A guide to the corporate tax system and practices in Papua New Guinea, including regulations relating to dividends, tax credits, exemptions, depreciation, inventory, incentives and concessions. Provided by KPMG’s Port Moresby office.

Introduction

A PNG resident company is subject to tax on its worldwide income. A company not resident in PNG will only be subject to PNG income tax on that income that is considered to have a PNG source. A company is resident in PNG if it is incorporated in PNG or its central management and control is in PNG. There is no regime for the attribution or taxing of foreign income earned by non-PNG resident companies in the hands of PNG resident companies.

Mining, petroleum or gas operators, collectively often referred to as ‘resource companies’, are subject to their own tax regime. Although that regime incorporates many of the general treatments noted below, some important differences include the fact that tax is calculated on a project specific basis (i.e. ring-fenced) and such companies have specific deductibility regimes available for allowable capital expenditure (ACE) and allowable exploration expenditure (AEE).

Industry specific tax provisions also apply in the case of a number of other industries such as timber and life insurance.

The scope of this publication is not however sufficient to cover these and other resource industry specific taxation treatments in greater detail.

Entities interested in such detail are advised to contact one of the four major international accounting firms operating in PNG.

Company tax administration

The tax year is the calendar year ended 31 December. Rules exist for adoption of substitute accounting periods and these will often be granted where a PNG subsidiary wishes to adopt the same balance date as its foreign parent company.

Payments for the estimated tax liability for the current year are required and this is referred to as provisional tax. Although the 2020 Budget had proposed changes to the payment dates for provisional taxes these are not yet being implemented by the IRC and 2020 provisional tax continues to be payable by 30 April, 31 July and 31 October of each year. There is an opportunity for taxpayers to vary the instalments in certain circumstances.  The tax liability raised through notification of provisional tax is legally enforceable but is adjusted when an income tax return is lodged in the following year. When the final income tax liability is notified, if there is one, then the tax is due and payable 30 days after the issue of this assessment.

Income tax returns which do not carry an approved substituted tax accounting period are due for lodgement by 28 February of each year for the previous 31 December year end, but this date may be extended if they are lodged by a registered tax agent.

Penalties may apply both to the late lodgement of income tax returns (100%) and the late payment of any income taxes (20% p.a.).

Dividends

Dividends paid by PNG companies are subject to a dividend withholding tax (DWT) of 15%. DWT is payable regardless of whether the dividend is paid to a resident or a non-resident of PNG, subject to some limited exemptions. DWT is not deducted if dividends are paid within a chain of PNG companies.  DWT is also a final tax in the hands of resident and non-resident individual shareholders.

Dividends paid by companies engaged in gas or petroleum operations are no longer exempt from DWT.

All dividends received by PNG resident companies must be included in assessable income in the corporate income tax return but as a dividend rebate is available they are not actually subject to corporate income tax in the recipient company.

Foreign tax credit

Foreign taxes paid on the foreign income of a PNG resident company are eligible for a foreign tax credit. This is limited to the lesser of the foreign tax paid or the PNG tax payable on this income.

There is no provision for the carry forward of foreign tax credits not utilised in a particular year.

General

Tax is charged on taxable income, which equates to accounting profit as adjusted by specific tax requirements. Therefore the PNG tax system will generally allow a deduction for expenses incurred in carrying on a business provided they are not of a capital nature. Allowable deductions include depreciation of plant and equipment. The accounting profit of a company is subject to a number of tax adjustments to arrive at taxable income, and these may include:

• A wide variety of accelerated depreciation deductions > Provisions for expenses are not deductible (but expenses actually incurred are)
• No deduction is available for formation expenses
• Unrealised foreign exchange gains or losses are not brought to account for tax purposes
• Business entertainment expenses are not generally deductible
• Accounting depreciation or amortisation of intangibles is not deductible
• Deductibility of management fees paid can be restricted
• Various other concessions and exemptions exist which may have a further impact
• Interest expense incurred in relation to the acquisition of capital assets are not deductible but must be capitalised for tax purposes prior to the commencement of assessable income or the completion of the asset to which it refers
• Thin capitalisation rules may restrict deductible interest

A new small business tax regime is to be introduced for individuals with businesses other than professional services.  The regime will apply to taxpayers with a turnover of up to K250,000.

Taxpayers will be subject to an annual flat tax of K400 where their turnover is less than K50,000.  This tax is payable annually by 28 January of the following year.

Taxpayers with a turnover of between K50,000 and K250,000 will be subject to tax equal to 2% of total turnover.  This is payable quarterly and within 28 days of each quarter.

Taxpayers are required to opt in and opt out of the regime by application in writing to the Commissioner General.  Where an individual has been approved to opt out of the regime they cannot opt back in within three years.

Capital gains

There is currently no general capital gains tax in PNG, although the Government has announced its intention to introduce one. The Government has stated that it will apply to sales of interests in real property and the disposal of shares in certain companies holding such interests.  At the current time capital gains are only taxable if they have been realised as part of a specific profit-making scheme or undertaking, or if they are related to the ordinary business of the taxpayer such as that of a share trader.

Exempt income

There are a number of exemptions available in the PNG Income Tax Act, including:

• Rural development income from a prescribed rural development area
• Unit trust distributions to unit holders
• A wide variety of charitable and public benefit type bodies

Trading stock (inventory)

Movement in the value of stock on hand is assessable or deductible as the case may be. Stock can be valued, at the taxpayer’s option, at cost, market selling or replacement cost and account can be taken for special circumstances such as obsolescence..

The Internal Revenue Commission (IRC) is the PNG tax authority. IRC may vary the value of trading stock where it considers that the transfer of trading stock did not take place at a reasonable commercial value.

Depreciation

Depreciation of plant and equipment is an allowable deduction for income tax purposes. There is no deduction currently available for depreciation of intangibles although the income tax rewrite legislation may take account of this.

Depreciation is allowable on either a prime cost (straight line) basis or a diminishing value (reducing balance) basis. The diminishing value rate is 150% of the prime cost rate.  The diminishing value basis is the default basis applicable unless the taxpayer opts to apply the prime cost method.

For depreciation purposes the cost of the asset is the cost of the particular item, plus any additional costs required to put that item into place, spread over its effective life.  That effective life is set by the IRC. Provisions do exist for a taxpayer to gain approval from the IRC for adopting a different rate in relation to a particular item.  This approval is however generally very difficult to obtain.

Where plant is sold at a price exceeding its tax written down value that excess, up to the amount of the depreciation claimed, is treated as assessable income of the taxpayer. That excess, known as a balancing charge, may alternatively be taken as a reduction in the written down value of other depreciable plant acquired by the taxpayer in that year.  Disposals at a value below tax written down value result in a tax deduction for the shortfall.

The depreciation of assets used in resource projects in PNG is normally subject to a separate special tax regime applicable only to those types of ventures. However, resource taxpayers may elect that the normal depreciation provisions apply, in the case of assets with an effective life of under 10 years.

A number of other depreciation incentives or concessions exist including:

• Qualifying industrial plant not previously used in PNG is eligible for a flexible rate of depreciation up to 100%, but this deduction may not create a tax loss
• Certain eligible new plant, or expenses incurred in conserving the use of fuel by that plant, may be subject to an additional 20% depreciation loading in the first year of use. For taxpayers in the tourism industry, that first year additional loading for certain eligible new plant is 55%
• Acquisition of non-oil fired plant, or the conversion of existing plant to non-oil fired use, is subject to an additional 30% depreciation loading in the first year of use
• A 100% deduction is available for the cost of qualifying agricultural plant or equipment, including that used in fishing, and for the cost of accredited dive boats

Tax losses

Tax losses may be carried forward for 7 years in PNG.  Tax losses of primary production ventures and resource companies may be carried forward for 20 years. The reduction to a 7 year carry-forward period was introduced in the 2019 Budget however there was a flaw in the legislation which the IRC advised they intended to amend such that losses incurred between 2005 and 2018 could be carried forward to 2025.  While the amending legislation has not yet been effected the IRC are currently allowing the carry forward of such losses until 2025.

The carry forward of tax losses by a company is subject to it passing either a continuity of ownership test or a continuity of business test. The continuity of ownership test involves meeting a minimum 50% threshold in the years between when the loss is incurred and when it is claimed (inclusive) and the test also applies to changes of ownership in holding companies higher up the ownership chain. The continuity of business or ‘same business’ test is applied quite strictly in the event that the continuity of ownership test is not passed.

Specific provisions exist in relation to the transfer of losses where amalgamation of companies occurs.  Losses cannot be transferred between separate companies nor are companies grouped for income tax purposes.

Transfer pricing

PNG tax legislation contains provisions specifically related to transfer pricing. The IRC has issued advice which explains how it will administer these provisions. The IRC will generally consider arm’s length or reasonable commercial value as the only basis for determining the value at which international transactions between commercial entities (related or unrelated) should take place.

That also applies to relevant management fee submissions, where PNG taxpayers seek to take advantage of DTA protection against the domestic deduction limit of 2% that otherwise applies to management fees.

The tax laws allow the IRC to substitute what it considers an arm’s length value for transactions which it believes have taken place at inappropriate values. However, there are no published safe harbour rules or values in relation to the pricing of transfers of goods, services or intellectual property.

The IRC has not to date concluded any advanced pricing agreements with taxpayers in PNG, but does not preclude that option being explored in the future.  However, PNG has committed to, and amended its tax legislation to allow, sharing of information internationally under the international BEPS initiative and its compliance requirements reflect this.

Thin capitalisation

PNG has for many years had a thin capitalisation regime in place for mining, petroleum   and gas companies which permitted a maximum debt to equity ratio of 3:1. Any interest amount paid on debt in excess of that ratio is not allowed as a tax deduction.

Since 2013 all other companies, except for licensed financial institutions, are also subject to a thin capitalisation regime. In this case the maximum debt to equity ratio is only 2:1, but the restriction on interest deductibility in relation to debt in excess of that ratio only applies where the lender is a non-resident entity.  The PNG Government has now extended the 2:1 ratio to mining, petroleum and gas companies as well.

Both thin capitalisation regimes also have provisions that allow the IRC to substitute a market interest rate to further restrict interest deductions. This is in situations where the borrower and lender are associates or do not deal with each other at arm’s length.

Exemptions, incentives and concessions

Successive governments have introduced and maintained a significant range of measures designed to facilitate legitimate domestic and foreign investment. These include:

• A 10-year tax holiday for new active business income derived in prescribed rural development areas (of which there are many)
• 100% depreciation for certain industrial, manufacturing or agricultural plant
• Double deductions for staff training of PNG citizens
• Double deductions for export market development by manufacturers and tourism operators
• Tax credits for infrastructure expenditure of resource, agricultural and tourism ventures
• Customs duty waivers on temporary importation of significant equipment

This guide to Papua New Guinea’s tax system is produced by KPMG’s Papua New Guinea office and is reproduced here with permission.