Papua New Guinea: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
12 Mar 2008
eISBN:
9781451831740
Language:
English
Keywords:
ISCR; CR; exchange rate; rate; repo rate; interest rate; goods and services tax; income tax tax rate; petroleum company; excise rate; company income tax; Mining sector; Tax incentives; Tariffs; Corporate income tax; Global
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This paper analyzes the workings and effectiveness of the monetary transmission mechanism in Papua New Guinea. The paper is organized as follows: it describes the current institutional structure in Papua New Guinea; interest rate is discussed; the evidence from vector autoregression analysis on the relationship between monetary policy variables and output and prices is considered; finally, implications are included. The Bank of Papua New Guinea (BPNG) uses a reserve money framework to conduct monetary policy operations. A macroeconomic balance approach estimates the REER, which simultaneously achieves internal and external balance.

Abstract

This paper analyzes the workings and effectiveness of the monetary transmission mechanism in Papua New Guinea. The paper is organized as follows: it describes the current institutional structure in Papua New Guinea; interest rate is discussed; the evidence from vector autoregression analysis on the relationship between monetary policy variables and output and prices is considered; finally, implications are included. The Bank of Papua New Guinea (BPNG) uses a reserve money framework to conduct monetary policy operations. A macroeconomic balance approach estimates the REER, which simultaneously achieves internal and external balance.

V. Tax Summary 2008 1

A. Direct Taxation

Taxation of Individuals

1. The tax year coincides with the calendar year. Residence is defined as physical presence in Papua New Guinea (PNG) for more than six months out of a given tax year. Resident individuals are taxed on global income from all sources, subject to double-taxation treaties. Nonresident individuals are liable for tax only on income derived from PNG sources. The maximum number of dependents for whom a tax rebate may be claimed was reduced from four to three in the 2004 Budget.

2. There are two separate types of assessment: (i) a fortnightly salary or wages tax assessment; and (ii) an annual non-salary or wages income assessment. Expenses of earning income are fully deductible, and there are no capital gains or gift taxes. The tax rates on assessed income are shown in Table IV.1.

Table IV.1.

Individual Resident Income Tax Rates From 1 January 2008

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Taxation of Companies

3. Tax years generally correspond to calendar years, unless there is a sufficient reason to deviate from that rule (e.g., if the parent company has a different tax year). A company is considered resident for tax purposes if it is incorporated in PNG, has its management in PNG, or is controlled by PNG residents. A resident company is taxed on its global income from all sources. Nonresident companies pay tax only on PNG sourced income.

4. The general company tax rate is 30 percent, except for authorized superannuation funds, for which the applicable rate is 25 percent. Taxable income generally corresponds to accounting income. Company income tax is payable as advanced payment tax (APT), so that companies pay tax on the current year’s income. Advanced payment tax is payable in three equal installments on the last business day of April, July, and October each year. Business losses can be carried over for up to 20 years; they cannot be carried back.

5. Special Temporary Rates for Agriculture and Tourism apply. The 2004 Budget introduced a 20 percent tax rate would apply for 10 years to agricultural projects with an investment of K5 million or more commencing between 1 January 2004 and 31 December 2006. The 2006 Budget extended the eligibility period for this temporary concessional tax rate from 31 December 2006 to 31 December 2011. The 2006 Budget also reduced the amount needed to be invested to qualify from K5 million to K1 million. The 2007 Budget introduced a temporary concessional tax rate of 20 percent for 10 years from the date of operation and the availability of infrastructure tax credits for an indefinite period but limited in amount to 1.5 percent of gross income in each year and to the income tax liability for large scale tourist accommodation facilities involving investment of US $10 million or more where construction commences within five years from 1 January 2007 and the resulting facility has at least 150 guest rooms.

6. Other assistance measures for tourism and agriculture have been introduced since 2005, including a double deduction for export market development costs for tourism operators and accelerated depreciation for capital expenditure. These concessions were expanded in 2007. A double deduction for staff training costs was introduced. The depreciation allowable for the first year was increased to 55 percent in 2007. The purchase by foreign tourists of travel and accommodation in PNG while outside the country will be exempt from GST from 1 January 2007. A 150 percent tax deduction for research and development and agricultural extension services, was introduced in the 2004 Budget. The level of infrastructure tax credits available to agriculture was increased from 0.5 percent of assessable income to 0.75 percent of assessable income in 2005. This was further increased to 1.5 percent of assessable income in 2006.

7. Dividend withholding tax of 17 percent is applicable to all dividends paid by resident companies and received by resident companies from sources outside of Papua New Guinea. Dividend withholding tax on dividends paid to nonresidents, resident individuals and resident trust estate is a final tax. While the standard rate of dividend withholding tax on dividends paid to nonresidents is 17 percent, under some of PNG’s bilateral double tax treaties, a lower rate is prescribed. A DWT of 10 percent applies to dividends from mining companies. Dividends from petroleum and gas operations are not subject to DWT.

8. Interest withholding tax of 15 percent was introduced in 1999. Interest withholding tax on interest paid to nonresidents is a final tax. Interest paid by mining and petroleum companies to nonresident financial institutions is exempt.

Taxation of Mining and Petroleum Companies

9. Mining and petroleum companies are subject to different rates of taxation than non-resource companies as summarized in Table IV.2. Corporate income tax for mining companies is payable as APT, as for non-resource companies. At the beginning of each year, the Internal Revenue Commission (IRC) assesses the APT estimate lodged by the tax payer and issues an APT assessment to the mining company. The company then pays this assessment (in Kina) to the BPNG account at the Federal Reserve Bank in New York in three equal installments in April, July, and October. Any differences between the APT assessment and final income tax assessment (also known as wash-up) for mining companies are requested to be paid in U.S. dollars. The payment mechanism of corporate income tax for petroleum companies is same as for mining companies, except that APT lodgment, assessment and payment are all made in U.S. dollars. Any differences between the APT assessment and final income tax assessment or “wash-up” for petroleum companies are requested to be paid in U.S. dollars.

Table IV.2.

Taxation Rates of Petroleum, Gas and Mining Companies

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Rate for nonresident mining companies is 40 percent, no distinction between resident and nonresident companies for petroleum and gas companies.

10. Business losses can be carried over indefinitely.

Other Provisions for the Mining and Petroleum Sectors

11. A mining levy was introduced in July 1999 to capture the windfall gain of the mining industry from the introduction of the VAT, which resulted from the zero-rating of their exports in conjunction with the removal of the 11 percent basic import duty for all sectors of the economy. In 2002 the government commenced phasing out the mining levy over a four-year period, intending to reduce it by one-fourth of the original amount every year. However, phase out of the mining levy was temporarily suspended in 2003. In 2004 the government reinstituted the phase out at the rate of 5 percentage points, and an additional 5 percentage points per annum every year thereafter, with the phase out to be complete by 2008. However, some payments for previous years assessments are expected to be received in 2008.

12. To promote new petroleum projects, the rate of corporate income tax was reduced from 50 percent to 45 percent and then effectively to 30 percent for petroleum projects. The reduced rate does not apply to projects that existed at the time of reduction in January 2001. The government has also introduced special fiscal incentives for Petroleum Prospecting Licenses issued before January 1, 2008, which convert to Petroleum Development Licenses before January 1, 2018. This practically entitles all petroleum projects that commence operation between 2003–17 to a reduced petroleum corporate tax rate of 30 percent for the life of the project. The reduced corporate income tax rate is aimed at providing incentives for new petroleum exploration.

13. Additional profit taxes, which were applied to mining and petroleum company income that exceeded an internal rate of return of at least 20 percent, have been abolished for mining and petroleum projects but not gas ones such as the prospective Gas to Australia project.

14. A national resource tax is imposed by the national government but paid to provincial governments and landowners as a royalty of 2 percent of the net value of output from mining, petroleum and gas projects.

15. Resource companies are allowed a full credit for the cost of approved infrastructure developments that they undertake for the benefit of communities. This Infrastructure Tax Credit (ITC) applies to the region in which they operate or elsewhere. The deduction is limited to the lesser of 0.75 percent (reduced from 2 percent from Jan 2001) of assessable income or tax payable for the year.

Taxation of Superannuation Funds

16. All companies employing 20 or more persons are required to provide superannuation for their employees. Employee contributions are deducted from gross basic salary at a minimum rate of 5 percent, while the employer contributes 7 percent of the employees’ gross salary. Civil servants contribute to the Public Officers Superannuation Fund, where contribution rates of 6 percent for the employee and 8.4 percent for the employer apply.

17. Superannuation funds are subject to income tax. The corporate income tax rate for authorized superannuation funds was reduced from 30 percent to 25 percent in 2004. This is expected to increase domestic savings, and boost member returns and benefits over time. To further encourage savings, the government also introduced concessional taxation arrangements in 2004, allowing the retention of funds in the newly established Retirement Savings Accounts (RSAs) up to a maximum of K 100,000. Under the new arrangement, employees exiting a superannuation fund can voluntarily transfer their savings to RSAs. These savings can be drawn down on a periodic basis free of income tax, providing an income stream in retirement. Draw-down rules limit the rate at which monies can be withdrawn in order to protect savings from dissipation. The earnings of RSAs are also free from income tax, subject to the maximum draw-down rules.

18. The 2004 Budget also introduced concessional tax rates for employer contributions and fund earnings at the benefit stage in accordance with Table IV.3. Previously, only employees who have been with a fund for more than 15 years benefited from the concessional tax rate of 2 percent.

Table IV.3.

Tax Rates Applying to Superannuation Earnings

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B. Indirect Taxation

Goods and Services Tax

19. The goods and services tax (GST) has a uniform tax rate of 10 percent on the price of goods sold by a business, with zero-rated exports, including for the mining and petroleum sectors. Exempted goods and services are mainly medical services, financial services, education services and supplies, fine metals and public transportation fees. GST is levied on all imported goods, with the exception of imports by aid donors and diplomatic missions and for the mining and petroleum sectors. All businesses with an expected turnover in excess of K 100,000 must register for GST. Registration for other businesses is voluntary.

20. From 2004, inland GST collections (net of refunds) are distributed between national government and provinces on the basis of 40 percent to the national government and 60 percent to provincial governments.2 Each provincial share of the net inland collection is calculated in accordance with the formula set out in the GST Revenue Distribution Act. Up until 31 December 2006 these distributions were based on an estimate of the revenue to be received in the year. For 2007 and future years the distribution will be based on the actual net revenue received two years previously, provided the distribution is no less than the actual distribution to a province in 2006.

Excise Taxes

21. Excise taxes are applied to alcoholic beverages (beer, wine, and spirits), cigarettes, other manufactured tobacco products, and fuels. Since the 1999 tax and tariff reform, excise taxes also apply to a few products that were previously protected by high tariffs, such as motor vehicles and audio-visual electronic equipment. The excise rates for alcohol and tobacco products were indexed by 4 percent every six months from May 1, 2003. However, the 2004 Budget froze the indexation for 12 months until November 31, 2004. From December 1, 2004, the excise indexation for alcohol and tobacco products resumed at 2.5 percent. From December 1, 2005, the excise indexation for alcohol and tobacco products became the lesser of 2.5 percent or the increase in the Consumer Price Index every six months, with the rates applying from December 1st 2008 shown in Table IV.4.

Table IV.4.

Excise Tax Rates

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22. From the beginning of 2004, an excise duty exemption was granted to business and individual importing tractors for use in agricultural and forestry work as well as pedestrian controlled tractors. The excise rate was reduced from 10 percent to 0 percent.

Import Duties

23. The Harmonized Commodity Description and Coding System (HS Tariff) was adopted in January 1991. The tariff classifications will be revised in 2008 to reflect the latest international standards. Papua New Guinea became a member of the World Customs Organization in 1998, and is implementing the WTO agreement on Customs Valuations. Papua New Guinea bound its entire tariff schedule during the Uruguay Round. A seven-year tariff reform program (TRP) commenced in July 1999, rationalizing the tariff structure and setting a schedule for the phased reductions of tariffs. Under the TRP, tariff rates were reduced to the current rates of 15, 25, and 40 percent in January 2006. A review of the TRP was concluded in 2007 and recommendations will be considered for implementation in the 2009 budget. Domestic sugar production is protected with a specific 70 percent tariff, which will be maintained until the end of 2010 while domestic canned mackerel production is protected with a specific 20 percent tariff, which will be maintained until the end of 2010.

24. Preferential import tariff arrangements exist with members of the Melanesian Spearhead Group, and a bilateral arrangement with Fiji.

Table IV.5.

Tariff Rates

(in percent)

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The descriptions of the tariff categories are as follows:

  • Duty free items: more than three-fourths of all lines fall into this category.

  • Intermediate rate items: intermediate goods.

  • Protective rate items: goods that are produced, or potentially can be produced, in Papua New Guinea and are seen as requiring a level of protection.

  • Prohibitive rate items: these include fresh vegetables, fruits and nuts (whether or not preserved), beer, cigarettes and cigars, veneer and plywood, articles of jewelry and pearls, prefabricated buildings and sugar. Tariffs for some of these products (plywood, and veneer sheets) will be higher than the prohibitive rate during the phased reduction, but set at the general prohibitive rate in 2006. There is a specific tariff on beer, spirits, cigarettes, matches, shelled birds’ eggs and certain tobacco products.

Import Levy

25. In 2004, a temporary levy of 2.0 percent was imposed on imports, except imports by the mining and petroleum sectors, by churches and charitable groups, and pharmaceuticals and medical goods. The levy was operative until December 31, 2004 only.

Export Duties

26. Export duties are levied only on unprocessed logs, sandalwood, crocodile skins and mineral ores; the duty varies depending on the product. Export duties are calculated on an f.o.b. basis and are payable before shipment. A pre-shipment inspection system on the export of round logs has been supplied by a private contractor since late 1994. Up until 31 December 2006 the log export duty was imposed on a progressive rate scale. A new forestry revenue sharing arrangement was introduced in 2007, which lowered the export duty on logs from 35 percent to 28.5 percent. Landowners are intended to benefit from this change as the export tax reduction is designed to be offset by the payment of an export development levy of K8 per cubic meter. Plantation logs are exempt from export duty. Crocodile skins are charged an export tax set at 5 percent, and sandalwood is charged at a rate of 15 percent.

C. Other Taxes

27. Gaming machine tax (Tax on Pokies) was introduced in October 1996 as a general revenue measure, and last increased by the Gaming Machine (Amendment) Act of 2002. In May 2007, the new Gaming Control Act amended the distribution of the turnover of gaming machines to all stakeholders as shown in Table IV.6.

Table IV.6.

Distribution of Poker Machine Tax

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28. The 2008 budget abolished stamp duty on a number of items. Stamp duties are imposed by the national government on the execution of certain documents. The rates vary by type of document. Stamp duty is abolished on the following items from January 1, 2008: loan agreements or contracts; loan securities, mortgages and foreign securities, hire and credit purchase agreements; bills of lading; and certificates of incorporation. Stamp duty on insurance contracts and debits tax will also be abolished from April 1, 2008.3

29. Departure tax of K 30 is payable by all persons departing Papua New Guinea. Departing international passengers also pay a K 30 terminal facility charge to the Civil Aviation Authority.

30. Land tax may be imposed by provincial governments although this tax is difficult to implement and collect.

D. Tax Concessions and incentives

31. To encourage investment a number of tax concessions are offered. Sector specific concessions in the agriculture, forestry, fisheries, manufacturing, petroleum, and mining sectors are noted above. In addition, and to try to avoid previous practices where ad hoc concessions were granted in particular project agreements, generally applicable tax concessions have been introduced. These include:

  • A research and development incentive, where a 150 percent income tax deduction is allowed for expenditure on research and development;

  • A double deduction for staff training costs, which allows a double deduction against company income tax for the payment of salaries and wages of registered apprentices or other employees attending full-time training at a Government training institute or prescribed tertiary institution;

  • A duty drawback, which is a rebate paid to exporting manufacturers when they export goods equal to the amount of duty already paid on new materials;

  • An export sales exemption, which exempts profits from export sales for the first three years and income from increases in exports for the following four years; and

  • Accelerated and flexible depreciation, which allows for capital assets to be written off at a faster rate than their effective lives. New industrial plant is eligible for increased depreciation up to 100 percent of cost. The taxpayer may elect the amount to be claimed in any year, but not so as to create a loss. To qualify, the plant must have a life exceeding five years, and can be used by the taxpayer or any other person.

32. The Government has over successive budgets estimated and reported on the size of its tax concessions. Table IV.7 shows the estimated size of the tax concessions for the past five years. Details of the amounts forgone are set out in budget documents.

Table IV.7.

Estimated revenue foregone due to tax concessions

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Source: Department of Treasury, 2008 Budget documents.

STATISTICAL APPENDIX

Table 1.

Papua New Guinea: GDP by Sector at Current Market Prices, 2002-06

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Sources: Data provided by the National Statistical Office through 2004; Treasury Department estimates for 2005 and 2006.

Sum of industries less imputed bank service charge, plus import duties less subsidies.

Table 2.

Papua New Guinea: GDP by Sector at 1998 Constant Prices, 2002–06

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Sources: Data provided by the National Statistical Office through 2004; Treasury Department estimates for 2005 and 2006.

Sum of industries less imputed bank service charge, plus import duties less subsidies.

Table 3.

Papua New Guinea: Production of Major Commodities, 2002-05

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Source: Data provided by the Papua New Guinea authorities.
Table 4.

Papua New Guinea: Employment by Sector, 2003-June 2007

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Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Not included in overall index; excludes subcontractors.

Table 5.

Papua New Guinea: Consumer Price Index by Expenditure Group, 2002-June 2007

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Sources: Consumer Price Index, National Statistical Office; and Bank of Papua New Guinea’s Quarterly Economic Bulletin.

Excluding food and goods and services subject to administered prices.

Weights are based on the 1977 expenditure survey.

Table 6a.

Papua New Guinea: Central Government Budget, 2003-07

(In millions of kina)

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Sources: Data provided by the Papua New Guinea authorities; and Fund staff estimates.

Includes Supplementary budget passed in November 2007.

For 2005-07 the government classified earmarked funds that are transferred to government trust funds as expenditure. Under the staff’s cash presentation, the outturns for 2005-06 reflect a cash accounting basis (consistent with Government Finance Statistics) where expenditure occurs only when money is disbursed from these trust funds.

Table 6b.

Papua New Guinea: Central Government Budget, 2003-07

(In percent of GDP)

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Sources: Data provided by the Papua New Guinea authorities; and Fund staff estimates.

Includes Supplementary budget passed in November 2007.

For 2005-07 the government classified earmarked funds that are transferred to government trust funds as expenditure. Under the staff’s cash presentation, the outturns for 2005-06 reflect a cash accounting basis (consistent with Government Finance Statistics) where expenditure occurs only when money is disbursed from these trust funds.

Table 7.

Papua New Guinea: Central Government Revenue and Grants, 2003-07

(In millions of kina)

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Sources: Data provided by the Papua New Guinea authorities; and Fund staff estimates.

Includes Supplementary budget passed in November 2007.

Table 8.

Papua New Guinea: Central Government Fiscal Financing, 2003-07

(In millions of kina)

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Sources: Data provided by the Papua New Guinea authorities; and Fund staff estimates.

Includes Supplementary budget passed in November 2007.

Table 9.

Papua New Guinea: Central Government Domestic Debt, 2003-September 2007

(In millions of kina; end of period)

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Sources: Data provided by the Bank of Papua New Guinea; and Department of Treasury.

Discount value.

Face value.