This brief note encapsulates the guidelines under the circular issued by the Department of Inland Revenue dated June 8, 2020 further to the changes proposed by the Commissioner General of Inland Revenue onApril 6, 2020 (Reference No. PN/IT/2020-03 (Revised)) in line with instructions stipulated by the Ministry of Finance.
The guidelines set out how Withholding Tax and Advance Income tax shall be deducted from payments such as interest, discounts, and income payable from Islamic financial transactions to any deposit holder.
WITHHOLDING TAX (WHT)
From whom the deduction should be made?
The important point to be noted here is that WHT will only be deducted from interest or similar kind of payments made by Banks or Financial Institutions to non-resident individuals. For further clarity these payments are detailed in the circular as being in the form of either interest, discounts, income received from Islamic Financial transactions “which has originated (source) in Sri Lanka.” The rate of deduction of WHT shall thereby be 5%.
When should the deduction be made?
The circular further presents detail as to the conditions applicable in the case of non-resident individuals who are citizens of Sri Lanka. If the individuals aggregate interest income or similar kind of payment from a Bank or Financial Institution exceeds Rs. 250,000/- per month or Rs. 3,000,000/- per annum, WHT is deductible from that income.
The circular outlines that, for the purpose of identifying whether an individual’s assessable income exceeds this limit or not; a declaration must be obtained by the Bank or Financial Institution from that individual or their authorised agent, thereby being able to determine whether the WHT deduction is necessary or not.
How the deduction should be made?
Whenever any Bank or Financial Institution receives a declaration to deduct the WHT, the deduction should be made on the amount stated therein. The circular expressly stipulates that this deduction should be made irrespective of whether or not the assessable income exceeds the aggregate of Rs. 3,000,000/- for the year of assessment.
In all other circumstances the WHT should be deducted based upon the total gross interest payment.
Are there any concessions available?
A concession may be obtained for the deduction of WHT if the provisions of any relevant Double Tax Avoidance Agreement between Sri Lanka and the country of residence of the non-resident individual concerned provides for it.
In brief a Double Tax Avoidance Agreement would essentially provide relief to individuals, in that they would be exempt from taxes twice, for the same income. Thus in terms of WHT deduction, the individual concerned, may pay the lower WHT rate when the two relevant rates are compared. Whoever makes the payments thereafter upon comparison, will be required to obtain a Tax Clearance Certificate from the Department of Inland Revenue and the lower rates will be taken into consideration, if they are deemed applicable when issuing the Tax Clearance Certificate.
For this purpose, the Bank or Financial institution making the interest payment may direct the individual claiming such a concession to obtain a tax clearance certificate from the Inland Revenue Department, after which WHT shall be deducted accordingly.
Special Circumstances
In addition, gross interest or similar payments are considered as sources of interest income, which are subject to WHT deductions.
Any amount considered to be in excess of the original payment, shall also be subject to such deduction. Moreover, if a Bank or Financial institution wants to pay the total due interest to any non-resident person, the said total amount sought to be paid will be treated as the ‘net amount’ (i.e. an amount already subject to tax deductions) and the relevant WHT should be deducted based on the ‘grossed-up amount’. (I.e. the amount prior to such tax deductions)
Alternatively, where a declaration is made in terms of interest payments due for investments that are owned jointly; interest payments to such joint owners should be apportioned in accordance with the individual’s interest. Where such interests cannot be clearly identified, payments to such joint owners will be made equally.
Exemptions
The circular furthers its scope to illustrate circumstances where WHT deductions shall be exempted. For instance;
If the interest is received by a person outside Sri Lanka for a loan granted to a person in Sri Lanka or to the Government of Sri Lanka WHT deductions are exempted.
If the interest is received by a person to whom the amount lies to his credit in foreign currency in a foreign currency account which is in a commercial/specialised bank as approved by the Central Bank of Sri Lanka.
Where the income is earned by a non-resident person through either an interest, discount or realisation of any gain on a sovereign bond (can be denominated in local or foreign currency)
Where the income is earned by any person, either by the payment of an interest or discount on any sovereign bond denominated in foreign currency. This may also include Sri Lanka development bonds issued by or on behalf of the Government of Sri Lanka.
If the amounts have been derived by a foreign country to the extent specified under a diplomatic immunities law.
Where amounts have been derived by an international organisation to the extent specified under a diplomatic immunities law or any agreement between that organisation and the government of Sri Lanka.
Exemptions shall also apply where an issuer of any sovereign bond denominated in foreign currency on or after the 21st October 2008 by or on behalf of the government of Sri Lanka, pays an amount equal to the interest, discount paid or allowed to any non-resident person or a licensed commercial bank in Sri Lanka.
ADVANCE INCOME TAX (AIT)
From whom the deduction should be made?
In terms of an AIT, it is important to note that it shall be deductible from any interest payment made to a resident person. However, it is subjected to the consent of that person and as such would not be deductible unless this consent is given.
When should the deduction be made?
In order for the AIT to be deducted the resident person may make a declaration expressing his/her consent to the said deduction, after which AIT shall be deducted from payments derived from any bank or financial institution which is either interest, discounts, or income from Islamic transactions, and which have its source in Sri Lanka.
How the deduction should be made?
The rate of deduction in the case of a resident person shall be such that the AIT shall be deductible from any amount of interest received by that person from the Bank or Financial Institution at a tax rate of 6%, 12% or 18%. The tax rate most appropriate should be declared by such an individual in his declaration.
In contrast, where the Declarant is a resident person other than a resident individual, the AIT shall be deductible at certain tax rates depending on the type of entity concerned.
For instance: – Partnership= 6%, Charitable institution= 14%, Employees trust funds, provident fund, pension fund or terminal funds= 14% and Other resident entities including resident company= 24%
COMMON GUIDELINES FOR WHT AND AIT
When should the tax be deducted? The tax should be deducted at the time that the Bank or Financial institution pays, credits, re-invests, accumulates, capitalises or makes available the relevant amount to the person.
How will the deducted tax be paid to the department of Inland revenue? Upon deducting the WHT or AIT the Bank or Financial Institution making the said deduction shall pay the relevant amount to the Commissioner General of the Inland Revenue Department within fifteen (15) days after the end of each calendar month.
What proof shall be available that the said taxes have been paid? The Bank or Financial Institution deducting the WHT or AIT must issue a certificate relating to the relevant deduction to every person. The certificate shall cover a calendar month and should be served within thirty (30) days after the end of month or as approved by the Commissioner General of Inland Revenue.
Consequences of false or misleading statements- Any declaration, statement or certificate provided to a Bank or Financial Institution should be accurate, since penalties can be imposed for false or misleading material.
Are there any responsibilities imposed on Banks or Financial Institutions?
Responsibilities would include, when deducting any WHT or AIT they must be a registered Withholding Agent under the Commissioner General of Inland Revenue, and if they are not so registered they must obtain a registration number form the Commissioner General at least thirty (30) days before commencing the deduction of the WHT or AIT.
However, in respect of deducting AIT, separate registration is not required, being a registered Witholding Agent would suffice. Such Registered Agents are further required to maintain proper records in accordance with the given formats and furnish them at the request of any tax official for inspection. Schedules to the Annual Statements should also be submitted on WHT and AIT deductions.
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