corporate taxation in sri lanka

PowerPoint Presentation

1CORPORATE TAXATION IN SRI LANKAHARISON SAMARATUNGACTA, ATII, MAAT, B. Sc. (B. Ad) Sp, HNDC

Chartered Tax Advisor andAuthorized Representative7th December 2015HWHS

1

2IMPORTANT NOTICEThe contents of this article are applicable for the year of assessment;2013/20142014/2015unless otherwise mentioned specifically.HWHS

2

CONTENTSIntroductionImposition of TaxResidency of a CompanyCalculating Income TaxAllowable DeductionDisallowable DeductionSources of IncomeThin CapitalizationResident CompanyNon-Resident CompanyInstrumentality RuleHead Office ExpensesAssessable IncomeUtilization of LossesTaxable IncomeWithholding TaxesTax CreditsDecided Tax Cases

3HWHS

3

4INTRODUCTION

Income tax is charged by Department of Inland Revenue of Sri Lanka, on the basis of the provisions of the Inland Revenue Act No. 10 of 2006 (Hereafter referred to as The Act) as amended by, Inland Revenue Amendment Acts No. 10 of 2007, 9 of 2008, 19 of 2009, 22 of 2011, 8 of 2012, 18 of 2013, 08 of 2014 and 09 of 2015.The Act provides the legal authority to charge, levy and collect income tax on the profits and income of every person or partnership, which arose or is arising to such person for every year of assessment commencing on or after 1st of April, 20064HWHS

4

IMPOSITION OF TAXSection 2 of The Act imposes liability to Income Tax for every year of assessment on profits and income of a person, Wherever arising in the case of a person resident in Sri Lanka,Arising in or derived from Sri Lanka, in the case of every other person.Accordingly, a resident person is liable to income tax on the global profits and income while a non-resident person is liable to tax on the profits and income arising in or derived from Sri Lanka.Person is defined including any company or body of persons or any government. But does not includes a partnership.Company means, a company incorporated or registered under any law in Sri Lanka or elsewhere.

5HWHS

5

RESIDENCY OF A COMPANYWhere a company or a body of persons has,Its registered or principal office in Sri Lanka, orWhere the control and management of its business are exercised in Sri Lanka,such company or body of persons shall be deemed to be resident in Sri Lanka for the purposes of The Act.

Accordingly, if any company does not fulfill both criteria above, such company deemed to be a non-resident company for the purpose of taxation in Sri Lanka.In terms of Section 79 (1) of The Act;6HWHS

6

RESIDENCY OF A COMPANY Con..This definition has based on some old English cases. Originally the idea was that a company was resident in the country where it was incorporated. But the House of Lords came to a different conclusion in the case of De Beers Consolidated Mines Ltd v Howe (1906) 5 TC 213 where Lord Loreburn said;

This principle was followed by the number of cases later like;1. New Zealand Shipping Company v Stephen (1907) 5 TC 5532. Egyptian Delta Land & Investment Co. Ltd. v Todd (1928) 6 TC 1523. Bullock v Unit Construction Co Ltd, (1959) 38 TC 712A company resides where its real business is carried on and the real business is carried on where the central management and control actually abides.7HWHS

7

CALCULATING INCOME TAX

Profits and Income as per AccountsAdjustments in Section 25 & 26Statutory IncomeDeduction in Section 32Assessable IncomeQualifying Payments in Section 34Taxable Income8HWHS

8

ALLOWABLE DEDUCTIONS

The general rule relating to expenses is prescribed in Section 25 (1) which read as;Subject to the provisions of subsections (2) and (4), there shall be deducted for the purpose of ascertaining the profits or income of any person from any source, all outgoings and expenses incurred by such person in the production thereofThis particular section indicates two requirements with regard to deductions.All outgoing and expenses is a clause used to cover not merely expenditure but items like loss of stock-in-trade by theft or fire.

The outgoing and expenses must be incurred to qualify as a deduction in arriving at profits and income. 9HWHS

9

ALLOWABLE DEDUCTIONS Con

In determination deductibility of an expenditure or outgoing the following must be considered.Is outgoing or expense is incurred in the production of income?Is the deduction specifically authorized under Section 25?Is the deduction specifically prohibited under Section 26?The following special provisions are applicable in deducting any outgoing or expenses. Depreciation charged in the accounts is not allowed as a deduction in arriving at the profits for tax purpose. But depreciation allowance is entitled to a person who owns such asset and uses in his trade, business, profession or vocation. Depreciation Section 25 (1) (a)10HWHS

10


Depreciation AllowancesAssetPrior To 01.04.2011On or After 01.04.2011 Bridge, Railway, Reservoir, Electricity & Water Distribution Line or Toll Roads6.67%6.67%Qualified Buildings6.67%10%Condominium Property 6.67%6.67%Plant and Machinery12.5%33.33%Office Furniture20%20%Motor Vehicles20%20%Information Technology Equipment25%25%High Tech Plant and Machinery-50%Locally Developed Software100%100%

11HWHS

11


Depreciation Allowance is Not DueDepreciation allowance are not due on following circumstances.Any asset which was given to employee to be used in residence.Machinery let on hire to an undertaking the whole or part of the profit is exempt from tax.Machinery let on hire to use an undertaking carry on by the person from whom such purchase was made.Motor vehicles used for travelling purpose other than,Motor cycles and bicycles that are used by non-executives.Motor coaches that are used for transporting employees.Any asset that was purchased on finance lease agreement.12HWHS

12


Depreciation Allowance is Not Due ConAny improvement of a building which does not result in increasing the floor area.Any building acquired for the purpose of letting premises.Value of any land.Any dwelling house used by any executive officer.Any asset which is not used in the production of income in any trade, business, profession or vocation.13HWHS

13


Depreciation Allowances in CommonAcquisition of asset may be a purchase, gift, inheritance, exchange or any other way.The allowance is granted on the year of assessment in which the asset was put into use.No allowance will be granted on the year of disposal.In the case of purchase, the cost of the asset will be the purchase price, the cost of dismantling old asset and replacing the new assets.The cost should not include the cost of overseas expenses incurred for the inspection of the asset.The cost should not include input VAT in the case of construction or acquisition.14HWHS

14


Depreciation Allowances in Common ConRenewal of capital assets like tools and utensils are allowable as a deduction against profit. The sale proceeds will be taken as income.The market value at the date of acquisition is considered as the value of the assets in the case of gift or inheritance.The sale proceeds in excess of the tax written down value is considered as a profit in the case of disposal. If the value is a loss that can be deducted from the profit.The de-facto owner is granted depreciation allowance in the case of assets which have purchased on hire purchase terms.The tax written down value is considered as the value for depreciation allowance of any asset, in the event of a company is formed by conversion of business carried out by individual or partnership.15HWHS

15


SectionExpenditure or OutgoingRemarks25(1)(b)(i)1/4th of any payment made as consideration for obtaining a license in favor of any manufacturing process.25(1)(b)(ii) 1/10th of the cost of acquisition any intangible asset, other than goodwill.25(1)(c)Renewal of any capital asset, if no allowance for the depreciation has been granted.25(1)(d)Any sum expended for the repair (not renewal) of any plant, machinery, fixtures, building, implement, utensil or any article.25(1)(e)Bad debts and reasonable doubtful debts.

AllowableAllowableAllowableAllowableAllowable16HWHS

16


SectionExpenditure or OutgoingRemarks25(1)(f)Interest paid or payable .25(1)(g)Any contribution by an employer to a pension, provident or savings fund approved by CGIR.25(1)(h)Tax payable under any Statute enacted by a Provincial Councils.25(1)(i) 300% of the expenditure, including capital expenditure, incurred in carrying on any scientific, industrial, agricultural or any other research. 25(1)(j)Any expenses incurred in opening up any land for cultivation, animal husbandry, livestock or poultry including certain capital expenditure.


17


SectionExpenditure or OutgoingRemarks25(1)(k)Traveling expenses incurred within Sri Lanka. 25(1)(l)Company formation or liquidation expenses.25(1)(m)Any expenditure incurred in operating a motor coach used for transporting employees from their residence to work place vice versa.25(1)(n)Gratuity payment to an employee on the termination of employment.25(1)(o)Contribution to a Gratuity Fund approved by CGIR under The Payment of Gratuity Act, No. 12 of 1983.


18


SectionExpenditure or OutgoingRemarks25(1)(p)Lump sum payment which not being an advance payment made regarding the letting or lease.25(1)(q)Training expenditure paid to any recognized institution for the purpose of developing skills and performance & improving efficiency of a employee. 25(1)(r)Accreditation expenses, where the person who is carrying on any profession.25(1)(s)Quotation expenses of any shares in any official list of any stock exchange licensed by the SEC. The aggregate expenditure shall not exceed 1% of Initial Public Offering of the company.

AllowableAllowableAllowableAllowable19HWHS

19


SectionExpenditure or OutgoingRemarks25(1)(t)Maintenance and management expenditure of any sports ground, stadium or sports complex.25(1)(u)Any sum paid by a Government Owned Business Undertaking as a special levy to the Government.25(1)(v)Cost of acquisition of any internationally recognized intellectual property used for producing profits and income.25(1)(w)Any royalty or ground rent paid by a person.

AllowableAllowableAllowableAllowable20HWHS

20

DISALLOWABLE DEDUCTIONS

Section 26 of The Act specifically prohibited in charging certain expenditure and outgoing to the profit and loss account in arriving at profits and income from any trade, business, profession or vocation.SectionExpenditure or OutgoingRemarks26(1)(a)Domestic or private expenses, including travelling between the residence and place of work vice versa.26(1)(c)Foreign travelling expenses other than solely in connection with the promotion of the export trade, provisions of any services for payment in foreign currency, services relating to design development, product development or product innovation.

Fully NotAllowable2% of Profits & income of Previous Year21HWHS

21

DISALLOWABLE DEDUCTIONS Con

SectionExpenditure or OutgoingRemarks26(1)(e)Entertainment expenses incurred by a company behalf employees.26(1)(f)Entertainment allowance paid to executive officer of the company. 26(1)(g)Any disbursements or expenses, not being money expended for purpose of producing profits or income.26(1)(h)Any expenditure of a capital nature or any loss of capital incurred by the company.26(1)(i)The cost of any improvements effected by the company.

Fully NotAllowableFully NotAllowableFully NotAllowableFully NotAllowableFully NotAllowable22HWHS

22


SectionExpenditure or OutgoingRemarks26(1)(k)Rent or expenses of any premises or part of a premises not occupied or used for the purposes of producing profits and income.26(1)(l)Income Tax, Economic Service Charge, Value Added Tax or Crop Insurance Levy.26(1)(m)Any annuity paid by the company.26(1)(n)Any payment made to pension, provident, savings, widows and orphans pension, or other society or fund which is not approved by CGIR.

Fully NotAllowableFully NotAllowableFully NotAllowableFully NotAllowable23HWHS

23


SectionExpenditure or OutgoingRemarks26(1)(o)Rent, rates, repairs and maintenance of residence provided by company to employees. If Employee Emoluments > Rs. 600,000 75% (Actual Expenditure Rental Value)

If Employee Emoluments

corporate taxation in sri lanka

Documents