A guide to withholding and other taxes in Papua New Guinea, including foreign contractors tax, stamp duty, and customs and excise duty. Provided by KPMG’s Port Moresby office.

Foreign contractors tax (FCWT)

This tax is initially imposed at a flat 15% on the gross revenue of contract work undertaken in Papua New Guinea.

A previously existing option for foreign contractors to lodge income tax returns and be taxed on their taxable income has been removed. Where the contractor is subject to FCWT of 15% as a first and final income tax, there are no other lodgement or payment requirements in respect of that contractor’s own income tax liability.

However, it should be noted that they will most likely still have an obligation to deduct and remit salary and wages tax to the IRC from the earnings of their staff engaged on the contract work in PNG and they may also have GST obligations.

In all cases it is the PNG entity making the payment who is responsible for deducting and remitting the relevant FCWT amount to IRC, within 21 days of month’s end (as is the rule for all other withholding taxes noted below).

Contracts subject to FCWT are those which are defined to be for ‘prescribed purposes’. This broadly means contracts which are ‘for or in connection with’ the following:

• The installation, maintenance or use in PNG of substantial equipment or machinery
• The construction in PNG of structural improvements including: roads, bridges, culverts or similar roadworks; buildings, fences or similar improvements; clearing or draining of land; ports or port facilities; facilities for the provision of water, light, power or communication; transport facilities
• The use of, or right to use, in PNG any industrial, commercial or scientific equipment including vehicles, ships and aircraft
• The provision in PNG of professional services as an adviser, consultant or manager.

This wide definition may draw an entire contract into the FCWT net even where some of the functions covered in the contract may not be for prescribed purposes (e.g. a contract that covers both goods and services). If this arises then it would be advisable to seek tax planning advice.

Interest withholding tax (IWT)

IWT is generally levied on all payments of interest from within PNG, regardless of whether the recipient is a resident or non-resident taxpayer. The flat rate of withholding is 15% though this is reduced to 10% for residents of all DTA partner countries other than Malaysia.

Where a taxpayer is required to include interest income in an income tax return lodged with the IRC, they are entitled to claim a tax credit for any IWT deducted.

Dividend withholding tax (DWT)

Imposition of DWT is generally made at a flat rate of 15% under the PNG domestic tax laws. DWT is applied to dividend income receipts of both resident and non-resident taxpayers.

DWT is a final tax liability on dividend income in the case of individuals and trusts resident in PNG, as well for all non-residents of PNG.

DWT does not apply to dividends paid to PNG resident companies or to PNG authorised superannuation funds.

As already noted above, where dividend income is received by a PNG resident company, the company is also entitled to an income tax rebate.

Royalty withholding tax (RWT)

RWT only applies to royalty payments to non-residents. Where the non-resident recipient of the royalty is an independent third party, the tax law provides for the payment to be taxed at the lesser of either 10% of gross income by means of RWT, or if the royalty recipient elects to lodge an income tax return with IRC, 48% of net taxable income. By contrast, royalty payments to associated parties are prima facie taxed at a flat 30% of gross income by means of RWT. Certain exceptions apply in cases where the royalty arises from a PNG resource company.

All residents of DTA partner countries are taxed at a maximum RWT rate of 10% on gross income, provided the royalty is an arm’s length one.

Management fee withholding tax (MFWT)

MFWT is imposed only on non-residents who receive payments falling within the domestic tax law definition of ‘management fee’. This term, and the interpretation of it by the IRC, is quite wide in application. It includes all payments in consideration for services of a managerial or technical nature and for consultancy services.

MFWT is imposed at a flat rate of 17% on all qualifying payments under the domestic law provisions. However, in the case of genuine residents of certain countries with which PNG has a DTA, MFWT may not be levied under the DTA.

PNG also has a domestic limitation on the amount of management fees that may be allowed as an income tax deduction, when paid by a PNG company to an associate. This limitation is to 2% of the greater of total income or total allowable expenses excluding the management fees.

On formal application, IRC may allow amounts that exceed these 2% thresholds, but only if the recipient is resident in a DTA partner country and the amount claimed can be shown to equate to be at arm’s length. Where tax deductions are limited to the threshold, MFWT is only imposed on the amount that is so allowed.

Other withholding taxes

In addition to the particular withholding taxes mentioned above, PNG has several other withholding taxes or withholding tax equivalent imposts, these are imposed on payments to:

• PNG resident business entities providing certain defined contract services, such as construction or security services, and which are not in possession of a current Certificate of Compliance from the IRC. This is imposed at 10% on the gross payment (known as ‘business payments tax’).  The tax deducted is fully creditable in the income tax returns of the entity which has had the tax deducted.
• Non-resident insurers, where 10% of gross premium income is subject to tax at the 48% non-resident company rate (or 30% for unincorporated associations).
• Overseas shippers, in some limited cases, where 5% of receipts for the carriage of goods or persons shipped in PNG is subject to the 48% non-resident company tax rate.

Stamp duty

Stamp duty is essentially a tax on documents in PNG.  It applies on the following:

• Transfers of real property
• Leases or rental agreements
• Deeds of settlement and deeds of gift
• Transfers of marketable securities and of mining and petroleum leases
• Powers of attorney
• Memoranda of agreement
• Betting tickets and lotteries.

The rates of stamp duty vary widely between the types of documents listed above. A number of exemptions may exist under each of these categories and several have monetary thresholds where either no duty applies or it is levied progressively on a sliding scale.

As an example, the general rate of stamp duty (above K140,000, below which reduced rates apply) for the transfer of interests in land or shares in a land-rich company, being some of the most common transactions subject to stamp duty in PNG, is 5%. The rate is only 1% for the transfer of most other shares.

Customs and excise duty

PNG has in past years generally decreased the overall number of imported items to which duties and excise apply, as it has the rates of such impositions. However, there are still a number of such items, both domestic and imported, to which significant duties still apply.

For significant items that are to be re-exported within 12 months of import into PNG (temporary imports), the duty otherwise applicable can be waived provided suitable arrangements (in the form of a bond or bank guarantee) are concluded in advance with Customs Office although in practice these are difficult to arrange.

There is also domestic excise levied on some key products, including alcohol and petrol. Notable among these are motor vehicles, with rates for normal passenger and four wheel drive type vehicles varying from between 20% to 40%.  These rates are substantial reductions from the rates previously applicable until recently of 40% to 120%.

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