Thursday, 29 December 2016

Papua New Guinea taxation of resources/non-resources sectors harmonized, CbC reporting introduced

The legislative instruments giving effect to the tax changes announced in Papua New Guinea’s (PNG’s) 2017 budget presented on 1 November 2016 have been passed. The 2017 budget is the Minister for Finance’s last budget before the 2017 national elections. As expected, the budget does not include a major overhaul to the tax legislation before the elections, but there are some unexpected and significant changes, mostly in line with the Tax Review Committee recommendations that were published in 2015.
The most important tax changes affecting companies are as follows (unless otherwise noted, the changes will apply as from 1 January 2017):

Corporate tax rate and deductions
In line with the recommendations of the Tax Review Committee, a number of tax concessions for resources companies will be removed to simplify the system and harmonize the taxation of resources companies with non-resources companies.
The company tax rate applying to resident companies will be standardized at 30% across all sectors of the economy.
Resident companies operating in the petroleum industry currently are taxed at different income tax rates, up to 50%.
The alignment is being implemented along with the standardization of a 15% dividend withholding tax across all industries.
The double deduction for pooled exploration expenditure currently available to mining companies will be repealed.

Additional Profits Tax (APT)
The APT, which applies to companies operating in the resources sector in addition to the company income tax, will be revamped. The APT currently applies only if a resources company receives a return that is above the average rate of return on its investments, and it applies only to gas projects (in practice, the APT is applied only to the “PNG LNG” project). The changes will extend the APT to all resources projects. Under the revamped tax, the hurdle rate will be a
flat nominal rate of 15%; there will be a single APT threshold rate of 15% and an APT rate of 30%.

Dividend withholding tax
The dividend withholding tax, currently applicable at a rate of 17% to dividends paid to residents and nonresidents, will be standardized at 15%, applicable to all sectors. Dividends paid or credited by mining companies currently attract a rate of 10%, while dividends from petroleum and gas companies’ operations are exempt income and not subject to any dividend withholding tax. Dividends paid out of mining, petroleum and gas operations now will be treated similarly to dividends paid out of other business operations. The standard dividend withholding tax rate, therefore, will result in a significant increase in the tax costs to the resources sector.
Dividend withholding tax no longer will apply where a PNG company pays dividends to another PNG company. Tax will have to be withheld only where a PNG company pays or credits a dividend or an amount that is deemed to be a
dividend to a resident individual, a resident trust estate or a nonresident person. Dividend withholding tax no longer will be a final tax, which means that dividend income will not be excluded from the assessable income of the recipient.
For instance, a resident individual who is in the highest income tax bracket will have an effective tax rate of 59.4% apply to dividend income.

Interest withholding tax 
The exemption from income tax and interest withholding tax for foreign companies lending to a company engaged in the PNG resources industry will be repealed, in line with the measure to standardize the corporate income and
withholding tax rates that apply to companies operating in the resources and non-resources industries.

Foreign contractor tax (FCT)
The taxation of foreign contractors will be standardized. The FCT withholding tax regime no longer will be correlated with 25% of the nonresident income tax rate of 48% (i.e. 12%); instead, a standard 15% withholding tax will apply to
all foreign contractors operating in PNG. Under the new FCT rules, foreign contractors no longer may apply for taxation on a net income basis, under which the contractor prepares and files an annual income tax return with the PNG tax
authorities. Taxation on a net income basis has been especially beneficial to foreign contractors that had operating margins below 25% on their PNG contracts, so this reform is significant for foreign contractors working in PNG. The PNG client, which is the tax agent to the foreign contractor, will be required to submit the foreign contract to the PNG tax authorities within 14 days of its signing and deduct and pay the foreign withholding tax to the authorities;
penalties will apply for noncompliance.

CbC reporting
A CbC reporting obligation, in line with action 13 of the OECD’s BEPS project, will be introduced in relation to transfer pricing. An annual CbC report will be required where a parent company of a multinational enterprise (MNE) group is
located in PNG for tax purposes. Separately, a qualifying subsidiary located in PNG or a PNG branch of a foreign subsidiary of an MNE group will have to file a CbC report with the PNG tax authorities in specific circumstances.
The report will have to contain aggregate information relating to the amount of revenue, profit or loss before income tax, income tax accrued, stated capital, earnings, number of employees and tangible assets other than cash or cash
equivalents with regard to each jurisdiction in which the MNE group operates. In addition, the report will need to include the identity of each qualifying entity of the MNE group, setting out the jurisdiction of tax residence of such entity (and, where different from such jurisdiction of tax residence, the jurisdiction under whose law such entity is organized) and the nature of the main business activities of such entity.
The CbC report will have to be prepared in a standard template from the OECD and filed with the PNG authorities no later than 12 months after the last day of the reporting fiscal year of the MNE group. The tax authorities will use the
CbC report for purposes of assessing high-level transfer pricing risks and other BEPS-related risks in PNG, as well as for economic and statistical analyses, but the information will need to be kept confidential. However, transfer pricing
adjustments by the tax authorities will not be based on the reports.

Taxation of housing benefits provided to employees
Of particular concern to companies with tax equalization schemes for expatriate employees, the taxable value of housing benefits provided to employees has been increased. This will have a substantial effect on how much income tax employees pay on such benefits. For instance, employees in the highest rental bracket (above PGK 5,000 per week) will pay an additional PGK 19,656 per annum in income tax. Employers increasing an employee’s remuneration to compensate for the higher tax should account for the fact that the increase is also taxable.
Source: Deloitte