Sri Lanka has a network of almost 42 double taxation treaties (DTAs), which are aimed towards the elimination of double taxation. With globalization, cross border trading is a key in any economy. The use of DTAs was discussed in detail at the seminar organised by the Association of Chartered Certified Accountants (ACCA) on ‘An Insight to Double Tax Treaties’ at The Kingsbury Hotel recently. The keynote speakers were KPMG Principal Tax and Regulatory Suresh R.I. Perera and former Inland Revenue Commissioner General and former Finance Ministry advisor on fiscal affairs Dayani De Silva. Explaining the role and fundamental concepts of DTTs, creation of permanent establishment (PE) under DTT,
De Silva said a typical DTA will contain articles covering various areas. The DTTs are vital in order to eliminate double taxation, reduce withholding taxes on cross-border investments and prescribe how certain profits are to be calculated. She explained the process of entering into a DTA, where the two countries will start off with a model convention, which is a template containing the standard articles. Each country will come to the negotiating table with its list of conditions. The treaty that is ultimately signed is therefore the culmination of rounds of negotiations, compromises and tradeoffs. She said that this was the reason why every treaty is unique and the particular treaty must be referred to whenever an issue arises pertaining to the two countries. She further said that PE is an important concept relating to business income in accordance with accepted principles of international taxation. She went on to explain the definitions of PE, which come under three broad categories that comprise of Basic rule (asset type) PE,
Construction/Service clause (activity type) PE and Agency type PE. She also emphasized the difference between the UN model and the OECD model especially in relation to PE. She further stated that a PE would only be taxed on the profits attributable to the PE as per Article 7, Business profits of the DTA. Suresh R.I. Perera in his address referred to the different model conventions and stated that Article 2 listed the taxes to which the DTT is applicable. He referred to examples and mentioned that most double tax treaties apply only to income tax and few treaties specifically refer to income tax on the Board of Investment (BoI)-registered enterprises. He referred to the concept of ‘Resident’ and the rules to apply to ascertain the country of residence, which is fundamental to identifying the applicable DTA.
He mentioned that the article related to ‘Dividend’ ‘Interest’ and ‘Royalty’ are significant and that for transaction between treaty countries the tax rates provided in the DTT would apply. He referred to the tax rates provided in selected treaties and also highlighted that the tax rate applicable for dividend payment is only 7.5 percent as per the new Sri Lanka India DTT. The other key topics discussed include relief for expatriates under the DTTs and methodologies of elimination of double taxation under the treaties.