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U.S. Income Tax Return Preparation and Advice for American Citizen (Expatriates) Living in Sri Lanka




At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Sri Lanka for over 8 years. Our clients hail from all parts of the country - Colombo and Jaffna, Galkissa and Moratuwa, Negombo and Kandy.





As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country. 


We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS


The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.


We have many clients living in Egypt and know how to integrate your U.S. taxes into the local income taxes you pay.  Any Egyptian income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.

As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end.  (You cannot file using the calendar year as is standard in Egypt for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.

There are other forms which must be filed if you have foreign bank or financial accounts;  foreign investment company; or own 10% or more of a foreign corporation or foreign partnership.   If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form.  These penalties are due regardless of whether you owe income taxes or not.

We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.

Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.



Below we include information on the Sri Lankian Tax System for the American Expatriates.

Sri Lanka personal income tax rates are progressive to 35%.

Monthly remuneration                       Tax
0 - Rs. 400,000                                  5%
Rs. 400,000 - Rs. 800,000                 10%
Rs. 800,000 - Rs. 1,200,000              15%
Rs. 1,200,000 - Rs. 1,700,000           20%
Rs. 1,700,000 - Rs. 2,200,000           25%
Rs. 2,200,000 - Rs. 2,700,000           30%
Over Rs. 2,700,000                           35%

 

Basis – Residents are taxed on worldwide income; nonresidents are taxed only on Sri Lankan-source income.

Residence – An individual is deemed to be resident in Sri Lanka if he/she is physically present in Sri Lanka for a period of 183 days or more within 1 year of assessment (1 April of Year 1 to 31 March of Year 2). The concepts of domicile and citizenship are not applicable. If a person is deemed to be resident for 2 or more consecutive years, he/she is deemed to be a resident until absent from Sri Lanka for a continuous period of 12 months.

Tax Filing status – Married couples are assessed separately.

Taxable income – Taxable income is classified under various "heads": income from a trade, income from employment, income from rentals, dividends, interest and royalties and other income.

Taxation of Capital gains – There is no capital gains tax in Sri Lanka.

Tax Deductions and tax allowances – Individuals are granted an allowance of SRL 300,000.

 

Other taxes on individuals:

Stamp duty – Stamp duty is levied on the transfer of immovable property and certain documents, with the rates set by the provincial and central governments.

Capital duty – No
Capital acquisitions tax – No
Real property tax – No
Inheritance/estate tax – No
Net wealth/net worth tax – No

Social security contributions – The employer contributes 12% and the employee 8% of remuneration to the Employees Provident Fund (EPF). The employer also contributes 3% of employee remuneration to the Employee Trust Fund. Employees that have completed 5 years of service are entitled to a gratuity at the time of retirement at a rate of 50% of the last drawn salary multiplied by the number of years of service at the time of retirement.

Other – A debit tax is levied on funds in a current or savings account maintained in a commercial bank.

Sri Lanka Tax year – Income tax is imposed based on an assessment year, which is a 12-month period from 1 April to 31 March.

Filing of tax and tax payment – The annual tax return must be furnished before 30 September of the following year of assessment. Taxes are payable on a quarterly basis under a self assessment regime, as follows: the first quarter payment is due on or before 15 August of that year of assessment; the second payment by 15 November of that year of assessment; the third quarter payment by 15 February following that year of assessment; and the fourth quarter payment by 15 May following that year of assessment.

Penalties – Penalties apply for failure to pay tax due in a timely manner or for failure to file a return.

Sri Lanka Corporate Tax

Sri Lanka corporate tax rates are up to 35%.

Companies with taxable income less than SLR 5 million: 15%
Venture capital companies: 20%
Quoted companies listed less than 5 years: 33 1/3%
Companies listed more than 5 years: 35%
Any unit trust or mutual fund: 10-20%
Hindu undivided families: 30%
Charitable Institutions(including corporate bodies): 10%
Executor (other than trustees under last wills) and receivers (other than liquidators): 30%
Trustees (including trustees under last wills): 30%
Partnerships: 30%
Any Co-operative Society registered or deemed to be registered under the Co-operative Societies Law No.5 of '72 On the taxable income: 5%
Employees Trust Fund and Provident or Pension Funds: 10%
Liquidators of companies: The rate of tax chargeable in respect of the company concerned
Mutual life assurance companies: 20%

 

Residence – A company is resident in Sri Lanka if its principal office is in Sri Lanka or if it is managed and controlled there.

Basis – Residents are taxed on worldwide income; nonresidents are taxed only on Sri Lankan-source income. Foreign-source income derived by resident taxpayers is subject to corporate income tax in the same manner as Sri Lankan-source income. Branches are taxed in the same manner as domestic companies.

Taxable income – Taxable income is classified under various "heads": income from a trade, income from rentals, dividends, interest and royalties and other income.

Taxation of dividends – Dividends paid by a resident company (to a resident or nonresident company) are not included in the assessable income of the recipient if tax has been withheld from the payment by the payer or the dividends are paid out of dividend income received by the payer.

Losses – Losses incurred in the operation of a trade or business may be carried forward indefinitely but only up to 35% of statutory income. The carryback of losses is not permitted.

Capital gains – There is no capital gains tax in Sri Lanka.
Surtax – A Social Responsibility Levy is imposed on companies at 1.5% of the income tax liability.
Alternative minimum tax – No
Participation exemption – No
Holding company regime – No
Foreign tax credit – Tax paid in a foreign country that does not have a tax treaty with Sri Lanka may be deducted.

Tax Incentives – Various tax holidays, investment incentives, exemptions and reliefs are available, and concessionary rates are granted to certain entities.

 

Withholding tax:

Dividends – Dividends paid to a resident or nonresident are subject to a 10% withholding tax unless the rate is reduced under an applicable tax treaty.

Interest – Interest paid to a nonresident is subject to a 15% withholding tax unless the rate is reduced under an applicable tax treaty. Interest paid to residents by banking and financial institutions is subject to a 10% withholding tax.

Royalties – Royalties paid to a nonresident are subject to a 15% withholding tax unless the rate is reduced under an applicable tax treaty.

Branch remittance tax – In addition to paying the standard corporate income tax, branches are subject to a 10% tax on remittances to a foreign head office.

 

Other taxes on corporations:

Capital duty – No
Payroll tax – The employer is required to deduct PAYE tax.
Real property tax – No

Contributions to social security system – The employer contributes 12% and the employee 8% of remuneration to the Employees Provident Fund (EPF). The employer also contributes 3% of employee remuneration to the Employee Trust Fund. The employer pays a gratuity for any employee who has completed 5 years of service at a rate of 50% of the last drawn salary multiplied by the number of years of service at the time of retirement.

Stamp duty – Stamp duty is levied on the transfer of immovable property and on certain documents, with the rates set by the provincial governments. The issuance or transfer of company shares also is liable to stamp duty.

Transfer tax – A non-citizen who acquires immovable property in Sri Lanka must pay additional stamp duty of 100% of the value of the property. If the property is a condominium, transfer tax is applicable up to the third floor; units on the fourth floor and above are not liable to transfer tax.

Other – An Economic Service Charge (ESC) is imposed on any person carrying on a trade, business, profession or vocation. The ESC rate is 0.25% to 1% on total turnover or receipts if in excess of SRL 7.5 million or USD 75,000 per quarter. This may be set off against the income tax payable by that person and carried forward for 4 years, but no refund is available.

 

Anti-avoidance rules:

 

Transfer pricing – Profits and income arising, derived from or accruing from, or any loss incurred in transactions between 2 associated parties must be determined with regard to the arm's length price. The Inland Revenue Department has issued specific regulations with respect to documentation and methods for determining the arm's length price for transfer pricing purposes.

Thin capitalisation – Deductions for interest paid by a subsidiary on loans obtained from a holding company or another subsidiary, or vice versa, may be restricted.

 

Controlled foreign companies – No
Disclosure requirements – No
Other – A GAAR applies when transactions do not reflect economic reality.

Sri Lanka Tax year – Income tax is imposed based on an assessment year, which is a 12-month period from 1 April to 31 March.

Consolidated returns – Consolidated tax returns are not permitted; each company must file a separate return.

Tax Filing requirements – Every resident and nonresident company is required to furnish a tax return before 30 September of the year following the year of assessment. Advance payments of tax are required on a quarterly basis.

Penalties – Penalties apply for failure to pay tax due in a timely manner or for failure to file a return.

Rulings – Rulings may be obtained on the interpretation of statutory provisions. However, there are no rules allowing APAs.

Sri Lanka VAT (Value Added Tax)

The standard rate of VAT in Sri Lanka is 12%, with a reduced rate of 5% applying to essential items. Certain supplies are zero-rated or exempt. Tax rate on luxury goods is 20%.

Taxable transactions – VAT is levied on the supply of most goods and services, as well as the import of goods. Retail and wholesale businesses that supply goods are subject to a turnover tax of 1%.

Registration – Any person who supplies goods and services for value at SRL 650,000 or more per quarter or SRL 2,500,000 per annum is liable to VAT and must register with the Inland Revenue Department. Voluntary registration is permitted irrespective of the threshold until turnover exceeds SRL 3 million per annum and SRL 750,000 per quarter for a 3-year period, whichever occurs earlier.

Filing and payment of tax – VAT returns generally must be filed every 3 months, although monthly filing is required in some circumstances..