CIMA Directors’ Tax Forum sheds light on Capital Gains Tax and Foreign Exchange Rules

CIMA Directors’ Tax Forum is an annual event conducted by CIMA Sri Lanka Branch to enlighten corporate directors engaged in providing guidance and directions to the affairs of their companies, on the latest developments in the field of taxation. The theme for the 2018 Forum was ‘Capital Gains Tax and Foreign Exchange Rules’. The Sri Lanka Institute of Directors was a joint partner of the event. The event was held on 25th of January 2018 at the Cinnamon Grand, Colombo.

The programme covered an in-depth analysis of the capital gains tax to be introduced from the beginning of the month of April in Sri Lanka under the new Inland Revenue Act No. 24 of 2017. The Presenter Mr Suresh R. I. Perera, Attorney at Law, FCMA and a Board member of CIMA Middle East, South Asia and North Africa (MESANA) Regional Board, opined that the Government of Sri Lanka is compelled to take measures to increase the collection of direct taxes in the country in the context of low Tax to GDP ratio coupled with anomalous Direct Tax to Indirect Tax ratio of 19:81. In relation to Capital Gains Tax, he pointed out that the proposal in the budget speech was only to introduce a tax of 10% on the sale of immovable property but the new Inland Revenue Act of 2017 has legislated income tax on all types of assets - movable, immovable and also on realization of liabilities. However, he expressed doubt with regard to the quantum of tax that may result in due to the measure.

“Income Tax on gains arise not only on sale but on ‘realization’ of assets and liabilities. Assets subject to tax on gains include all types of assets extending to immovable, movable, tangible and intangible, currency, goodwill, know how, right to income or future income, a benefit that lasts longer than 12 months etc. But the word “Liabilities” has not been defined in the Act” pointed out Mr. Perera.

Explaining the rules under the new Foreign Exchange Act (FEA) he explained the criteria for remitting funds outside Sri Lanka and the ability of the PR holders, Dual Citizens and Sri Lankan migrant workers to borrow loans from Sri Lankan Banks. The existing 18 types of Accounts have been streamlined to 9 types of accounts under the new Act. The current names such as Resident Foreign Currency (RFC), Non Resident Foreign Currency (NRFC), Resident Non Nationals’ Foreign Currency Accounts (RNNFCs), Non-Resident Non

National Foreign

Currency Accounts (NRNNFC As) would not be prevalent after 1st April 2018 as these four accounts will be re designated as Personal Foreign Currency Account

(PFCA). The Foreign Exchange Earners Account (FEEA) along with other two accounts will be re designated at ‘Business Foreign Currency Account”(BFCA).

The Regulations issued under the Act also provide details pertaining as to the eligibility of various parties for opening different types of accounts plus the debits / credits to such accounts.

Mr Perera, in his presentation detailed one of the salient features of the FEA, the ‘tax and foreign exchange amnesty’ provision. This provision permits a person to remit money retained abroad back to Sri Lanka without payment of any taxes or being subject to any penalty. The Act also permit for such money remitted to Sri Lanka to be repatriated (taken out) again. He also explained the conditions to be fulfilled to enjoy the benefit under the Amnesty Scheme.

The new Foreign Exchange Act has also introduced a new appellate process whereas under the repealed Exchange Control Act there was no specific appellate procedure in the Act.

The presentation also covered the Tax Governance, different types of tax risks a corporate is exposed to and the tax risk management techniques. The tax risks face by a corporate is twofold; ‘General’ and ‘Transactional’ Tax Risks - the General tax risks entails risk in relation to compliance, planning and accounting. The Transactional Tax Risks refers to tax risks a company is exposed due to undertaking an unusual transaction such as amalgamation, sale or acquisition of a high value asset, launch of a new product or service line, changes in the tax law, technical interpretation variances or failure of administrative procedures.

Mr. Perera explained that the introduction of significant amendments to tax statutes or repealing of a new Act and introduction of a new Act, as in the case of what is happening in the income tax regime in Sri Lanka, requires the Board of Directors to carry out “impact assessments” on their companies to prevent surprises and pitfalls. “Tax health Checks” should be carried out periodically to ensure companies are in compliance with existing tax laws and to avoid sudden high value assessments being raised by the Inland Revenue Department. Further, where a company is being acquired, a tax due diligence should be performed.

Mr. Perera further elaborated that under certain circumstances tax statutes impose personal liability on Directors and principal officers of an organization. The new Inland Revenue Act also has provisions to impose personal liability on Directors. He also mentioned that the time bar for raising assessments has been extended under the new Inland Revenue Act. The four stage appellate procedure applicable for income tax would also undergo certain changes under the new Inland Revenue Act.