Sri Lanka Double Taxation Avoidance Agreements: What You Need to Know
Double taxation essentially occurs when an individual or company is taxed twice on the same income or asset. To prevent this, many governments have entered into double taxation avoidance agreements (DTAAs). These agreements ensure that taxes paid in one country can be credited against the tax payable in another country, thereby avoiding double taxation.
Sri Lanka, like many other countries, has entered into DTAAs with various countries across the globe. These agreements not only prevent double taxation but also facilitate cross-border trade and investment by reducing the tax barriers.
Some key aspects of Sri Lanka`s DTAs include:
1. The number of DTAAs:
Sri Lanka currently has DTAAs with 39 countries across the world. These agreements cover various areas of income, including business profits, income from employment, dividends, interest, royalties, capital gains, and shipping and air transport.
2. Withholding tax rates:
One of the key components of a DTAA is the withholding tax rate for each type of income. In Sri Lanka, the withholding tax rates for business profits, dividends, and interest range from 5% to 15%. For royalties, the rate is generally 10%.
3. Reduced tax rates:
Another important feature of a DTAA is the reduced tax rates on certain types of income. For instance, Sri Lanka has reduced the tax rate on royalties paid to resident taxpayers of treaty countries.
4. Scope of DTAA:
The scope of a DTAA varies from agreement to agreement. Some DTAAs only cover certain types of income, while others cover all types of income. Moreover, some agreements are more beneficial to one country than the other, depending on the economic conditions and investment opportunities.
5. Tax residency:
DTAAs also provide clarity on tax residency, which determines the country where an individual or company is liable to pay taxes. A person or company can be resident in more than one country for tax purposes. The DTAA establishes the criteria for determining residence and provides a mechanism for resolving disputes.
In conclusion, DTAAs play a crucial role in promoting cross-border trade and investment by reducing tax barriers and preventing double taxation. Sri Lanka`s DTAA network covers a broad spectrum of countries and income types, and offers various benefits to companies and individuals engaged in international business activities. It is crucial for businesses to understand these agreements and use them to their advantage.