After two years of research and hearings, Papua New Guinea’s Tax Review Committee is due to present its final report to Government next month. PricewaterhouseCoopers PNG’s Jason Ellis looks at the tax reform measures it is likely to recommend.
PricewaterhouseCoopers’ Jason Ellis
The Committee is expected to recommend the reductions in tax rates be funded by an increase in the GST rate, introduction of a capital gains tax to broaden the tax base, and restrictions on tax concessions.
The Chairman of the Committee, Sir Nagora Bogan, spoke to business organisations in Port Moresby and Lae and outlined the following proposed reductions in tax rates:
- a reduction in the corporate tax rate to 25%,
- a reduction in the dividend withholding tax rate to 15%
- a reduction in personal marginal tax rates
It is of course a difficult time for tax reform. With global commodity prices low, and the current challenging fiscal position in PNG, it seems likely that any reforms will only be supported by the Government if they are at least revenue neutral.
In commenting on the PNG fiscal position at the 2015 PNG Advantage Investment Summit in Brisbane, Prime Minister Peter O’Neill said his Government has no intention of increasing taxes or introducing new taxes, and if this is the case tax rate cuts would need to be funded by increased collection and compliance enforcement activity by the IRC.
In our view there is considerable scope for improvement in tax administration.
Notwithstanding the difficult fiscal times, PwC believes that tax reform is essential if PNG is to remain competitive in the global economy. Many jurisdictions are reducing income tax rates to encourage greater levels of investment by the corporate sector.
In addition PNG has a very high reliance on salary or wages tax, which is borne by a relatively small proportion of the population, and personal tax rates are very high at the low and middle income levels.
‘PwC believes that tax reform is essential if PNG is to remain competitive in the global economy.’
One of the key factors we are concerned about at PwC is that middle income earners are not ignored in the reform process.
Middle-income earners
There is a temptation to focus on low income earners, and corporates, but the middle income range (K50,000-K150,000) is the engine for growth in employment and development in PNG.
Chairman of the PNG Taxation Review Committee, Sir Nagora Bogan
People in this range would bear the brunt of an increase in the GST, and introduction of broad capital gains tax, and they need to be properly compensated when personal income tax rates are reduced.
It is also important that if tax concessions are wound back this does not affect the affordability of education and housing in PNG, both of which are currently concessionally taxed.
PwC believe there is a clear need for comprehensive tax reform–done the right way.
The ‘right way’ means increasing those taxes that have the least effect on investment and employment, and at the same time reducing reliance on taxes that distort incentives to work, invest and transact business.
It also means addressing those factors which increase the complexity of the tax system and the cost of compliance.
Following the work of the Tax Review Committee, it is important that the opportunity is taken to implement real tax reform to position PNG for future growth, and to ensure the tax system is appropriately designed to deliver future revenues to the Government in a changing economy.
Jason Ellis is a Partner at PricewaterhouseCoopers PNG.
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I believe in the aims that the tax review commission is trying to achieve for PNG. I like how PwC tries to put it “doing it the right way”. The middle income earners have been the back bone of government revenue and it is correct to say it deserves a compensation of lower tax going forward. Logically you can’t force someone to work their guts out and keep paying them less. We are finally addressing this question of income fairness in a general sense of social welfare. An important note to remember regardless of whether you’re a middle or low income earner is that, we should see this tax changes as a form of motivation to increase our productivity, efficiency and effectiveness in whatever we do. Without noticing, this tax reform has enormous positive result in a Darwinism perspective. It entails a spirit of competition that is incumbent and is what we need to let policies improve us than us sympathizing with policies – which is the lay back stereotypical PNG attitude on any change that suit the condition and not result driven. One should know that to effect change we need conflict. Once we realize the greater good this is doing, we may become like Japan (high income, high GST) and see where they are now.
If someone has a better analysis on the tax differentials between PNG and Japan, I’d be glad to see it.
Let’s stop the complaining and start improving our country in the small things we do and have a bigger picture at the back of our minds.
Cecil Reinxeed
Japan has experienced a massive brain drain as mobile high income earners are relocating to Singapore and other low tax jurisdictions. This first happened when they increased the scope of their taxation on global income and then more recently when they expanded their inheritance tax rules. The same in high tax states in the US such as New York and California where people are going to low tax states like Texas, Florida and Tennessee in droves. If you want more of something (unemployment) you subsidize it, if you want less of something (people generating economic activity) you tax it.
It is disheartening to note Tax Review Board suggesting increases in GST and Personal Tax. For Government Department employees would be okay because their Income Tax or Personal Tax is very low compared to Mining, Gas and Oil company employees which are the highest in the world between 30 -35%. If an industry employee earns K2,000.00 his/her Income Tax is over K600.00 per fortnight and you work out the annual Income Tax! This poor guy takes home around K600-K700.00 per fortnight after other deductions in superannuation and maybe a personal bank loan to to sustain his living.
Also imaging the expectation from family relations and friends! The same poor guy goes to withdraw his money from the bank and is taxed withholding tax as well as withdrawal tax and then takes his money to the store and pays GST on his basic shopping. The poor same guy might be living in a village and has to get on a PMV and head for home but the road might not reach his village so he has to walk 2- 3 hours before reaching his village. Then he has to go to a creek to bath or fetch water for cooking because there is no water supply in his village! At night he has to buy kerosene to light his hurricane lamp also as there is no power supply! What kind of Government tax are we talking about? Does it worth it for a poor guy who goes through the experiences I had described above? Let’s come to reality and not live in fantasy as ordinary Papua New Guineans live on scrapes unlike the government bureaucrats, MPs and their cohorts! Bring down the tax rate and release the suffering industrial workers who work 12 hours or more daily just to earn that scrape getting up at 3 or 4:00AM and finishing off for the day at 6 or 7PM!
You will be pleased to note, Peter, that the review is likely to recommend ‘a reduction in personal marginal tax rates’. That’s a cut in personal tax rates.
Good to hear that but when and by what percentage would be interesting.
Thank you.