📈 Transfer Pricing Evolution in Sri Lanka’s Knowledge & Innovation Sector

Deloitte Sri Lanka and SLASSCOM recently highlighted a strategic shift in transfer pricing (TP) for the ICT/BPM and innovation sectors, moving from basic compliance to a core business strategy following the end of tax holiday regimes. • Strategic Shift: With the Inland Revenue Department’s (IRD) new Advance Pricing Agreement (APA) framework introduced in January 2025, firms can now secure prospective tax certainty for up to 4 years, reducing audit risks and double taxation. • Regulatory Focus: The government is intensifying scrutiny on intra-group transactions to ensure they meet the "arm’s length principle." This aims to accurately recognize taxable profits in Sri Lanka and bolster foreign currency inflows from exports. • Key Requirements: • Alignment of pricing with economic substance (where decisions are made and risks managed). • Robust documentation of DEMPE activities (Development, Enhancement, Maintenance, Protection, and Exploitation) of intangibles. • Use of appropriate billing models: Cost-plus for routine services vs. Profit-split for complex value-sharing. • Compliance Framework: Businesses must maintain detailed Local Files, Master Files, and Country-by-Country Reports. Key dispute areas include FX treatment, ESOPs, and margin computations. • Sector Impact: As a major contributor to national export earnings, the Knowledge and Innovation sector's adoption of stable TP policies is seen as vital for long-term global competitiveness and transparency.