Stricter punishments mean that contractor compliance in Sri Lanka is set to become far more complicated

Contractor compliance in Sri Lanka

12th July 2019

An island famed for its tea, tourism and test cricket, Sri Lanka is a country on the up, recently transitioning from a rural-based society towards a modern, urbanised economy built on a foundation of manufacturing and services. The destination has made significant progress in its socio-economic and human development indicators, and has seen a robust economic annual growth of 6.4 % over the course of the 2003-2012 period – well above its regional peers.

However, as with Pakistan last week, and many countries across the globe, Sri Lanka is clamping down on tax crime, with authorities recently increasing the legal penalties for wrong-doers. Those wanting to work in the burgeoning economy will need to be aware of these latest risks. Here’s what you need to know about contractor compliance in Sri Lanka.

Contractor compliance in Sri Lanka

The Inland Revenue Act (IRA), enacted in Sri Lankan Parliament last year, has stipulated that there will be heavy punishments for those convicted of evasion. The IRD, Sri Lanka’s tax authority, has also announced that any informant providing information on tax evaders will be offered a reward of 10% of the additional surcharge and total fine recovered.

According to the new Act, a fine of Rs. 10 million or imprisonment for up to two years will now be imposed on those guilty of evasion. This is a marked shift from the previous punishment of six months. Furthermore, a person who fails to comply with a request for information made under this Act, shall be liable for a penalty of up to Rs.1 million.

A person who wilfully impedes or attempts to impede the IRD in the administration of this Act shall be guilty of an offence and shall be liable to a fine not exceeding Rs.1 million or to imprisonment for a up to a year. Finally, a penalty of up to 2% of the total transaction value could be imposed on any Sri Lankan company that violates transfer pricing rules by not disclosing any information required for transactions between related parties.

The legal bit

While this latest act has made contractor compliance even more complicated in Sri Lanka, there are a few long standing tax concerns that contractors need to be aware of:

Most importantly, contractors will require a work permit. In order to obtain this, professionals must first have a local sponsor that will act as contractor’s employer for the duration of the contract. Once this permit is in place, contractors will be paid as an employee in Sri Lanka by the company that sponsored the permit, with taxes deducted at source. In terms of how much this will likely be, total deductions from income in relation to taxes will be around 33%.

It’s important to be aware that working in Sri Lanka without a valid visa is illegal and can lead to deportation. It is strongly recommended that contractors speak with the company managing their contract to find out whether they are able to assist with the work permit application and taxes in country.

Contractors need to be aware

As authorities worldwide seek to clampdown on fraudulent behaviour, staying ahead of legislative changes and ensuring you abide by local laws can be hugely challenging. However, the penalties for getting compliance wrong make taking correct action critical. Therefore, whether you’re looking at work in Sri Lanka, or anywhere overseas, and you want to make sure you are compliant in your chosen destination, we strongly advise the use of an expert contractor management service. Contractors cannot afford to be complacent when it comes to international compliance, and by investing in an expert management service, you can rest assured that any risk is managed for you, allowing you to focus on the job at hand.


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