Papua New Guinea’s new, modern Income Tax Bill 2025 was passed by Parliament on 20 March, although it is yet to be certified into law. Karen McEntee, Partner, Business & Tax Advisory in KPMG’s PNG office, analyses the key reforms.

The 2025 Income Tax Amendment Bill. Credit: BAI

Papua New Guinea’s new Income Tax Bill 2025 was passed in Parliament on 20 March. It is yet to be certified into law. The Bill represents a comprehensive modernisation of the country’s tax framework. Effective from 1 January 2026, following a cooling off period, the new legislation introduces significant structural changes to align with international standards while addressing PNG-specific economic conditions.

KPMG’s Karen McEntee

While the initial objective had been a simplification and consolidation of the Income Tax Act 1959, one of the oldest income tax acts in the world, many policy changes have made their way into the new Bill. The number of sections has been halved, the length reduced by 80 per cent and the language simplified. The modernisation includes major policy reforms, minor policy reforms and technical amendments. Some changes may even benefit taxpayers.

The legislation will be supported by regulations providing administrative mechanisms, substantiation requirements, and practical implementation frameworks. The Regulations have not yet been published. Comprehensive transitional provisions ensure business continuity while enabling the shift to the new system. Updates are required to the Tax Administration Act to ensure it aligns with the Income Tax Act – these are to follow at a later date.

A major advantage of the Act is that it brings together into one place various disparate exemptions and treatments previously codified in some cases in legislation other than the Income Tax Act. In our view, the new Income Tax Act attempts to strike a balance between international best practice and local economic realities. While introducing more sophisticated mechanisms for countering tax avoidance, it maintains important concessions for key sectors and provides clear pathways for compliance.

Key reforms include:

Employment income

The new Income Tax Act consolidates and refines the taxation of employment income in PNG, defining it broadly to include all forms of remuneration while preserving key principles from the previous regime.

The legislation clarifies the tax treatment of non-cash benefits with a comprehensive valuation framework and the codified 60/40 rule for salary packaging arrangements.

For the first time, the Act introduces specific provisions for employee share schemes, resolving previous uncertainties by establishing clear taxing points and valuation methodologies. Notably, the Act expands exemptions for non-resident employees and maintains essential compliance requirements, including withholding obligations for employers.

These provisions collectively address modern employment arrangements while preserving important PNG-specific concessions for housing, transport, and other benefits.

Business income

The new Income Tax Act largely preserves the fundamental structure of business taxation while introducing important refinements and new provisions. The central elements of company income tax remains unchanged – the core principle is still to tax a PNG company’s annual net gain derived from its business activities at the 30 per cent tax rate.

The foundational formula for calculating taxable income continues to be the difference between assessable income and allowable deductions for a taxpayer in a tax year. This maintains continuity with the existing tax framework while incorporating targeted changes.

For most businesses, the general scope of what constitutes assessable income and what qualifies as allowable deductions remains largely familiar. This provides welcome certainty and stability for taxpayers while the new provisions are incorporated into tax planning and compliance processes.

The Act introduces notable refinements in several key areas, however, ranging from uniform asset rules and enhanced depreciation provisions to innovative approaches for business intangibles and international transactions. These changes reflect modern business practices and international tax trends, creating a more robust and coherent framework for business taxation.

Perhaps the most exciting and useful aspect, if tax can ever be said to be exciting, is the introduction of a type of group relief for the intra-group transfer of tax losses and assets, subject to certain conditions.

International tax

PNG’s new tax framework significantly modernises its international tax provisions, aligning with global standards while addressing specific economic concerns. The enhanced international tax regime balances PNG’s interests as a resource-rich developing economy with the need to attract foreign investment by providing greater clarity and certainty for cross-border transactions.

The international tax provisions apply across several key areas:

• Defining PNG tax jurisdiction through permanent establishment rules
• Streamlining withholding taxes on cross-border payments
• Fundamental change in taxation of foreign contractors
• Expansion of withholding taxes to include administrative services (not previously caught)
• Expansion of royalty definition to include digital content, software services and equipment leasing
• Reduction in withholding tax rate on management and technical fees from 17% to 15%
• Providing specific regimes for foreign losses and tax credits

These changes respond to global developments including the OECD’s Base Erosion and Profit Shifting initiatives while maintaining PNG’s sovereignty over its tax policy.

Capital Gains Tax

The introduction of Capital Gains Tax (CGT) represents one of the most significant new elements in PNG’s tax reform package. Unlike many jurisdictions with broad-based capital gains taxes, PNG has implemented a targeted approach focusing specifically on resource-related assets—reflecting the country’s economic reliance on its natural resource sector while avoiding potential administrative challenges of a comprehensive CGT system.

This selective approach aims to:

• Capture value from transactions in PNG’s most economically significant assets
• Align with international trends
• Address indirect transfers
• Maintain simplicity by targeting a well-defined asset class

The new Capital Gains Tax applies at a rate of 15 per cent to gains made on the disposal of taxable assets.

This is an extract from KPMG’s 73-page Income Tax Bill 2025 report, which can be accessed here, and has been republished with the permission of KPMG.