Taxation of foreign exchange earnings and other matters | Sunday Observer

Taxation of foreign exchange earnings and other matters

This is in response to the article ‘Awareness Campaign on new tax law necessary - Experts’, which appeared in the Business Observer of Sunday, April 8, 2018.

Foreign exchange earnings -

There is no blanket income tax exemption on foreign exchange earnings, in the New Inland Revenue Act. Further, there is no specific exemption up to US $ 100,000, applicable to individuals.

However, there is a relief given under paragraph 2(e) of the Fifth Schedule to the new Act, as follows -

“In the case of a resident individual or partner of a partnership with income earned in foreign currency in Sri Lanka, from any service rendered in or outside Sri Lanka to any person to be utilized outside Sri Lanka. Rs. 15,000,000 for each year of assessment, up to the total of such income for the year”.

Accordingly, this relief is applicable only to resident individuals. There is a problem with regard to a partner of a partnership when such partner is a corporate body and not an individual.

The type of foreign currency has not been mentioned. The important requirement is that the income should have been earned in foreign currency in Sri Lanka. Since the services can be rendered in or outside Sri Lanka, the income earned in foreign currency in Sri Lanka may be understood as foreign currency received in Sri Lanka.

However, nothing has been mentioned about remittance of such foreign currency to Sri Lanka through a bank.

Further, if the services were rendered in Sri Lanka, the relevant individual may receive his earnings in foreign exchange, directly in Sri Lanka.

Since, this is not an exemption, but a relief, the individual will have to declare such earnings in his assessable income and deduct the relevant relief, in arriving at his taxable income.

Another, problem, with regard to the Rs. 15,000,000, whether it is gross income earned or the assessable income after allowable deduction, has not been clarified.

In relation to non-resident individuals, the treatment is very clear. Their foreign earnings, when earned, will not be liable to income tax in Sri Lanka. Any remittance of such earnings to Sri Lanka cannot be considered as income arising or derived from Sri Lanka and therefore, will not be liable to income tax in Sri Lanka, when such earnings are remitted to Sri Lanka.

However, Section 69 of the New Act which deals with the residence of an individual does not deal with the situation in which a “individual resides in Sri Lanka” who is a resident, could have become a non-resident.

However, the question raised by many was in relation to interest earned in foreign currency on such remittances deposited in Sri Lanka, whether the individual is non-resident or resident. Up to 31.03.2018, such interest income was exempted but from 01.04.2018 no such exemption.

Lower tax rate of 14% for exports -

It is important to note that this lower rate has been given only to companies.

Although, the meaning of ‘export’ has been expanded beyond any imagination, by including certain activities considered as ‘specified undertakings’, this relief cannot be enjoyed by individuals and partnerships engaged in exports.

Therefore, income from exports by companies will be liable to tax at 14%, whereas individuals and partners will be paying tax at higher rates going up to 24%. Isn’t it a violation of equality?

Even in the case of a company, this lower rate is applicable only where such company has 80% or more of the gross income from exports.

Double tax relief -

According to the provisions of the new Inland Revenue Act, to claim foreign tax credit, a Double Tax Agreement is not necessary.

Capital Gains Tax -

There is no Capital Gains Tax under the new Inland Revenue Act. The ‘Gains’ from realisation of ‘assets’ have been included under the four main sources of income; i.e. business, employment, investment and other income and the assessable income form gains will always be a part of assessable income from main sources as mentioned above.

There can be a problem when a person not having any income from business, employment, investment or any other source, having only a ‘gain’ from realisation of assets. The question is how to charge tax on such ‘Gain’ made by such person on the realisation of any asset, if such asset was not an ‘investment asset’ as defined in the Act?

Senior citizens -

Senior citizens have not been exempted from income tax. But the pension paid by the Government, any balance from an approved provident fund; share of investment income received from other provident and similar funds; any annuity purchased for life or for a period not exceeding 10 years; interest income from deposits with the banks or financial institutions up to Rs. 1,500,000 have been exempted.

Losses B/F -

According to my understanding of the provisions of the new Act, specially the provisions of Section 203(2), there is a ‘bridge’ between the ‘previous year of assessment’ under the repealed Act and the new Act. As a result, any allowable loss carried forward, under the repealed Act from the y.a. 2017/18, may be claimed under the new Act in the y.a. 2018/19. However, such loss will be subject to the new conditions imposed by the new Act.

Legality of the D.T.R. Agreements -

Double Tax agreements were always considered as superseding the provisions of the Inland Revenue Acts. Certain provisions in Section 199 may solve any problems regarding the validity of such agreements.

Unabsorbed Capital Allowance -

There are no unabsorbed capital allowances. Only the Tax WDV of the relevant asset. Any one reading paragraph three of the Fourth Schedule to the new Act can find out a solution.

Existing tax holidays -

Under S.9 of the new Act, the exemptions granted under the repealed act cannot be considered. But any exemptions granted under any law or agreement (such as BOI or SDP) which are valid as at 01.04.2018, will be applicable under the new Act.

Conclusion -

If the country wants an increase in direct taxation then such increase has to be recovered from the individuals and entities who or which are liable to tax under the relevant legislation. If the ‘ability to pay’ principle has not been violated, the measures adopted in the new Inland Revenue Act, may have to be accepted.