Oct Sun 2020

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Withholding Tax Sri Lanka? Here’s Everything You Need to Know

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The Withholding tax was introduced in Sri Lanka as a tax charge on interest payments in 1986. In recent times, withholding tax has been the subject of many changes, including periods where it was completely removed and then re-introduced.

Due to the complexity and the frequency of changes it may be challenging to understand what is considered as WHT, how it is calculated, what are the applicable WHT rates and stay up to date with the latest developments. This article is designed to help you easily understand your responsibilities regarding WHT and the steps you need to take in accordance with the present tax regulations.

Table of Content 
  1. What is a Withholding tax?
  2. Types of WHT applicable payments and rates
  3. What payments are exempted from Withholding tax?
  4. How do I calculate the Withholding tax?
  5. When should you deduct and pay WHT?
  6. How to pay the WHT?
  7. Certificate of deduction 
  8. Penalties for late payment, underpayment, and false statements
  9. How to register as a withholding agent?
  10. Next steps

What is a Withholding tax?

A Withholding tax is a type of income tax which is charged from an individual based on their income level.   The person or the entity, who is in charge of paying the withholding tax is called a ‘withholding agent’.

It is the responsibility of the withholding agent to retain the payable amount under WHT from any type of payments, that are described as per IRD notice, and credit the retained amount to the government.

Types of WHT applicable payments and rates

According to the Department of Inland Revenue, WHT will be charged for the following types of payments, which have a source in Sri Lanka, and paid to non-resident persons, subjecting to some exemptions.

Type of paymentWHT rate
Winnings from lottery, reward, betting, or gambling exceeding LKR 500,000*14%
Sale price payable to the seller of gems through a gem auctions conducted by the National Gem and Jewellery Authority*2.5%
Payments by resident person as a charge, natural resource payment, rent, royalty, premium, retirement payment or other similar payments payable to any non-resident person14%
Interest payments, discounts payable to any non-resident person5%
Payments by a resident person to a non-resident person with regard to land, sea, air transport or telecommunication services as described in section 85(2) on the Inland Revenue Act and Extraordinary Gazette No. 2064/51, subject to provisions of double tax avoidance agreements2%
Source – www.ird.lk

Although WHT is typically only charged from the payments to be made to non-resident persons, in the case of the following payments, they are charged from resident persons as well.

  • Winnings from lottery, reward, betting, or gambling 
  • Sale price payable to the seller of gems through a gem auctions conducted by the National Gem and Jewellery Authority

What payments are exempted from Withholding tax?

  • Amounts from lottery winnings below the amount of 500,000 LKR
  • Payments by resident person as a charge, natural resource payment, rent, royalty, premium, retirement payment or other similar payments payable to any resident person
  • Interest payments, discounts payable to any resident person
  • Interest that has been gathered or obtained from any loan provided  by a non-resident person to any person in Sri Lanka or the government of Sri Lanka
  • Any dividends paid by a resident company to a member if such dividend was obtained or attributable to another dividend received by the same company or another company
  • Any dividends that are paid by a resident company to a member, in the event if such dividends has been subject to withholding under section 84 of the Inland Revenue Act
  • Dividends paid by a resident company to a non-resident member
  • Dividends paid by a company which conducts any of the following business activities and is registered in accordance with the provisions of PART IV of the Finance Act. No 12 of 2012 and falls within the meaning of an agreement entered into with the board of investment of Sri Lanka established Under the Board of Investment of Sri Lanka Law, No. 4 of 1978;
    • Companies that conduct re-exporting activities 
    • Offshore businesses which procure or manufacture goods in one country and sells to another country without the goods entering Sri lanka
    • Companies that provide front-end services to clients that are outside Sri Lanka
    • Headquarter operations leading buyers for management of financial supply chain and billing operations
    • Logistic services which provide bonded warehousing or multi-country consolidation in Sri Lanka
    • Amounts derived from foreign governments subject to provisions of diplomatic immunity or similar laws
    • Amounts derived by international organizations subject to provisions of diplomatic immunity, similar laws or any agreements between the organization and the government of Sri Lanka, in the event such agreement provides a broader exemption than other laws 
    • Any amounts derived by a non-resident person from laboratory service standards certification services.

How to calculate Withholding tax?

When calculating WHT, you can follow the below guidelines.

  1. WHT calculations should be made on the gross amount payable excluding any VAT payments. Once you calculate the gross amount, you need to then apply the tax rate for the relevant category of payments.
  1. In the event where a person wants to transfer the total amount of an invoice to a non-resident person, this will be treated as the net amount. The relevant tax rate should be calculated on the grossed-up amount.
  1. The person making the payment is required to apply the currency exchange rate (selling rate) which is published in the Central Bank Website on the date of remittance, to convert the foreign currency into rupees.
  1. In the event, where an investment is jointly owned, the appropriate payments shall be made according to the percentage held by each party. If the share cannot be ascertained, they will be treated as having equal percentages.

When should you deduct and pay WHT?

The withholding agent must deduct the taxes at the time an amount is paid, credited, re-invested, accumulated, capitalized or made available to a person. 

The agent must pay the collected WHT amount to the Commissioner General of Inland Revenue within 15 days after the end of each calendar month.  Each of these time periods are identified with a period code as below.

Quarter Payment Period From Payment Period To Period Code Due Date Installment No.
First Quarter 01.01.2020 31.01.2020 20010 15.02.2020 1
01.02.2020 29.02.2020 20020 15.03.2020 2
01.03.2020 31.03.2020 20030 15.04.2020 3
Second Quarter 01.04.2020 30.04.2020 20040 15.05.2020 1
01.05.2020 30.05.2020 20050 15.06.2020 2
01.06.2020 30.06.2020 20060 15.07.2020 3
Third Quarter 01.07.2020 31.07.2020 20070 15.07.2020 1
01.08.2020 31.08.2020 20080 15.08.2020 2
01.09.2020 31.09.2020 20090 15.09.2020 3
Fourth Quarter 01.10.2020 31.10.2020 20100 15.10.2020 1
01.11.2020 31.11.2020 20110 15.11.2020 2
01.12.2020 31.12.2020 20120 15.12.2020 3

How to pay the WHT?

The payments must be paid out to the Commissioner General of Inland Revenue (CGIR), – (*Peoples Bank Account No: 014-1002-6-9026620) by using the paying slip issued by the IRD.

(Payment Slip – www.ird.gov.lk)

For the ‘Tax Type Code’ field, you can use the relevant code from below.

  • WHT on interest (43)
  • WHT on other payments (44)
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Certificate of deduction 

Every withholding agent is required to issue a certificate of deduction to each person in the specified format. This certificate shall cover a calendar month and must be served within 30 days of the end of the month.

The certificate needs to comply with the formats as belows.

<insert certificate formats>

Penalties for late payment, underpayment, and false statements

Any type of declaration, statement or a certification which is provided to a bank or any other financial institution is considered as a statement which is made to a tax official. 

Under the sections 179, 180, and 181 of the Inland Revenue Act, penalties are imposed for the following offences. 

  1. Late payment of taxes
  1. According to Section 179, a person who fails to pay all or part of a tax due for a tax period within fourteen days of the due date or by the due date, will be subjected to penalty of 20% of the amount owed as taxes
  2. A person who fails to pay all or part of an installment within fourteen days of the due date or by the due date, will be liable to penalty of 10% of the sum owed as taxes.
  3. If someone has applied for an extension on a form specified ( (1) of section 151 of the IRD act),  they will not be liable for this penalty, unless they cannot pay within the extended time period.  
  1. Underpayment of taxes

According to section 180, if a taxpayer underpays taxes as a result of incorrect statement or omission either intentionally or due to negligence, the following penalties will apply.

  1. A penalty of 75% if the amount of the underpayment is higher than LKR 10 million or higher than 25% of the person’s total tax liability for the period
  2. A penalty of 25% where the above thresholds are not met.  
  1. Making false or misleading statements to a tax official.

Under section 181, if there is a difference between the actual tax liability and the provided statement of the tax liability as a result of a false statement to a tax official the person who provided the statement shall be liable for a penalty.

The penalty will be the amount that has been underestimated or overestimated as a result of the false statement, and which exceeds 50,000 LKR.

However,  no penalty will be imposed in cases where the person who made the statement is unknown, or could not reasonably be expected to know that the information was misleading or false.

How to register as a withholding agent?

Every withholding agent is required to register under the Commissioner General of Inland Revenue, no later than 30 days prior to deducting the WHT.

The registration as a withholding agent, can be done either manually or electronically. There is no difference between the outcome of either of these, and it is completely up to you to choose a method that you prefer.

Manual Registration

Step 1 – You must obtain a Tax Identification Number (TIN number) from any of these government agencies.

– Primary Registration Unit (Located at the 2nd Floor of the Department of Inland Revenue) 

– Relevant regional office (You can find the relevant information from this list)

– Taxpayer Service Unit (TPSU) of the Department of Inland Revenue

Step 2  – Once you obtain a TIN, you must complete the registration form with all the necessary documentation (available at any of the above mentioned locations and from the IRD website)

Step 3 – Present all the documentations to the Tax Type Registration Unit of the Department of Inland Revenue. Alternatively, you can also send the documentation on postal service to the TPSU.

Step 4 – Provided you meet all the requirements, you will receive the tax certificate by mail or you can collect it in person at Inland Revenue Department offices.

Online Registration 

The process to register online changes based on the type of registration you require. 

Source – ird.gov.lk

Next steps

This article provides a detailed guide on everything you need to know about withholding tax, including how to register, how to calculate, deduct and pay withholding tax according to the present regulations.

If however, you need further information or guidance, get in touch with us for a free personal consultation.

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