Transfer Pricing in Sri Lanka

The legal framework

Sri Lanka's transfer pricing rules sit in two instruments. The statute is Division III of Chapter VII (International) of the Inland Revenue Act, No. 24 of 2017: section 76 for international transactions between associated enterprises, section 77 for domestic ones, section 78 for the Dispute Resolution Panel. Sections 23 to 25 of the Inland Revenue (Amendment) Act, No. 10 of 2021 made targeted repeals and substitutions within those sections, retroactive to 1 April 2018, and no amendment Act since has touched them. The detail sits in the Regulations on Transfer Pricing No. 02 of 2020, Gazette Extraordinary No. 2217/7 of 2 March 2021, effective from 1 April 2020 and unamended since. The OECD Guidelines have no formal domestic status; the regulations state their own methods, factors and range rules, so an OECD paragraph is persuasion, not authority.

Two features set Sri Lanka apart. The rules run one way only: sections 76(4) and 77(3) disapply them where recomputation would reduce chargeable income or increase a loss, so there is no downward self-adjustment. And sections 76(5) and 77(4) override the rest of the Act and any other law to deny any exemption or benefit on income added by an adjustment. For a Board of Investment entity on a tax holiday, an adjustment converts exempt profit into taxable profit. That is the most under-appreciated feature of the regime.

Domestic transactions are not caught wholesale: Regulation 1 confines the machinery to three gateways, where one party is exempt, the parties face different income tax rates, or one has a current or brought-forward loss. Association is defined by a twelve-limb test in Regulation 8, running from voting power and board appointment through debt at 51% of book assets to a residual limb catching any controlled transaction that departs from what a non-participating party would have accepted while conferring a potential advantage. That last limb reaches commercial dependency with no equity link.

Methods, comparables and benchmarking

Regulation 2(I) prescribes five methods on a most-appropriate basis with no hierarchy: comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split, the last expressly contemplating a residual split. There is no sixth "other method". Regulation 5 keys selection to the functional analysis, the availability and reliability of data, the degree of comparability and the scope for reliable adjustments.

The range rule is prescriptive and unforgiving. Regulation 2(II) fixes the interquartile range as the arm's length range. A price inside it stands; a price outside it is replaced by the median, not the nearer quartile. The gap between a result at the 24th percentile and one at the 26th is therefore not marginal; it is the whole distance to the centre.

Comparability turns on the Regulation 3 factors, which reach beyond contract terms and functions to economic circumstances including market size, local law, input costs and competition. Regulation 4 restricts data to the year of assessment, with a proviso for up to two prior years where it reveals influencing facts.

A foreign "tested enterprise" is permitted if the local file justifies it, but every worked example in Annexure V uses the Sri Lankan company. There is no official local comparables database, so regional sets are the practical reality, and Regulation 3(d) hands the IRD an explicit hook for demanding market-difference adjustments when you use them. Transactional guidance is otherwise thin: nothing on intangibles, services or financial transactions, and no cost contribution rules.

Documentation: what the IRD expects

Regulation 6 imposes the three-tier structure plus a fourth, local, layer. A local file is required where aggregate controlled transactions exceed LKR 200 million for the year, excluding dividends and loan capital movements; it must be in English for international transactions and retained six years. A master file is required where declared group revenue exceeds EUR 50 million, from year of assessment 2020/2021, well below most jurisdictions, catching mid-sized groups that have never prepared one elsewhere. CbC reporting follows the EUR 750 million standard, with notification on Form TP_CbCR_001_E by 31 December of the reporting fiscal year and the report within twelve months of year end.

The fourth layer is the Transfer Pricing Disclosure Form, filed with the return by any enterprise over the LKR 200 million line. It is not a formality: Annexure IV Part B requires, per transaction category, the counterparty and its country, the association criteria, the method, the profit level indicator, the tested result and the range maximum, median and low. The taxpayer publishes its own benchmarking conclusion annually. Returns fall due eight months after the 31 March year end, so 30 November. Electronic filing through RAMIS runs from the year of assessment commencing 1 April 2023 under section 113(1B), but it is not absolute: section 113(1C) lets the Commissioner-General authorise filing in writing where just and equitable, and section 113(1D), inserted by the Inland Revenue (Amendment) Act, No. 11 of 2026, lets a senior citizen file either way from the year of assessment commencing 1 April 2025.

Local and master files must be produced within 60 calendar days of a written request from the Commissioner General, with no separate preparation deadline. Contemporaneity is implicit, and 60 days will not build a study from nothing.

Audits, penalties and the enforcement climate

Section 184 carries the penalties, and Regulation 6(f) channels transfer pricing failures into it: up to 1% of the value of transactions with associated enterprises for failing to maintain documents, up to 2% for non-disclosure, up to LKR 250,000 for failing to submit and up to LKR 100,000 for late submission. Each is a maximum, so quantum is discretionary and a matter for advocacy. The exception is section 184(e), where concealment or inaccurate particulars coupled with an attempt to evade tax carries a fixed 200% of the additional tax.

There is no documentation-based penalty defence; compliant documentation protects only by removing the section 184(a) to (d) triggers. The burden runs against the taxpayer twice, since sections 76(3)(c) and 77(2)(b) require it to satisfy the officer that pricing was arm's length and section 141 puts displacing an assessment on the objector. Assessments run under section 135: 30 months from filing of a self-assessment return, unlimited where there is fraud or gross or wilful neglect.

Two caps outside the transfer pricing rules bite independently of any arm's length analysis and are routinely missed: section 18 limits a non-financial company's financial cost deduction to four times issued share capital plus reserves at year end, with the excess carried forward six years, and section 79 caps a non-resident's head office expenditure deduction at 10% of assessable income.

Dispute resolution and advance certainty

The dispute path is unusual and largely internal. A Transfer Pricing Officer determines the arm's length price in section 76 cases; section 77 cases stay with an Assistant Commissioner. The preliminary order goes to a Technical Review Committee, which may confirm, reduce, enhance or annul. Note "enhance": internal escalation carries upside risk. Unanimity produces a final order, a majority an interim order.

A taxpayer dissatisfied with an interim order has 14 days to notify the Secretary to the Dispute Resolution Panel under section 78; miss it and the order is deemed final. The Panel must rule within six months. Only then does the assessment issue and the ordinary chain begin: administrative review under section 139 within 30 days, appeal to the Tax Appeals Commission under section 140, then the Court of Appeal within one month under section 144. Appeals do not suspend collection. No Sri Lankan transfer pricing judgment has been reported: the regime dates only from 1 April 2018 and the chain keeps disputes non-public for years.

Regulation 10 gives corresponding adjustments where a treaty partner makes a primary adjustment, on an evidenced request within the treaty MAP time limit. That is correlative relief, not a secondary adjustment. On our reading the OECD country profile mischaracterises it, and Sri Lanka has no secondary adjustment provision at all. The MAP Guideline applies the three-year Article 25 limit where a treaty is silent, and bars access where the taxpayer already holds a private ruling or a Tax Appeals Commission settlement order on the issue.

Advance certainty is now real. Section 76(6) and Regulation 7 permit unilateral, bilateral and multilateral APAs for up to four years of assessment, and the IRD's APA Guide of January 2025 supplies the process: pre-filing at least six months before the first covered period, application before that period begins, a 24-month completion target, LKR 1,000,000 for a new unilateral APA and LKR 750,000 on renewal, and rollback bounded by the section 135 limits. Regulation 7(d) is the prize: where APA terms are fully complied with, no section 76 adjustment is made to covered transactions.

Pillar Two, Amount B and what changes in 2026

Sri Lanka has not enacted Pillar Two. Neither the consolidated Act to 2025 nor the amendment Acts of 2025 and 2026 contains GloBE, income inclusion, undertaxed profits or domestic top-up tax provisions; 2025 engagement was capacity-building only. Model Sri Lanka as a non-implementing Inclusive Framework member whose low-taxed profit, BOI holiday entities above all, may be topped up elsewhere, which reframes the value of the holiday and the pricing policy built around it. Amount B is likewise unadopted; Sri Lanka sits on the OECD's covered-jurisdiction list, but that commitment is dormant.

The live 2026 issue is exchange. Sri Lanka has not signed the CbC Multilateral Competent Authority Agreement, and Regulation 6(e)(II)(ii)(bb) triggers local filing where the parent's jurisdiction has an international agreement with Sri Lanka but no qualifying competent authority agreement in effect. The IRD publishes no QCAA list, so assume a secondary local CbC filing obligation until you can show otherwise.

Capability is shifting too. An 18-month Tax Inspectors Without Borders programme to July 2025 produced a risk assessment framework, an audit strategy manual, support on nine anonymised audits and the APA guidelines, and in 2025 the Risk Management Unit began building a transfer pricing database with scoring models. Case selection is moving from ad hoc to systematic.

How practitioners should respond

Treat the disclosure form as the audit trigger it is. A median-and-range table filed annually lets the department see, without opening a file, which taxpayers sit outside their own ranges. Reconcile the TPDF to the local file before submission.

Benchmark defensively. An outside-range result goes to the median, not the nearer quartile, so the cost of a marginal position is the full distance to the centre. Where regional comparables are unavoidable, document the Regulation 3(d) market factors and any adjustments proactively.

Map the internal chain before entering it: the 14-day notice to the Dispute Resolution Panel is short and fatal, the Technical Review Committee can enhance an assessment, and appeal does not suspend collection.

Test the APA programme. It is operational but unproven, with no concluded APA published. For a group with stable, material Sri Lankan flows, a captive service centre, a BOI manufacturer or a routine distributor, a unilateral APA at LKR 1,000,000 buys four years of Regulation 7(d) protection, cheap against a 200% concealment penalty and a multi-year internal dispute. Pre-filing sits six months ahead of the first covered period, so the decision must be taken about a year out.

Above all, watch the exempt-entity exposure. Sections 76(5) and 77(4) mean an adjustment lands as fully taxable income even inside an exempt entity, and Pillar Two abroad may take what the holiday leaves behind.