Corporate tax in Papua New Guinea

Summary

Corporate Income Tax Rate (%) 30
Capital Gains Tax Rate (%) 0
Branch Income Tax Rate (%) 48 (a)
Withholding Tax (%)
Dividends 0 / 10 / 17 (b)
Interest 15
Royalties
Associates 30
Non-associates — (c)
Foreign contractors 12
Management fees 17
Net Operating Losses (Years)
Carryback 0
Carryforward 20 (d)

a) See Section B.

b) The 0% rate applies to dividends paid out of oil or gas profits. The 10% rate applies to dividends paid out of mining profits. The 17% rate applies to other dividends.

c) For payments to non-associates, the amount of tax equals the lesser of 10% of assessable income or 48% of taxable income. Assessable income is the amount assessable under the provisions of the Income Tax Act. Taxable in come is the amount remaining after deducting from assessable income all allowable deductions.

d) Resource (mining, oil and gas) and primary production taxpayers may carry forward losses for an unlimited number of years.

Taxes on corporate income and gains

Corporate income tax. Resident companies are subject to income tax on worldwide assessable income. Nonresident companies car­rying on business through a branch pay tax only on Papua New Guinea (PNG)-source income. A resident company is a company incorporated in PNG. A company not incorporated in PNG is con­sidered a resident company if it carries on business in PNG and it has either its central management and control in PNG or its voting power controlled by shareholders who are residents of PNG.

Tax rates. Resident companies are subject to tax at a rate of 30%. Branches of nonresident companies (other than those engaged in mining operations) are subject to tax at a rate of 48%. Nonresident companies deriving “prescribed income” are subject to the foreign contractor provisions (see Foreign Contractor Withholding Tax).

The following table lists the tax rates for companies engaged in mining, petroleum and gas operations.

  Residents’ rate (%) Nonresidents’ rate (%)
New petroleum operations 45 45
Incentive rate petroleum operations 30 30
Other petroleum operations 50 50
Gas operations 30 30
Mining operations 30 40

In addition to any tax liability determined in accordance with the above rates, an Additional Profits Tax may be levied with respect to gas projects in certain circumstances.

Foreign Contractor Withholding Tax. Most activities conducted by nonresidents in PNG (including PNG branches), other than indi­viduals deriving employment income, fall under the foreign con­tractor and management fee (see Management Fee Withholding Tax) provisions of the domestic law. The Foreign Contractor With­holding Tax (FCWT) applies if income is derived by nonresidents (usually referred to as “foreign contractors”) from contracts for “prescribed purposes,” including installation and construction projects, consultancy services, lease of equipment and charter agreements.

FCWT is calculated by reference to the gross contract income. In broad terms, the PNG Income Tax Act provides that if a foreign contractor derives income from a prescribed contract, the person is deemed to have derived taxable income of 25% of the gross contract income. This taxable income is subject to tax at the non­resident corporate tax rate of 48%, resulting in an effective PNG tax rate of 12% on the gross contract payment. The local contract­ing party must withhold the tax and remit it to the Internal Revenue Commission (IRC) within 21 days after the end of the month in which the payment is made.

As an alternative to paying FCWT, the foreign contractor can elect to file an income tax return and pay tax on actual taxable income at the nonresident corporate tax rate of 48%. This election must be made by written request to the Commissioner of Internal Revenue before the end of the year following the commencement of the contract. The FCWT is considered the default tax regime. Re quests to be assessed on a net profit basis are subject to the discretion of the Commissioner General.

If the foreign contractor elects to be assessed on a net profit basis, a deduction is available for all costs directly attributable to the de rivation of the PNG-source income, including depreciation of equip ment. A deduction is also available for any indirect costs related to the income (that is, head office, general administration and management expenses). The deduction for indirect costs is limited to the lesser of the following:

  • 5% of the gross income from the prescribed contract
  • An amount calculated by applying to the total head office gen­eral administration and management expenses (other than ex­penses incurred directly in deriving the contract income) the ratio of the gross income from the prescribed contract to the worldwide income of the taxpayer

Management Fee Withholding Tax. Subject to the availability of treaty relief, Management Fee Withholding Tax (MFWT) at a rate of 17% must be withheld from management fees paid or credited to nonresidents.

The definition of “management fee” is very broad and includes “a payment of any kind to any person, other than to an employee of the person making the payment and other than in the way of roy­alty, in consideration for any services of a technical or manage­rial nature and includes payment for consultancy services, to the extent the Commissioner is satisfied those consultancy services are of a managerial nature.”

In practice, MFWT generally applies to services rendered outside PNG, and FCWT (see Foreign Contractor Withholding Tax) applies to fees for services rendered in PNG.

The deduction for management fees paid by a PNG resident com­pany to a nonresident associate cannot exceed the greater of 2% of assessable income derived from PNG sources or 2% of allow­able deductions excluding management fees paid. In addition, for resource companies, to the extent that management fees exceed 2% of the allowable exploration or capital expenditure (other than management fees) incurred during the year, the excess is not al­lowable exploration or capital expenditure, respectively. However, a full deduction is allowed if the management fee can be sup­ported as an arm’s-length transaction. The above limit does not apply with respect to payments made to non-associates.

Incentives. Several specific incentives are available with respect to taxpayers operating in certain industries, including resource taxpayers (mining, oil and gas) and taxpayers engaged in primary production. These incentives range from general concessions with respect to the calculation of taxable income to concessions with respect to specific types of expenditure. Although some in vestors have been able to negotiate specific incentives for par­ticular projects, the government now aims to include all tax con­cessions in the domestic legislation and make any concessions available on an industry basis with the goal of developing a more neutral and equitable treatment of projects.

Capital gains. Capital gains are not subject to tax in PNG. The dis posal of a capital asset may be subject to tax to the extent the dis posal takes place as part of a profit-making scheme or is part of the ordinary business activities of a taxpayer.

Although capital gains on the disposal of depreciable plant and equipment are generally not subject to tax, a calculation of any gain or loss on disposal must be performed. If the amount receiv­ed exceeds the tax written-down value, an amount of income may be derived (up to the amount of depreciation deductions previously claimed). Alternatively, if the amount received on disposal is less than the tax written-down value, the taxpayer may be able to claim a deduction.

Administration. The PNG tax year is the calendar year. However, for most companies, a substituted accounting period is permitted on written request to the Commissioner General of Internal Rev­enue. Tax for any fiscal year is payable in three equal installments on a provisional tax assessment basis according to the following schedule:

  • First installment by 30 April
  • Second installment by 31 July
  • Third installment by 31 October

Provisional tax is generally assessed by the Commissioner based on the income tax return of the preceding year. Accordingly, pro­visional tax does not generally become payable until after a tax­payer has filed its first tax return.

Any balance must be paid within 30 days after the assessment is issued and served on the taxpayer. Any overpayment of provision­al tax is refundable to the taxpayer. The Commissioner General of Internal Revenue does not pay interest on overpaid tax. Penal­ties apply for underestimation of provisional tax.

Companies are required to file tax returns within two months after the end of the fiscal year (that is, by the end of February of the following year). However, for returns filed by registered tax agents, extensions of an additional four, six or eight months are possible, depending on the level of taxable income. The in come and expenses of taxpayers must be expressed in Papua New Guinea currency, unless permission is granted by the Commis­sioner General of Internal Revenue to report in a currency other than Papua New Guinea currency.

Companies carrying on business in PNG, or deriving income in PNG, must appoint a public officer to act as the representative of the company in all dealings with the IRC. The public officer need not be an employee or shareholder of the company but must be tax resident in PNG.

Dividends. Dividends received by resident companies from other resident companies are fully rebatable; that is, although dividends received by corporate taxpayers from other PNG corporations are fully assessable, the taxpayers may claim a credit of 30% (corpo­rate tax rate), thereby reducing the effective tax rate to nil. Divi­dends are exempt if they are paid out of profits derived by petro­leum or gas operations. Dividends paid out of profits arising from the sale or revaluation of assets that were acquired for purposes other than resale at a profit are also exempt if the dividend is distributed through the issuance of non-redeemable shares.

Dividends paid or credited by resident companies to nonresident shareholders are generally subject to a final 17% dividend with­holding tax (unless the rate is reduced by a tax treaty), which is de ducted at source from the gross amount of the dividend.

Foreign tax relief. A resident deriving foreign-source income that has been subject to foreign tax is entitled to a credit equal to the lesser of the following:

  • The foreign tax paid
  • The amount of PNG tax payable on that income

For purposes of the foreign tax credit, no distinction is made between income derived from treaty and non-treaty countries.

Determination of trading income

General. Income is defined as the aggregate of all sources of in – come, including annual net profit from a trade, commercial, finan­cial or of other business. Expenses are deductible to the extent that they are incurred in producing assessable income, and are not capital or of a capital nature or incurred in producing exempt income. Deductions are allowable for certain capital expenditures incurred in the agriculture and fishing industries.

Foreign-exchange gains and losses. Realized exchange gains and losses from debts incurred or borrowings made on or after 11 November 1986 (at any time with respect to reforestation activities) in a foreign currency are generally assessable and de­ductible, respectively, as well as any realized gains or losses made on amounts of income or deductions. Unrealized gains are not assessable, and unrealized losses are not deductible.

Inventories. Trading stock must be valued at the end of an income year either at cost, market selling price, or replacement price. Any change in the method of valuing trading stock must be approved by the Commissioner General of Internal Rev enue. The Com mis-sioner has the discretion to make adjustments if the trading stock is sold or otherwise disposed of other than at market value.

Provisions. Provisions are not deductible until payments are made or, in the case of doubtful debts, until the debts are considered totally irrecoverable and are written off.

Tax depreciation. Depreciation of fixed assets that are used in the production of taxable income is calculated using either the prime-cost (straight-line) method or the diminishing-value method. The default method is the diminishing-value method with taxpayers having the option by notice in writing to use the prime-cost method for any or all units of property. Any change in the method of depreciation must be ap proved by the Commissioner General of Internal Revenue.

The IRC publishes depreciation rates for certain items of plant

and equipment. The following are some of the applicable rates

published by the IRC.

 

 
  Method

    

Item Prime-cost (%) Diminishing‑value (%)
Buildings    
Residential buildings 2 3
Storage buildings (steel framed) 4 6
Transportation    
Aircraft 12.5 18.75
Motor vehicles (other motor vehicles, including buses, lorries and trucks) 20 30
Wharves 5 7.5
Ships and steamers 7.5 11.25
Mining    
Development works Nil Nil
Dragline 13 20
Plant and machinery    
General plant and equipment 10 15
Drills 17 25
Earthmoving plant and heavy equipment 20 30
Motor trucks 20 30
Shovels 20 30
Oil    
Exploration 20 30
Oil companies    
Aircraft 25 37.5
Aircraft refueling equipment 15 22.5
Drilling plant 20 30
Seismic geophysical survey
equipment
20 30
Oil rigs (offshore) and ancillary plant 10 15
Petroleum    
Drilling and down hole (specialized drilling) equipment 20 30
Earthmoving plant and heavy equipment 20 30
General plant and equipment 17 25
Onshore production plant 13 18
Offshore production plant 13 20
Refining plant 13 20
Wharves and jetties 5 7.5
Vehicles 20 30

 

Manufacturing
Cement, pipe and tile manufacturing
plant
10 15
Chemical manufacturing plant 10 15
Primary industries, farmers and so forth
Cocoa and coffee industry plant 10 15
Copra industry plant 5 7.5
Other industries
Aircraft 10 15
Building industries 20 30

The amortization deduction for allowable exploration expenditure (AEE) incurred by resource taxpayers is determined by dividing the undeducted expenditure by the lesser of the number of years in the remaining life of the project or four.

The deduction allowable for short-life allowable capital expendi­ture (ACE; effective life of less than 10 years) incurred by resource taxpayers is calculated by dividing the undeducted bal­ance of ACE by the lesser of the number of years in the remaining life of project or 4. For long-life ACE (effective life of 10 years or more) incurred by resource taxpayers, depreciation must be cal­culated at a rate of 10% under the straight-line method.

The order of deductions for AEE and ACE amortization is AEE, long-life ACE and short-life ACE. The deductions may not create a loss and any excess deductions are carried forward to future years.

Environmental protection and clean-up costs. A specific deduc­tion is available to taxpayers for certain expenditure incurred with respect to environmental-protection activities and clean-up costs incurred when pollution occurs. This measure is available to tax­payers in all industries. It was introduced to encourage taxpayers to safeguard the environment.

Several specific exclusions exist, including capital expenditure incurred to acquire land and buildings. Expenditure incurred for environmental impact studies is deductible under a separate mea­sure (see Environmental impact studies).

Depreciation deductions are also available for plant and equip­ment used in environmental-protection activities.

Environmental impact studies. A deduction is allowed for environ­mental impact studies. For this purpose, an environmental impact study is the study of the environmental impact of an assessable income-producing activity or business that is carried on or pro­posed to be carried on in PNG by the taxpayer.

The expenditure incurred is apportioned over the life of the project or 10 years, whichever is less. If the taxpayer is in the resources industry, the cost of the environmental impact is not allow able under this measure, but is available under the specific resources taxation provisions.

Depreciation deductions are also available for plant and equip­ment used for environmental impact studies.

Rehabilitation costs of resource taxpayers. For resource projects that begin on or after 1 January 2012, at the end of a project, a resource taxpayer may transfer losses incurred on environmental rehabilitation to other projects owned by it. PNG uses ring-fencing provisions and calculates the profits of resource projects on a project-by-project basis. Historically, losses incurred were effectively lost if no further income was produced.

Research and development. On 1 January 2014, the extended de­duction of 50% was phased out for research and development (R&D) expenditure. Previously, a 150% deduction was available for “prescribed” R&D expenditure. To claim the R&D conces­sion, taxpayers needed to complete and submit an application annually to the Research and Development Expenses Approval Committee (within the PNG IRC) for approval before the start of the fiscal year. However, any expenditure on scientific research incurred before 1 January 2014 will continue to be eligible. In addition, although the additional deduction (50%) for eligible R&D expenditure has been abolished, such expenditure will con­tinue to be deductible on a 100% basis even if such expenditure might otherwise be capital in nature and not deductible under general provisions.

The following payments and expenditure incurred by a taxpayer carrying on business for the purpose of obtaining assessable in­come may be allowable R&D deductions:

  • Payments to an approved research institute for scientific re – search related to the business of the taxpayer and payments to an approved research institute for the purpose of undertaking research related to the business of the taxpayer
  • Capital expenditure on scientific research related to the business of the taxpayer (except expenditure on plant, machinery, land or buildings, or alterations, additions or extensions to buildings)
  • Expenditure on plant and equipment used solely for R&D pur­poses (depreciable at a rate of 33% per year)
  • Expenditure on buildings and additions to buildings used solely for R&D purposes (deductible in equal installments over three years)

For purposes of the R&D concession, scientific research includes any activities in the fields of natural or applied science for the extension of knowledge.

Relief for losses. Losses incurred may generally be carried forward for 20 years. However, losses incurred by resource taxpayers and primary production taxpayers can be carried forward indefinitely. Losses incurred by a company are allowed as a deduction only if the taxpayer passes either the continuity of ownership test or the same business test.

For entities in the resources sector, losses may also be quarantined on a project basis.

Losses may not be carried back.

No provisions exist for grouping losses with associated companies (with the specific exception of certain company amalgamations).

Groups of companies. No provisions exist in PNG for the grouping of income or losses of associated companies or for other group relief. Companies are assessed on an individual basis.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Goods and services tax (GST); imposed
on virtually all goods and services unless
the goods or services are exempt (for
example, financial services and gambling)
or the supply is zero-rated (for example,
supplies to resource companies); any
entity undertaking taxable activity in PNG
must register and charge GST if taxable
supplies exceed, or are expected to exceed,
PGK250,000 in any 12-month period (the
registration threshold before 1 January 2012
was PGK100,000); entities that are registered
must account for GST collected (output tax)
and GST paid (input tax) during each month
with any excess of GST collected to be
remitted to the IRC by the 21st day of the
following month; entities may generally
claim a refund for most GST input tax paid
on importations or local purchases of goods
and services; effective from 1 January 2016,
a deferral scheme applies with respect to
GST on imports
10
Training levy; imposed on all businesses with
an annual payroll exceeding PGK200,000; the
amount payable is reduced by training expenses
incurred by the employer for the benefit of
PNG citizen employees; expenses incurred to
train non-citizens are not qualifying training
expenses for the purpose of the training levy
2
Customs and excise duty; imposed on all
goods imported into PNG, unless the goods
are duty-free or exempt from duty; duty is
imposed on the total value including cost,
insurance and freight; the rate of duty depends
on the nature of the goods; a zero rate often
applies to goods imported into PNG if the
goods are not available in PNG, but a specific
analysis must be undertaken in each instance
Various
Stamp duty; imposed on dutiable instruments
such as deeds, share transfers and a wide range
of other documents at varying rates; may also
apply to documents executed outside PNG under
provisions that impose an obligation to file
documents for assessment for stamp duty with
respect to property or activities in PNG
Various

Miscellaneous matters

Foreign-exchange controls. The currency in PNG is the kina (PGK).

A tax-clearance certificate is required if certain cumulative remit­tances of foreign currency exceed PGK200,000 in a calendar year. For a remittance to a tax haven, a tax clearance is always required, regardless of the amount being remitted.

PNG resident companies are generally not permitted to receive payment for goods or services in a foreign currency. Conse quent-ly, if a contract is entered into between two PNG resident compa­nies in a foreign currency (for example, US dollars), the settlement of the invoice must be made in Papua New Guinea currency. For exchange-control purposes, a resident includes a foreign company operating actively in PNG as a branch.

Debt-to-equity ratios. Previously, the thin-capitalization rules ap­plied only to taxpayers operating in the resources sector. Effective from 2013, PNG’s thin-capitalization rules apply to PNG compa­nies in all industries. The 3:1 debt-to-equity ratio for resource companies is retained. However, all other companies are subject to a 2:1 ratio (with the exception of approved financial institu­tions, which are not subject to any ratio). If the applicable ratio is breached, a proportion of the interest on foreign debt is denied as a tax deduction.

Anti-avoidance legislation. Contracts, agreements or arrangements that have the effect of avoiding any tax may be rendered void by the tax authorities.

Transfer pricing. Related-party transactions are accepted by the tax authorities if they are carried out at arm’s length. However, a taxpayer’s taxable income can be adjusted if transactions are not conducted on an arm’s-length basis (that is, if the transaction would not have been conducted on the same basis between inde­pendent parties). Specific provisions also exist with respect to management or technical fees paid to international related parties. Documentation of the appropriate methodology and calculation of pricing must be maintained.

Controlled foreign companies. The PNG tax legislation does not currently contain any controlled foreign company (CFC) rules. Con sequently, any income derived by foreign subsidiaries of a PNG entity is typically taxed on a receipts basis only.

Treaty withholding tax rates

Taxpayers self-assess any treaty reductions of withholding taxes.

The following table lists the treaty withholding tax rates for divi­dends, interest, royalties, management fees and payments to for­eign contractors with respect to prescribed services.

 

Dividends (%) Interest (%) Royalties (%) Management fees (a) (%) Payments to foreign contractors (%)
Australia 17 10 10 0 (b) 12 (c)
Canada 17 10 10 0 (b) 12 (c)
China 15 10 10 0 (b) 12 (c)
Fiji 17 10 15 15 12 (c)
Germany (f) 15 10 10 10 12 (c)
Indonesia (f) 15 10 (g) 10 0 12 (c)(d)
Korea (South) 15 10 10 0 (b) 12 (c)
Malaysia 15 15 10 10 12 (c)(d)
New Zealand 15 10 10 0 (b) 12 (c)
Singapore 15 10 10 0 (b) 12 (c)(d)
United
Kingdom 17 10 10 10 12 (c)(d)
Non-treaty
countries
17 15 – (e) 17 12

a) For the purposes of this table, management fees include technical fees.

b) Management services, including services of a technical nature rendered from sources outside of PNG for a resident of PNG are subject to MFWT at a rate of 17%. For services provided by a resident of a country with which PNG has entered into a double tax treaty that does not have a specific technical ser­vices article, the payment is not subject to withholding tax in PNG if all of the services were performed outside PNG.

c) Nonresident entities deriving income from “prescribed contracts” are subject to FCWT at a rate of 12% of the gross receipts. The income of residents of countries with which PNG has entered into a double tax treaty is subject to the FCWT provisions if the nonresident is conducting business in PNG through a permanent establishment.

d) Until recently, a reduced FCWT rate may have applied to foreign contractors from these countries in accordance with the non-discrimination article in the relevant treaty. However, the PNG tax authorities now apply the 12% rate to foreign contractors from all countries.

e) The rate is 30% for payments to associates. For payments to non-associates, the amount of the tax equals the lesser of 10% of assessable income or 48% of taxable income.

f) The treaties with Germany and Indonesia are not yet in force.

g) The rate is 0% for interest paid to the government or the central bank.