lanka, and Section 199 empowers the Minister to enter into or amend mutual administrative assistance agreements. The profile indicates that Advance Pricing Agreements (APAs) are not established as a typical administrative option in the jurisdiction; the source does not record statutory unilateral, bilateral or multilateral APAs as available mechanisms. For detailed MAP procedure information the profile refers to Sri Lanka’s OECD MAP Profile.

Penalties and other considerations

Specific transfer pricing penalties are set out in Section 184 of the Inland Revenue Act, No. 24 of 2017 for failures to comply with the requirements of Sections 76 or 77 regarding transactions with associates. TP Regulation 10 provides for secondary adjustments in relation to international transactions. The jurisdiction does not require or allow year-end adjustments, according to the profile. Regarding financial transactions, although the TP Gazette does not include specific transfer pricing guidance, taxpayers must disclose information on financial instruments and services in the TPDF. Separately, Sri Lanka has an interest limitation rule in Section 18 of the Inland Revenue Act, No. 24 of 2017: the amount of financial costs deductible for a company (other than a financial institution) shall not exceed four times the total of the company’s issued share capital and reserves as at the end of the year of assessment. Sri Lanka does not follow the Authorised OECD Approach (AOA) for attribution of profits to permanent establishments; profit attribution follows the applicable Double Taxation Agreement provisions and the Inland Revenue Act.

Domestic dispute resolution procedures

Section 78 of the Inland Revenue Act establishes a Dispute Resolution Panel (DRP) to resolve disputes about interim orders arising under Sections 76 and 77. When a taxpayer communicates dissatisfaction with such an interim order, the DRP must issue a final order within six months of that communication and transmit it in writing or electronically to the taxpayer. Taxpayers retain the right to appeal DRP decisions.

Other relevant aspects

Sri Lanka does not have domestic legislation or regulations specific to Cost Contribution Arrangements, intangibles pricing or hard-to-value intangibles (HTVI), nor does it have a simplified approach for low value-adding intra-group services; the TP Gazette requires disclosure of intra-group services in the TPDF and provides guidance in Annexure V and Annexure VI for completion of the form. For those matters the profile expressly notes No se proporciona guía doméstica específica en el perfil, and practice relies on OECD guidance and the general TP Gazette provisions.

Conclusion

Sri Lanka has established a transfer pricing framework consistent with international standards, anchored in Sections 76 and 77 of the Inland Revenue Act and developed in the TP Gazette (Extraordinary Gazette Notification No. 2217/7 dated March 02, 2021). The authority applies the arm’s length principle following the OECD Guidelines, uses the “most appropriate method” approach, accepts interquartile ranges and comparability adjustments, and enforces documentation requirements (Master File, Local File, CbCR and a Transfer Pricing Disclosure Form) with clear monetary thresholds and procedural deadlines. The regime includes dispute resolution mechanisms through rulings, MAP and a Dispute Resolution Panel, and envisages secondary adjustments. At the same time, several technical areas such as intangibles, HTVI, safe harbours, and detailed financial transactions guidance remain underdeveloped domestically and are handled with reference to OECD/UN guidance.

References

For consolidated information and access to the OECD country transfer pricing profiles please consult https://www.oecd.org/en/topics/sub-issues/transfer-pricing/transfer-pricing-country-profiles.html