Multinational groups have historically faced scrutiny where profits were reported in low-tax jurisdictions while significant functions, assets, risks, or value-creating activities were located elsewhere. Transfer pricing rules are designed to ensure that transactions between related parties are priced in accordance with the arm’s length principle, broadly reflecting the conditions that would have been agreed between independent parties.
This conversation with Charmaine Tillekeratne, Partner and Head of Tax at Deloitte Sri Lanka and Maldives, and Srivatsan Raghavan, Senior Director – Transfer Pricing at Deloitte India, explores how transfer pricing enforcement has evolved globally, and how Sri Lanka’s still-developing market compares with India’s more mature one.
Charmaine brings the discussion to Sri Lanka’s current status, detailing how enforcement has progressed since TP rules were introduced, where the Inland Revenue’s audit focus lies today, and what companies, from multinationals to small tourism operators, should be doing now to prepare for a system that is still catching up with global standards.
Srivatsan draws on India’s two-decade journey with transfer pricing to explain how safe harbours and advance pricing agreements (APAs) work in practice, from the arbitrary markup disputes that pushed India towards these mechanisms to the specifics of bilateral relief, IP ownership, and choosing between litigation and negotiated certainty.
How do you describe the current state of transfer pricing enforcement globally, and how do you think Sri Lanka fits into that picture?
Srivatsan Raghavan: Transfer pricing has evolved over the years with increasing globalisation. Over the past five decades, particularly in developing economies, multinational corporations (MNCs) set up shop to tap into skill sets and cost arbitrage, resulting in transactions between multinationals. Transfer pricing matters because companies have been abusing pricing of these transactions to minimise their global tax. As a result, many jurisdictions lost out on their fair share of taxes, essentially using local resources without giving back to the society they operated in.
In the past, companies used tax havens like Mauritius and the Cayman Islands, where all you needed was a post-box company with no real substance, routing transactions through them tax-free. This resulted in double non-taxation, with multinationals reducing their effective global tax rate while developing countries lost out. The subject gained prominence and evolved from a stage where countries looked at it unilaterally, understanding only what operations happened in their own country and whether they were fairly remunerated, to a more holistic, transparent approach.
Broadly, there’s a “prior to 2008/2013” and “post-2013” divide. Before that, countries were largely happy with a one-sided approach. In 2013, the Organisation for Economic Co-operation and Development (OECD) identified $100–250 billion in annual global tax revenue loss, which is roughly 4–10% of global corporate tax revenue, and introduced 15 action points to address base erosion and profit shifting (BEPS), addressing various business models. Earlier tax laws were built for brick-and-mortar business models; digitalisation made those models much harder to attack under existing rules, and there were also a lot of hybrid business models that had to be addressed. These action points were meant to address the substance-over-form aspect.
MNCs have also used treaty shopping by routing investments or transactions through countries with favourable withholding tax rates, exemptions, or other treaty benefits. General anti-avoidance rules were introduced to address this so that arrangements designed even partly to gain a tax advantage would be judged on its commercial substance, not just its legal form.
Sri Lanka’s transfer pricing rules were introduced some time ago. How has the enforcement environment evolved since, especially since the practices that originally triggered TP rules came from multinationals, and Sri Lanka has hosted MNCs for over a century, much like India?
Charmaine Tillekeratne: TP was brought into law around 2006, with the relevant provisions introduced then. Over the years there have been various amendments to bring it in line with OECD regulation. The most significant amendments came in 2008, when the TP methods were brought in line with OECD again. In 2015, compliance became mandatory, and everyone had to scramble to properly understand what TP is. At that time, there was a certificate that needed to be signed off; that requirement was later removed, but three-tier documentation was then introduced, again moving more in line with OECD.
So we’ve sort of caught up with the legislation, but it’s more in the execution that we’re lagging behind on the curve. Globally, TP has become institutionalised, moving away from niche compliance and from an “audit and adjust” method towards more dispute resolution, more data analytics, and more risk-based assessments.
Sri Lanka is still not quite there, so we need to move to more sophisticated risk-assessment methods in line with the rest of the globe.
If Sri Lanka were to take initiatives now to align more with global OECD-driven expectations, what’s the impact on boards and senior leadership at large companies?
Charmaine: What they need to be aware of is that the Inland Revenue Department (IRD) already has a lot of data, but it’s not yet being analysed properly. Once that happens, all related-party transactions are going to be scrutinised with a fine-tooth comb. CEOs need to be prepared to answer for substance over form, as transfer pricing is essentially about substance over form. They will have to prove that for any given transaction, they’ve received or paid the right share of income or cost. Companies should be able to demonstrate that their related-party pricing falls within a supportable arm’s length range.
Companies here fall broadly into two groups: multinationals headquartered globally, and companies that have grown organically in Sri Lanka and now have a global presence. Multinationals may already have a group policy in place, and because they’re part of a bigger structure, things tend to be in place and that trickles down. The organically grown companies that have moved out of Sri Lanka are the ones we find lacking in documentation, the structure of how they’ve made out these transactions, and a policy framework. This leaves little gaps that become difficult to answer.
TP was brought in to address multinational practices impacting countries like India and Sri Lanka, but now it applies as local companies become global. India seems further along in this journey, so what have the challenges been, and can you explain the three-tier documentation approach?
Srivatsan: Transfer pricing law was introduced in India back in 2001. It’s been a long journey, syncing with the shift from a unilateral mindset to looking at the bigger picture. One difference between Sri Lanka and India is the number of audits: tax authorities in India have been very aggressive from the beginning. Early on, transaction-based thresholds for triggering TP scrutiny were used to pick up cases, and because that threshold was set very low, the number of cases selected was huge. This affected the quality of audits. Tax authorities made adjustments too often, causing a lot of cases to pile up. That is what led to the idea of a fast-track dispute resolution mechanism.
India’s tax audits effectively began from around 2004 onward. Any investor coming into a country needs certainty on tax matters so they can focus on business, but prolonged litigation in India could take anywhere between 13–15 years, depending on the kind of issue and which forum it moves through. That’s where tax authorities and government realised they needed a more business-friendly environment to give investors certainty, which resulted in safe harbour rules and Advance Pricing Agreement being implemented.
To explain what safe harbour is, take a simple transaction: say a company has a captive setup in Sri Lanka or India providing an export of services to its group, working exclusively as a service provider to the group. The question is what markup should apply to that. Before you were covered by safe harbour, a tax authority could pick you up and say your markup should have been 17–18%, depending entirely on the officer.
Some officers might categorise the services as “high value add” and push the markup higher; others might stretch it further and expect a share of profit from the group. To formalise the process, India brought in safe harbour rules: you undertake a defined transaction, a markup is prescribed, you file an application if you accept it, the tax authority validates it, and then you get certainty for the next five years.
When India first introduced safe harbour, the markup was set as high as 24%. There were only few takers since it did not make commercial sense. No company wanted to pay that, so few opted in. It was later rationalised down to around 17–18%, though the revenue threshold for companies eligible to apply was still quite low, limiting the number of companies that could actually use it. India has since revisited its safe harbour rules recently to widen the eligibility, and the threshold for all IT services was updated from ₹3 billion to ₹20 billion, meaning many more IT companies now fall within its scope. It also rationalised the margins to 15.5% for the IT support services. As a result, tax authorities can also equally focus their attention on the much more complex cases that fall outside safe harbour.
To illustrate why a taxpayer might accept safe harbour even at a slightly higher rate than what they’re currently reporting: say Sri Lanka introduced a 15% safe harbour markup for a certain transaction type. If a company in Sri Lanka is currently operating at 13%, they likely wouldn’t mind pushing that up to 15% in exchange for certainty over the next five years because they can avoid the risk, cost, and uncertainty of an arbitrary assessment.
On the three-tier documentation itself, the objective was to move away from the unilateral, inward-looking approach towards understanding the bigger picture. Picture it from 50,000 feet down. The master file is the blueprint of the group’s operations globally, its key business drivers, where it operates, and what its key international transactions are and who the players are. The country-by-country reporting (CbCR) captures the numerical metrics in the geographies they operate, in terms of number of entities, employees, revenue, profit, taxes, etc., and is applicable where the group exceeds the threshold of €750 million aimed at large multinationals. Its objective is to highlight anomalies in the figures.
For instance, for each country of operation, a company reports the characterisation of the entities operating there, headcount, and tax paid. If a Cayman Islands entity reports two employees, very high revenue and profit, but zero tax paid, that clearly flags that there’s an operation with no real substance behind it. So the master file gives the blueprint, CbCR gives the numbers, and the local file looks at the operations of the specific country in terms of the nuts and bolts of how the organisation is structured, what the key triggers are, and how the financials fit into that context.
A company in Sri Lanka that has gone overseas in the last decade or two might be hearing about this three-layer documentation system and realise their information is already sitting with the IRD, even if the authority hasn’t had bandwidth to act on it yet. Where do they start, and who’s responsible?
Charmaine: Authorities have started with the low-hanging fruit: the transactions openly shared in a company’s financials. Typically they look at intercompany service agreements, service payments, royalty payments, and intercompany balances. If these look excessive or too little, they issue an assessment or propose a transfer pricing adjustment resulting in additional tax, penalty, and interest. Sometimes this is left up to each officer, who will have their own view even though the factors should be similar within a given industry.
What’s needed is a framework or guideline that identifies the typical transactions such as intra-group service, royalty, outstanding balances and industries in Sri Lanka, and sets a benchmark, such as where a service agreement transaction requires a proper service agreement document and a need/benefit analysis demonstrating the actual benefit received. Companies will then be aware of what they need to do and maintain to avoid unnecessary disputes.
Is this part of the safe harbour rule approach ?
Charmaine: Yes, this can be resolved to a greater extent through two mechanisms; either safe harbour or advance pricing agreements. Sri Lanka’s legislation is quite mature and the provisions exist, but it’s the guidelines around them that we lack. That creates a big headache for taxpayers facing constant assessments and inconsistent views from officers who aren’t always able to fully understand their business operation.
Each operation is different, so you can’t say industry A should carry this margin and industry B should carry the same margin. It’s a range. All of this can be pre-agreed, pre-discussed, and made to be understood, then agreed upon. Under safe harbour, the authorities agree on a suitable range for an industry and under an APA, there’s a direct discussion between the tax authority and the taxpayer, and they agree on a range suitable for that specific business. Though the tax authority has already introduced APA rules, the safe harbour rules have not yet been issued. Until such time safe harbour is not operative in Sri Lanka.
This sounds like a two-tier system with a broad safe harbour and a more individualised APA layer. How well is this working in India?
Srivatsan: Advance pricing agreements take commitment from both the tax authority and the taxpayer, because it’s a long, drawn-out process that may take anywhere between one and two years, even in the shortest cases. It’s handled case by case between the taxpayer and the tax authority, because every case is looked at on its individual merits. The tax authorities visit the premises of the taxpayer, understand the business, and work out where the Indian operation fits into the overall picture, and what value is being attributed to that operation. Based on that, they reach an agreement.
The APA programme has been very successful in India. As of March 2026, India had crossed the 1,000 marks in terms of the number of APAs signed between the tax authority and individual companies.
Given that MNCs increasingly realise TP isn’t something they can overlook and often have better processes, has reaching an agreement on APAs been challenging?
Srivatsan: Business models have evolved, so where reduced cost once brought in value; now it’s the market that brings in value. As a result, it’s not easy to agree with a particular company that may tie its value to the market. The tax authority focuses on how much the local operation in India contributes to making the marketing entity competitive in that market. So, it’s really two levers being weighed against each other.
To make it more complicated, one of the things MNCs also do is bucket their operations into different zones: red zone, orange zone, or green zone. Green zone jurisdictions are the ones where tax authorities are not particularly aggressive, so companies may not be as serious about their transfer pricing compliance in those countries, focusing instead on the red or orange zones where scrutiny is higher. It’s increasingly becoming difficult for MNCs to selectively focus this way, because of the three-tier documentation requirements we’ve discussed, and also because of BEPS 2.0, with Pillar One and Pillar Two.
Pillar One is essentially about the big corporates seeing more than 10% profitability, and how to attribute that profitability to the market functions they perform. Think of the “Apples of the world.” Pillar Two is similar in threshold to the CbCR figure and its objective is to discourage countries from setting tax rates below 15%. This hurts developing economies like ours, because for investment to come in, we rely on tools like tax holidays and concessional rates, which is where we’re making the case that this approach may work for the Western world but may not necessarily suit us.
The global minimum tax regime is not yet fully operational. It’s a long way away from coming into force, if at all.
How active is Sri Lanka’s IRD in conducting TP audits right now, and what typically triggers them?
Charmaine: Audits have started, broadly. The triggers generally include companies that aren’t making profits — the question there is why you’re running a business at a loss; companies with very low margins — why run your business at such low margins; large expense items on the profit-and-loss account going overseas — why is this much money going out and what are you actually getting in return, and why isn’t it translating into your bottom line; and money that should be coming into the country being kept outside — why, and for how long.
Those are the low-hanging fruit that have been getting assessed over the last few years. There is a lot more depth authorities want to get to that they’re currently unable to reach, because of the lack of organised data analysis, but they’ll get there soon once they categorise and analyse the data they hold. Right now, the triggers remain low profit, large payouts, and loss-making companies.
Is it fair to say most of these audits are concentrated on MNCs rather than Sri Lankan companies that have gone global?
Charmaine: Yes, I’d say that’s largely the case. It’s concentrated on MNCs, since they naturally have a larger number of transactions, but authorities are looking a bit more inward now too, especially for organically grown companies. Especially after the economic crisis, they’ve noticed a tendency for companies to park money outside Sri Lanka and put in structures to take money out, so they’re mindful of that and look carefully at shareholding structures, along with related-party notes in financial statements. So it’s not accurate to say it’s only about MNCs. Companies that started local but have gone global are also getting picked up.
Sri Lanka has a huge IT/tech industry presence, but none of these companies are headquartered here. Does this draw the IRD’s interest?
Charmaine: This is something we’re really looking into now, and it ties back to substance over form. In many of these cases, especially in the IT sector, companies create the entirety of the value in Sri Lanka as the entire product value chain is developed and generated here, but the headquarters, billing, or shareholding sits outside the country.
Locally, the entity maintains something like a cost centre, or a cost-plus-marginal-markup centre, while the value is booked offshore. Looking at those offshore entities, they often lack real substance, employing maybe two or three people, yet all the decisions and transactions are actually driven out of Sri Lanka. The money is parked there, and when the owners decide to dispose of it, they do so at that offshore level, not from Sri Lanka. So Sri Lanka doesn’t get the share of income it should.
What’s a little more disturbing is that most of these companies enjoyed tax holidays for a long time, at the expense of other taxpayers. That concession was consciously given to help build up that industry, and there’s nothing inherently wrong with that. But once the value has been created and the companies have matured, and the money continues to be parked outside, Sri Lanka is losing out on the very thing that helped that business grow.
Once you’ve matured, you ought to be able to give back, rather than parking your value entirely outside.
Is it common for companies to set up a new parallel entity once a tax holiday expires? Is that within transfer pricing’s jurisdiction to address?
Charmaine: It can be, because in addition to specific transfer pricing regulation, we have several provisions in the act dealing with general anti-avoidance rules. If you’re structuring arrangements with the pure intention of avoiding tax, those can also be picked up and assessed. This has been a discussion in many forums regarding how our tax holidays have been administered.
It’s not really well monitored and is sometimes abused. The concession is given so that a company can come up, but once it has come up, it should ideally be phasing out the holiday, yet some entities continue enjoying it for years. That’s one of the general criticisms around how holidays are administered here. The relevant law to address that does exist; it’s the execution that’s the issue. However, this isn’t due to transfer pricing alone; it’s part of a more comprehensive framework.
How far has Sri Lanka gone towards advance pricing agreements, given enforcement itself is still developing?
Charmaine: The regulations and guidelines around advance pricing agreements were issued in 2025 and brought into effect immediately, giving taxpayers the opportunity to enter into APAs with the tax authorities. Various firms have already filed applications, but it’s been slower than we’d expect, again likely due to lack of capacity. It’s a long, drawn-out process of constant dialogue and negotiation, and at the end of the day it’s meant to be a win-win situation, not one where the taxpayer gets a wholly good deal, or the authorities do. Both need to meet halfway.
That’s the somewhat unfortunate part currently, because getting that final framework properly executed would be very attractive to multinationals. If we can zero in on actually executing a few APAs to begin with, that would demonstrate our level of competence to the world and be genuinely helpful.
From a corporate board perspective, companies are concerned about unquantified enforcement risk. What does India’s experience with APAs teach us here?
Srivatsan: One aspect I’d highlight is that right from the beginning in India, the APA team and the regular tax authority (TP audit) team are two different teams. They’re part of the same income tax department, but organisationally separate.
What this does is remove the inhibition a taxpayer might otherwise have about sharing information that could be used against them later. It also changes the underlying approach: a tax officer trying to understand a transaction may end up making an adjustment on an arbitrary basis, but an APA process is worlds apart. It involves a much greater depth of information-gathering, and the tax authority actually visits the company’s office to understand the entire value chain. As a result, APAs tend to develop a more practical solution compared to a traditional officer working with their own, sometimes limited, understanding of the business.
To use the example again of a company with operations split between Sri Lanka and the US, which we’re increasingly seeing as companies from developing countries expand overseas: both operations are equally important parts of the same whole. You can’t treat one as a “routine, limited-risk” function as against the other. If the customer side is important, the product side is equally important. If decision-making related to these is split between Sri Lanka and the US, then the profit or loss arising from the operation should be rightfully split between the two, weighted according to their respective contribution.
An officer may fail to understand that nuance, whereas an APA, aiming to understand the operations more deeply, is more likely to give a proper solution.
Another aspect worth mentioning: there’s an increasing focus by the OECD on publishing rankings of countries by how business-friendly they are, and the timeline within which each country resolves cases. This can be through an APA, or through a Mutual Agreement Procedure (MAP), which comes into play post-adjustment, when you’re trying to find a resolution. This ranking plays into the mind of each country, creating pressure to minimise resolution time so that more companies see the country as an investable destination.
Singapore is a good example as it uses a single window where it’s easier and more predictable. You know what hurdles exist and what’s required of the taxpayer. Once you fill it in, you know you’ll get a resolution.
One further aspect relevant to Sri Lanka: APAs come in two forms. The first is unilateral, where the Sri Lankan taxpayer agrees terms with the IRD alone.
The second is bilateral, which matters because, say Sri Lanka is remunerated on a cost-plus basis for some capital service provision, and the Sri Lankan operation agrees a cost-plus-15% arrangement with the IRD. The US IRS shouldn’t then separately say it won’t accept that and insist it should be cost-plus-13%, disallowing 2%. To the extent of that 2% gap, there’s double taxation. What happens in a bilateral APA is that the Sri Lankan competent authority and the US competent authority sit together, understand the operations in detail, and agree, such as on 14% as the right figure. Sri Lanka gets taxed at 14%, and the US grants relief for the same 14%.
The current limitation is the number of tax treaties Sri Lanka has, and how actively they’re being used. I believe it’s around forty-seven.
How does the bilateral APA process work in practice for Sri Lanka?
Charmaine: In terms of bilateral APA agreements, which stem from the double tax treaties, Sri Lanka does face a challenge as some of the other jurisdictions’ authorities don’t even engage with us, because we’ve never actually filed that first application. The provisions are there, but they’re not really being used.
Beyond bilateral APAs, which involve the taxpayer and two jurisdictions, there are also multilateral APAs, involving the taxpayer and a number of jurisdictions. Before going down that route, it probably makes sense to start with unilateral APAs, which would build confidence within our own authorities before moving to the more complex step of bilateral or multilateral agreements. Ultimately, a lot of this is about capacity building within the authorities. They need to be able to understand how businesses work and dig into the data. It’s not really a legal thing; there’s hardly any interpretation involved here. It’s mostly about understanding the businesses.
Given the criticism that tax law enforcement here can be arbitrary and opaque, and capacity building will take years, how should a company practically start building a risk mitigation strategy now?
Charmaine: You start with your TP policy covering all your transactions, and that’s where the three-tier documentation also comes into play. Once you look into it and start creating that policy document, you find yourself going deep into the nitty-gritty of each transaction.
Things you might have taken for granted before, you now look at and ask: is this right, do I have a risk here, and what do I do to address it. That gets documented in the policy, so it’s not an “audit and respond” style action plan, but more pre-planned and pre-prepared. It also demonstrates to the tax authority that the company has adopted a structured, consistent, and defensible approach to related-party pricing.
Is this TP policy something you’d share with the tax authority once drafted?
Charmaine: No, it’s an internal document, kept for a few reasons.
First, it functions as a policy for the entire organisation and group, so everyone follows it consistently, rather than one person doing one thing and another doing something different. Second, if any transaction deviates from what’s in the policy, that gets flagged and addressed with a plan. And third, yes, if in the process of an audit defence you need to submit certain documents to prove your point, it’s available to use, but it isn’t filed with the department as a matter of course.
Take the example of a Sri Lankan company that’s built a successful overseas product or brand. This raises intellectual property and royalty questions, especially given how big US tech companies have been criticised for where they choose to own their IP. How should a Sri Lankan company balance shareholder returns with managing this risk?
Srivatsan: That’s a fair question. In transfer pricing, we say business follows tax, and not the other way around as you cannot structure a business transaction purely for the purpose of suiting your tax outcome. As long as there’s genuine commercial substance, IP protection can legitimately be much stronger in certain jurisdictions like Singapore, Dubai, the US, and so on. That could be a valid reason to house or centralise IP ownership there.
But when you’re paying a royalty out from Sri Lanka to that jurisdiction, it’s important that the IP owner has, in their own capacity, undertaken all the functions or has real control over the functions relating to that IP. In our world, we call this Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE), and each of these functions has to genuinely be undertaken by whoever claims to be the owner.
We also try to split this between the legal owner and the economic owner. If an IP is developed in Sri Lanka but owned by a Singapore company, with maybe one or two people actually present there, and if the decision-making relating to that IP, and the real capability to protect, maintain, develop, or exploit it, sits with Sri Lanka, then Sri Lanka becomes the economic owner. In that case, what the legal owner should rightfully get is only a return on whatever cost they’ve incurred in registering or maintaining that IP, not the full economic value. So in intangible-asset transactions, it becomes very important to establish who genuinely undertakes the DEMPE function in relation to that IP.
How might Pillar One and Pillar Two impact Sri Lanka specifically?
Charmaine: We are part of the inclusive framework, but we haven’t really adopted either Pillar One or Pillar Two. The reason is that for a developing country like ours, implementing something like a global minimum tax could put us at a disadvantage. We’re trying to attract investment into the country, and giving concessions and exemptions is one of the tools we rely on to make ourselves more attractive.
While the Pillar One and Pillar Two rules continue, there will always be external influence to follow them. Under these circumstances, we probably need to look at a way around it. Rather than relying heavily on outright tax holidays and concessions, we would have to consider gradually curtailing such incentives and shifting towards alternative mechanisms, such as capital allowances, enhanced or accelerated deductions, double deductions, and so on
How should taxpayers evaluate whether to pursue an APA versus managing TP exposure through audit defence and litigation, given the unclear environment?
Srivatsan: There are several parameters to consider, such as the timeline within which you want a resolution. An APA takes some time, but the traditional litigation route is typically even longer. The second consideration is how deep it’s going to hurt your pocket. You tend to run a back-of-the-envelope calculation of the effort involved, because an APA requires a significant, deep level of information from the taxpayer. Third is whether the issue is repetitive, with existing legal precedent that would give certainty through litigation, or whether it’s a fact-specific issue with no precedent, needing a different route to certainty. The fourth is corporate governance and how you want to be perceived publicly: some litigated case law gets published, and companies need to consider how that affects their brand.
An APA typically runs for a period of around four to five years, and we’re still seeking clarity in Sri Lanka on how many years an APA can be rolled back retrospectively. It’s prospective, but there’s a question of how far back it can also apply.
It’s a valuable mechanism because it gives bilateral relief if you go for a bilateral APA, whereas going through traditional litigation carries the risk that the position could get challenged again at the other end of a cross-border transaction. It also depends on how dynamic your business is. If you have a routine setup and don’t foresee significant changes in the near future, you may want to sign up for an APA because of the clarity it offers. But if you don’t know how your business will evolve, since you might venture into something new next year, you may not want to lock into an APA, because it comes with a lot of fixed assumptions and conditions that you’re signing up for.
Does the Transfer Pricing requirement apply only to large companies or taxpayers exceeding the documentation thresholds, or does the arm’s-length principle apply to all related-party transactions regardless of their size?
Charmaine: TP applies to everyone, because it’s all about being at arm’s length. There are two aspects to this: the three-tier documentation is mandated only once you reach a certain threshold, but everyone is required to be at arm’s length, whether the transaction is worth Rs10, Rs100, or Rs100 million not as under TP provision but under other section of the Act, which says that the transactions between associates should be at arm’s length standard. The provisions apply regardless of value. So even if you’re small right now, if you have related-party transactions, irrespective of their value, you need to take a look and make sure everything meets this standard.
Being a small company now isn’t a reason to ignore it. Now is the best time to start, in fact, because you can correct things while you’re still small and not yet on everyone’s radar, rather than waiting until you’re at a size where adjustments start getting flagged.
What type of taxpayers or industries should proactively consider entering into APAs in Sri Lanka?
Charmaine: You should be a company with fairly routine and repetitive transactions expected to continue into the near future.
Entering into an APA doesn’t mean you’re completely exempt from scrutiny. What happens is you come to an agreement based on certain assumptions and functions as they exist today, and that agreement holds for the following five years, regardless of how your values and numbers may grow. Your functions and those underlying assumptions have to remain the same throughout. So if you’re in a volatile industry where your business model keeps changing year on year, an APA isn’t really for you. APAs are suitable for recurring transactions where the facts, functions, risks and critical assumptions can be defined with reasonable certainty. They may apply to both routine and complex transactions.
What’s your one key message for CFOs and business leaders in Sri Lanka on managing transfer pricing risk and unlocking opportunities?
Charmaine: I would say: please take a look at your transactions today, have a TP policy in place however little or great the values may be, and make sure it’s implemented across the board, across all entities. So the starting point is to please take a look at it, get yourself assessed, and do a risk assessment to see where you stand at the moment.
Srivatsan: I’d say, as Charmaine mentioned, start with the transfer pricing policy. One aspect we see more than often is a lack of documentation to substantiate what you’re actually claiming, so ensure that whatever business model you adopt, there is real substance behind it. You may want to have funds located in a particular jurisdiction for legitimate business reasons, but it should follow substance. You need to ensure there’s adequate substance behind that positioning, because the world is getting more transparent.
With three-tier documentation, and evolving Pillar One and Pillar Two frameworks, what tax policy is increasingly aiming at is, to reduce the reliance on tax incentives as a differentiator that companies and countries have historically been given to attract investment and make a fairer playing field for all companies and all countries to compete in.