Papua New Guinea has a ‘tax mobilisation challenge’ if it is to deal with the financial challenges resulting from the COVID-19 crisis, according to a new Asian Development Bank report.

Tax vs non-tax revenue in PNG from 1999 to 2019. Credit: ADB

The latest Asian Development Bank (ADB) Pacific Economic Monitor is predicting PNG’s economy will contract by 1.5% this year, with the country’s balance of trade also affected.

‘Export earnings are expected to fall from the equivalent of 45.6% of GDP in 2019 to 38.0% of GDP in 2020, significantly reducing the current account surplus from 22.3% of GDP in 2019 to 14.6% of GDP in 2020,’ it says.

‘As a result, there is increased downward pressure on foreign exchange reserves … and availability of foreign exchange in the commercial market.’

Revenue problem

The report also notes the government’s expected revenue shortfall of K2.2 billion, due in part to lower tax revenues. It dedicates some space to consider why PNG has one of the lowest tax-to-GDP ratios in the East Asia and Pacific region.

‘Overall revenue (tax and non-tax, excluding grants) as a percentage of GDP averaged 17.9 per cent between 1999 and 2013, but has since has reached a low of 13.4 per cent.’

The ADB points to ‘volatile revenue receipts from the resources sector’ and says PNG’s current revenue system has been ‘limiting the government’s capacity to generate sufficient revenues to fund its expenditures, at times forcing the government to introduce successive supplementary budgets and, at other times, resorting to additional domestic and external borrowing to cover its fiscal deficits.’

‘The average tax rate in PNG is still one of the highest in the Pacific region.’

The report noted that, because of the COVID-19 crisis, the government has had to deviate from its debt strategy and request parliamentary approval to raise the threshold level of debt to GDP.

Unless there are cuts in government spending, it says public debt is projected to go ‘above the current legislatively allowable ceiling of 45 per cent of GDP’.

Narrow base

The ADB report argues that PNG has a ‘tax revenue mobilisation’ challenge: the tax base needs to be broadened.

‘Reliance on income taxes leads to high income tax rates,’ the ADB says. ‘In 2018, 43.4 per cent of total revenue came from income taxes. It is also estimated that over 90 per cent of personal income tax was contributed by salary and wage taxes paid by just 400,000 people in the formal workforce – 4.8 per cent of the national population.

‘Discretionary incentives have narrowed the tax base, and the government has found it difficult to reduce income tax rates in a falling tax-to-GDP ratio environment. Personal income tax rates in PNG range from 22 per cent of taxable income up to 42 per cent.

‘The average tax rate in PNG is still one of the highest in the Pacific region. The resident corporate income tax rate of 30 per cent is still higher than the average rate for Asia (21 per cent) and globally (23.8 per cent).

Trends in corporate tax, comparison between PNG, selected Asia-Pacific countries, Africa, OECD and Latin America. Credit: ABD/Pacific Economic Monitor

Incentives

The report notes that many companies do qualify for discretionary tax incentives, identifying 25 tax incentives available in PNG on corporate income. However, it described the incentives as ‘generous compared with other resource-rich countries’ adding that they did ‘not reflect the maturity’ of PNG’s resource sector.

‘The qualifying criteria are non-transparent and rarely audited.’

‘In most cases, the qualifying criteria are non-transparent and rarely audited,’ it says.

The ADB report also described PNG’s Income Tax Act as outdated and unclear.

‘In its current form, the legislation lists a number of tax concessions even before establishing the tax that is payable. Administrative provisions are also difficult to decipher.’