Sri Lanka has recently introduced a maximum 15% tax on individuals earning foreign currency income. These new policies primarily impact freelancers and remote workers who provide their services for organisations and clients outside of the country.
As these new tax policies came into effect from April onward, accountants are proving invaluable resources for freelancers and remote workers in Sri Lanka, according to Sarala Kodagoda, partner, tax and business advisory services at Deloitte Sri Lanka. ‘Their guidance is essential in navigating the complexities of the tax system and optimising financial strategies for the future,’ she says.
The new regulations treat remote workers as employees
Previously in Sri Lanka, both foreign service income and foreign-sourced income were exempted from tax. As most professionals who provide their services to overseas companies will now have to adjust to a new economic landscape, practitioners, Sarala adds, can help freelancers and remote workers minimise their tax burden while ensuring they stay compliant with the law.
New policies
In the Sri Lankan context, many freelancers and remote workers will now have to familiarise themselves with paying tax on their income, says Shavindra Samaratunga FCCA, director of Hayleys Group Services and head of group tax at the Hayleys Plc, a multinational conglomerate in Sri Lanka. It is ‘something new to them’, where these professionals need to ‘assess the impact to their cashflow and savings’.
They’ll also have to adapt to new changes as they bear the tax compliance burden, he adds. While freelancers will have to pay their taxes quarterly by self-assessment, remote workers who are employees of a foreign company that does not have a presence in Sri Lanka will need to pay taxes monthly under the new policies.
‘The new regulations treat remote workers as employees, where you are taxed on your employment income,’ he says. Tax accountants can help them by calculating their monthly tax liability and handling compliances.
Keeping track
The income of both freelancers and small business owners, however, is considered business income, Shavindra explains, which is different to employees who are taxed on their salaries.
What this means is that ‘freelancers and small business owners have to maintain meticulous accounts’, Shavindra adds. This ensures that they can deduct costs that are claimable by law – such as expenses required for internet, software and office space – before calculating their taxable business income. Businesses can claim expenditures that qualify for tax relief, as it would ‘lower their final taxable income’, he says.
A competent tax accountant is very valuable right now for freelancers
Shavindra also speaks about other strategies that freelancers and small business owners can follow to minimise their tax burden while staying compliant, such as looking at ‘unexpired tax losses’ from previous years. If a business lost money in previous tax years, it can take those losses to reduce the amount of profit it pays in tax on the current year.
A new shift
These new tax policies may also influence the decision between freelancing and formal employment, according to Thadsajini Thavachselvam, finance assistant at the non-profit Dabindu Collective.
Formal jobs offer advantages like retirement schemes and social security funds that provide financial benefits to employees after their retirement, she says. Increased compliance and administrative tasks could also push some professionals towards formal employment.
‘Some freelancers may opt for formal jobs due to stable income, job security and employer-covered benefits, while others may still prefer freelancing for its flexibility.’ Those who also earn significantly higher income than salaries offered at formal jobs – even after tax deductions – might still opt for freelancing, she adds.
Meanwhile, those who are formally employed in a local company in Sri Lanka must pay income tax up to 36%, depending on how much they earn as it’s based on a progressive sliding scale.
But there are other valuable aspects to formal employment, especially at a reputable organisation. Aside from the ‘protections of employment and benefits attached’, there’s also ‘the leadership, guidance and sense of community that employees benefit from while being part of a large organisation’, Shavindra says. These are a ‘few salient considerations that individuals should keep in mind beyond tax’.
Strategic support
All this means a competent tax accountant is very valuable right now for freelancers.
They can, for example, ensure ‘all possible tax deductions are claimed and any benefits or incentives available are applied’, Shavindra says. Practitioners can also advise on tax-efficient investments and charitable donations, which provides freelancers and small business owners the scope to ‘plan their tax affairs efficiently within the constraints of the evolving legal framework’.
It’s important to stay up to date in a dynamic financial environment
Accountants can also play a vital role by providing financial and business advice, regular updates on tax law changes, and help optimise the current business structure, Sarala adds. Consulting with a tax professional, planning ahead and making smart financial decisions can help mitigate the impact of new policies. It can ‘ensure a smooth transition under the new regulations’, she adds.
Freelancers who pay taxes on their foreign income abroad can also claim a foreign tax credit in Sri Lanka. ‘It reduces their tax liability, even in the absence of a double taxation agreement between Sri Lanka and the foreign country,’ Sarala says.
Seeking assistance
Without the guidance of practitioners, ‘freelancers will have to handle tax fillings, bank remittances and record-keeping’, which increases the administrative burden they face, Thadsajini says. Accountants can help with ‘keeping good records and tracking all income and expenses regularly by using apps or spreadsheets for easy organisation’. They can optimise tax planning and ‘start preparing early to avoid a last-minute rush.’
Freelancers and small business owners can also prepare for taxes in advance by ‘setting aside a portion of their income regularly to cover tax liabilities and avoid penalties’, Thadsajini says.
As the tax framework is constantly evolving with new requirements, regulations and changes to existing laws, Shavindra says that it’s also important to stay up to date with new information in a dynamic financial environment.
‘It is the networking sessions and resources extended freely by organisations like ACCA that allow freelancers and remote workers to stay updated, and be fully aware of their tax liabilities and commitments,’ Shavindra adds.
