Introduction The importance of tax varies and it goes beyond providing income to support financially the public sector, investments and the basic needs of citizens. The development of a state has been closely connected to the development of tax system. However, the tax system has not only contributed to establishing states, but also to promoting the states legitimacy and strengthening democracy, as well as to creating economic well-being for the general population. The well known concept of fiscal social contract explains the development of representative states and western countries democracy. The Pretoria-communiqu concludes that more effective tax systems are central for a sustainable development because they can; mobilize the domestic tax base as a key mechanism for developing countries to escape aid or single resource dependency; reinforce government legitimacy through promoting accountability of the government to tax-paying citizens, effective state administration and good public financial management; and achieve a fairer sharing of the costs and benefits of globalization. This discussion concentrates with special focus to the concept of tax residence in Sri Lanka and whether it is unclear and complicated. A person who is a resident in Sri Lanka is assessable to tax on his two main contents which is profits and income where ever arising in or derived from Sri Lanka. The Act provides in Section 79 a conclusive seven (7) different categories which could help to constitute a residence. This discussion will move forward to discuss on those seven different requirements in depth. Tax Residence for Individuals: The test of residence for individual plays a very important place in the statute for residence test. The section regarding to this is 79(2) and it is stated simply with a description of presence of 183 days or more. The simplicity is a feature of imposing tax, but the simplicity itself has made the individual residence concept narrow down too much and made it more unclear. The section 79(3) which refers to an individual residence have been stated in the Budget Speech 2013, under Taxation that this section
to be removed and that only the 183 days rule will apply in deciding an individuals residence status. Thereby with the change of Section 79(3) the Section 79(4) is also influenced and will be take into count as, which has no effect. To prove substantially why the Sri Lankan single statutory definition is complicated and unclear, I will extend my discussion to elaborate on few jurisdictions which has put some effort to make the tax residence definition clearer and less complicated. In United Kingdom they have made changes to Statutory Residence Test (SRT) based on Draft Finance Bill 2013. The intention behind is that a SRT should always consist a simple process and certainty for tax payers with their residence status. Their SRT is in 3 parts named as Part A Conclusive non - residence , Part B- Conclusive residence and Part C- Other connection factors and day counting. Referring to the reference that is provided, it shows how in detail the provision is and they have been able to state the requirements of each of their aspects providing the tax payer less complicity. Making a distinct clarification on those in my opinion stands a very high level of standard in their new SRT provision. They have looked in to depth of this SRT that there have been criticisms too regarding this newly introduced SRT. It has been stated that those definitions could adversely reflect on any individual who bares UK property or has any UK resident family members. It has been also stated that the proposed new rules may also affect individuals accepting work abroad, either coming to the UK or going overseas. At the same time it is very important to note that to work out such a comprehensive standard scheme that the technology should be much advanced. Developing countries such as Sri Lanka should concentrate on technology improvements too while reforming the necessary statutory definitions to make it more effective. As an example New Zealand has created an online facility where you could talk to your tax agent and solve any issue that could arise. In my opinion the newly introduced residence test by UK is a good example for Sri Lanka too because UK too had similar statutory provision previously. With the Budget Proposal of 2013 it seems Sri Lanka has identified that there needs to be some reform in tax residence statutory definitions, but in my opinion it needs to be more comprehensive and extend the reforms to a higher level of standard which is equivalent to the UK newly introduced SRT. Another jurisdiction statute that I would relate in my discussion is South Africa Income Tax Act 1962. With regard to individual tax residence it has two main tests which are ordinary residence test or the physical presence test. Though this piece of legislation is not comprehensive as in UK, it still does provide you with list of clarifications which is useful to determine whether an individual is a tax resident or not.
Also it is important to note that Under South African law, an individual who is a tax resident in another country cannot be considered tax resident in South Africa. Another jurisdiction that I saw with a comprehensive, clear tax residence statutory law definition is the Australian jurisdiction. They have four main tests of residency within the definition of resident in subsection 6(1) of the Income Tax Assessment Act 1936. They are named as the Resides Test , the Domicile Test , the 183 day rule and the Superannuation Test. In my conclusion regarding an individual tax residence status my suggestion is that Sri Lanka should look forward to those jurisdictions who have reformed their statutes with regard to this aspect and try formalizing a comprehensive, simple and clear statutory provision for tax residence, because as I have explained to you the current status of Sri Lanka though gives a simplicity by surface, it is complex when it goes into depth of it. Tax Residence for Companies or body of persons: The next important factor regarding a place of residence can be attributed to a company or body of persons. This has been revolved around whether the company resides where the control and management of its business is exercised. Therefore under Sri Lankan law there will be only two requirements which need to fulfill and they are; company/body of persons has registered/principal office in Sri Lanka or where the control and management of its business are exercised in Sri Lanka. Though this statutory provision fulfill a wide range of the concept, that itself has made it be more complicated by the difficulty of defining the term control and management. A finding expressed in words which have the same meaning as the words in the section is sufficient to bring the company within the definition. Past case law decisions has been used to signify this definition in the control and management of the affairs of the company, the head and seat of the affairs of the company, and the control of the affairs of the company. It has been also decided that a company may have several places of business & only place where the powers of control and management are exercised will be a place of residence. E. Gooneratne has also made reference to state that where there are two Boards with separate functions it is necessary to distinguish between acts done by the Directors in performing their duties under the Companies Act and acts done in earning the profits from the business of the Company. It is important to note that the control and management of business may be removed from one country to another without any change in the place of business and the residence of a company is changed when the control and management is removed from one country to another too. Referring to the
registration of a Company under Section 113(1) and (2) of Companies Act No. 07 of 2007 every company shall have registered. Therefore with the above discussion that I have made, it is evident that there are two (2) kinds of reforms that Sri Lanka should look forward to. Firstly, there should be a clear interpretation from the judiciary to define this context of company been a resident or not and secondly, if it is a company locally reside to use the control and management test and if it is a unit based foreign company to use the place of effective management test. In my opinion those two reforms could lead the statutory provision of tax residence of companies to a clear and less complex statutory definition of identifying company tax residency. Accordingly I have discussed in this report the areas that in my opinion which do not have a full statutory definition in Tax residence and also the areas which are complicated and unclear in Sri Lankan jurisdiction. The discussion is extended with reference to other jurisdictions and suggested the reforms that Sri Lankan regime could have, for a clear and less complicated tax residence statutory definition.