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Business Payments Tax / Income Reporting System

Business Payments Tax

Introduction

The business payments tax / Income reporting Systems provide for tax to be deducted, by those payers who made taxable business payments, when the payment is made.

Payments are subject to the following rates –

  • NIL from those business payments made to persons or organisations who have provided a ‘Certificate of Compliance’to the person making the payment (Certificates
  • 10% from business payments made to persons or organisations who do not hold a ‘Certificate of Compliance’.
    Deducted tax has to be remitted to the Internal Revenue Commission in the month after the tax was deducted. After the end of each year every business must lodge a tax return with the Internal Revenue Commission. On assessment of that return the Internal Revenue Commission will allow a credit for the tax deducted during the year to those businesses that have had tax deducted.

OBLIGATIONS OF PAYERS

Who Has To Deduct Tax?
Any person (referred to as a ‘payer’) who pays a taxable business payment must deduct tax.

What Are Taxable Business Payments?
A taxable business payment is:-

(1) any payment (other than the exceptions listed in 2) paid to a businessman, contractor, subcontractor, etc. (referred to as a payee’) by a company, business group, business institution or body for work or services in the following industries

  • building and construction, including repairs, painting, fitting of built-in furniture and any other building or construction activity;
  • road transport of any goods or materials;
  • repair or maintenance of any motor vehicle or any motor vehicle component, including painting, panel beating etc;
  • construction of any items of joinery which will become a fixture in any building;
  • provision of architectural services
  • provision of surveying services;
  • provision engineering services;
  • provision of cleaning services, including cleaning of buildings, offices, roads, parks, sporting venues, etc;
  • provision of security services;
  • provision of advertising services,
  • provision of entertainment of any kind;
  • provision of sign writing services; and
  • provision of professional services, including services as an advisor, manager or consultant

(2) but does not include the following payments:-

  • a payment of a private or domestic nature for which a deduction is not available under any provision of the Income Tax Act;
  • a payment of salary or wages;
  • a payment to a contractor which is taxable under the Foreign Contractor provisions of the Income Tax Act;
  • a payment of exempt income or a payment to an exempt person or business;
  • a payment to or by the trustee of a bankrupt or the liquidator of a company; and
  • a payment to a person holding a valid CERTIFICATE OF COMPLIANCE, exempting his payments from the tax.

What Do I Have To Do If I Pay Taxable Payments?

You have to register as a ‘payer’ with the Internal Revenue Commission by filling in FORM P2, the PAYERS FORM and sending it to the Internal Revenue Commission.

You need only register as payer once, this registration will stay current until you notify the Internal Revenue Commission that you are no longer in business or that you do not anticipate ever again making any more taxable payments.

What Happens When I Have Registered As Payer?

The Internal Revenue Commission will give you a Paying Authority Registration Number and at the end of the year, send you copies of FORMS P7, INCOME TAX DEDUCTION CERTIFICATE and FORM P8, BUSINESS TAX RECONCILIATION STATEMENT.

What Do I Do With These Forms?

If the payee quotes the details of a FORM C3 (Certificate of Compliance) or gives you an original of FORM C3 with the invoice, no tax is to be deducted at all. The payee must obtain an original C3 in all cases where no tax is deducted.

FORM P5, the remittance advice, must be sent to the Internal Revenue Commission, with any tax deducted, by the 14th day of the next month. If no tax was deducted the remittance advice must show ‘NIL”.

At the end of the year you must fill in one FORM P7, the income tax deduction certificate for each person, company or business group to whom taxable payments were made, whether tax was deducted or not, showing name and address of that person or group, the total tax deducted, if any, and the total income paid.

The income tax deduction certificate is completed in quadruplicate. The original and duplicate are given to the person to whom the payments were made by 21 January of the following year. The triplicate is sent to the Internal Revenue Commission together with the reconciliation statement by the 21 February of the following year, and the quadruplicate is kept as your own copy.

What Is The Penalty If You Do Not Register Or Deduct Tax?
There are substantial penalties, including fines of up to K 2,000 and/or imprisonment of up to six (6) months for each time you fail to deduct tax or to pay it to the Internal Revenue Commission.

In addition you become liable to pay the amount of tax that should have been deducted.

Obligations Of Payees

To lodge an income tax return after the end of the year of income and enclose the original of all income tax deduction certificates, whether tax was deducted or not, received for that year from payers.

Certificate Of Compliance

Taxpayers who have been lodging tax returns and paying tax assessed for at least four (4) years and who have a good record with the Internal Revenue Commission (or who consider there are special circumstances in relation to their case) should apply for a Certificate of Compliance.

To apply you must fill in FORM C2, APPLICATION FOR A Certificate of Compliance. Originals only, should be given to payers whenever an eligible (taxable) business payment is received.

What Special Circumstance Will Be Considered For Certificates Of Compliance?

Generally those who have recently started or intend to start a new business which would be subject to the deduction of business income payment tax are considered under the special circumstances of the Income Tax Act, this does not imply automatic granting of a Certificate of Compliance. Situations will include cases where a person (or partnership) previously trading in his own name or where a partnership is dissolved and a previous partner continues the business in his own name. In these cases the Commissioner General will consider the tax record of the persons who form or are associated with the new entity.

Other special circumstances which may be considered are –

A newly incorporated company which has met all tax requirements since incorporation and whose directors or, in the case of a private company, whose share holders and directors have complied with all tax requirements for past four (4) years or,

(b)A newly established partnership which has met all tax requirements since incorporation and whose partners have also complied with all tax requirements for the four (4) years or,

(c)Any other good and sufficient reasons, acceptable to the Commissioner General.

If you consider you qualify under any of the above categories complete all the information requested in FORM C2 and in addition attach a statement detailing the special circumstance you consider apply.

Note the following are not considered special circumstances –

  • That you were unable to get an accountant or registered bookkeeper to prepare your books;
  • That you did not have time to prepare or lodge tax returns;
  • That because of other commitments you could not afford to pay tax;
  • That you did not realise you had to lodge tax returns and pay tax;
  • That your bank repayments are so great you did not have enough cash left over to pay tax (bank repayments are not deductible from income, only that part which is interest).

If I Don’t Have A Tax File Number How Do I Get One?

You can get a tax file number by writing to or contacting the Internal Revenue Commission or sending in a completed P9 FORM. You will be asked to fill in a simple FORM P9 showing some details of your business, after which, you will be issued a tax file number.

Can I Get Any Of The Tax Deducted Back?

Yes, you must fill in and lodge a tax return at the end of the year. To this return you must attach the original copy of each income tax deduction certificate, P7, given to you for the year.

An assessment will then be made of the tax you are liable to pay (if any). If the tax payable is less than the amount deducted during the year any excess deduction will be refunded to you.

When Is Tax Calculated?

Tax is calculated at the time payment is made not when the work was performed.

GENERAL EXPLANATION OF THE FORMS INVOLVED

P2 – Payers Form
This form must be filled in by persons who intend to pay taxable business income and is sent to the Internal Revenue Commission.

On receipt by the Internal Revenue Commission the payer will be registered as a payer of taxable business income, advised of his registration number and sent all necessary stationery to comply with the withholding tax system.

C2 – Application For A Certificate Of Compliance
This form is to be filled in by persons who will be paid taxable business income if they think they qualify for exemption from the withholding tax; this does not imply exemption from Income Tax in general.

In general these will only be granted to persons who have had a good tax record for at least four (4) years or to whom special circumstances apply. If the tax office agrees that the applicant qualifies he will be sent a Certificate of Compliance FORM C3.

C3 – Certificate Of Compliance
A Certificate of Compliance, FORM C3, is sent to any payee who has sent an Application for a Certificate of Compliance, FORM C3, to the Internal Revenue Commission and has qualified for the issue of a Certificate of Compliance. If the payee does not wish to have tax deducted from his payments (where payment is not made in person) an original of FORM C3 should be given to each person paying him taxable business income.

P5 – Paying Authority Remittance Advice
This form must be filled in and sent to the Internal Revenue Commission irrespective of whether or not any tax was deducted in the previous month. The original will be returned and becomes the receipt.

P7 – Income Tax Deduction Certificate
One of these forms must be filled in, in quadruplicate, with details of income and tax deducted, at the end of each year for each person from whom you have deducted Business Payments Tax.

The original and duplicate should be handed to that person, the triplicate plus all unused and cancelled certificates returned to the Internal Revenue Commission with a completed business tax reconciliation statement FORM P8 and the quadruplicate kept for the payers record.

P8 – Business Tax Reconciliation Statement
One of these must be filled in and sent to the Internal Revenue Commission, together with all triplicate copies of used FORMS P7, the income tax deduction certificate and all four (4) copies of unused and cancelled certificates.

Details to be shown include the total tax deducted and sent to the tax office during the year, the total tax shown on the triplicate copies of the tax deduction certificates (the two should match) and details of certificates used and returned unused or cancelled.

P9 – Application For A Tax File Number
Used by payees/payers who do not have a tax file number.

C9 – Annual Income Reporting Statement
Form to be lodged by the Paying Authority detailing all eligible payments made during the twelve-month period 1 January to 31 December each year. Must be lodged by the 15th March in the following year to the year in which the eligible payments are made.

Duplicate to be lodged together with an Income Tax Return for the relevant year.

Payers may produce their own statements providing that permission has been obtained from the Commissioner General to do so.

GUIDE TO THE INCOME REPORTING SYSTEM

Introduction

The following is a guide to the Income Reporting System which applies to all contracts for eligible payments which occur after the 1st of January 1993.

This system involves the reporting of certain types of income to the Internal Revenue Commission by the 15 March in the following year. It also involves the deduction of 10% tax from some payments (see previous chapter on Business Payments Tax System) and the submitting of a copy of a statement, listing all eligible payments made, with the usual Income Tax Returns required to be lodged.

It also aims to assist in the compliance with taxation laws administered by the Commissioner General through the issue of Certificates of Compliance to those taxpayers who satisfactorily comply with the acts.

Eligible Income

This income is defined in the regulations as payments for work in the following industries (as can be seen, these industries are identical to those involved in the Business Payments Tax System).

  • building and construction, including repairs, painting, fitting of built-in furniture and any other building or construction activity;
  • road transport of any goods or materials;
  • repair or maintenance of any motor vehicle or any motor vehicle component, including painting, panel beating etc;
  • construction of any items of joinery which will become a fixture in any building.
  • provision of architectural services;
  • provision of surveying services;
  • provision of engineering services;
  • provision cleaning services, including cleaning of buildings, offices, roads, parks, sporting venues, etc;
  • provision of security services;
  • provision of advertising services;
  • provision of entertainment of any kind;
  • provision of sign writing services; and
  • provision of professional services, or services as an adviser, manager or consultant.

Also included are all payments for the hire and leasing of plant and equipment, including all forms of motor vehicle.

The only exclusions are;

  • Salary or Wage payments to employees, or
  • Payments which fall under the provisions pertaining to foreign contractors, or
  • A payment made to or by a trustee being a trustee of the estate of a bankrupt or the liquidator of a company that is being wound up.

Paying Authority, means a person who makes, or is likely to make an eligible payment and is either, a natural person and the payment is not wholly or principally of a private or domestic nature, or not a natural person (a company, business group, trust, partnership etc).

Duties Of A Paying Authority

A person who is a Paying Authority shall, within 14 Days after becoming a Paying Authority, register on an approved form, with the Internal Revenue Commission.

Upon receipt of completed registration form the Commissioner General will register the Paying Authority and send him a Paying Authority Number.

A person registered as a Paying Authority under the old Business Payment Tax System is NOT REQUIRED TO RE-REGISTER. The old registration number remains in force until cancelled.

REGISTER, Upon making any eligible payment, the Paying Authority is to enter the particulars of the payment into a register kept for this purpose. This register is to be produced when required for inspection purposes by the Commissioner General or his appointed delegate.

Particulars required are;

Date of payment, and Amount of payment, Income Tax File Number, Certificate of Compliance Number (if held), and Amount of tax deducted (if no Certificate held), and Name & Address of payee.

This applies to any eligible payment made whether it exceeds the K 500.00 limit or not. This register is to be kept for a period of 7 years after the transactions or acts were completed.

As a Paying Authority the person MUST EITHER obtain a valid Certificate of Compliance from the payee before entering into a contract where the GROSS PAYMENT will exceed K 500.00 or, if the payee does not have a Certificate of Compliance, deduct Business Payment Tax at the rate of 10% of gross regardless of the value of the payment.

Deducted tax has to be remitted to the Internal Revenue Commission by the 14th day in the month after tax was deducted. A Paying Authority must remit the tax deducted using a form P5 -Paying Authority Remittance Advice – available from the Internal Revenue Commission.

After the end of each year every business must lodge a tax return with the Internal revenue Commission. On assessment of the return the Internal Revenue Commission will allow a credit for the tax deducted during the year to those businesses that have had tax deducted.

Income Reporting Statement

By the 15 March in the following year the Paying Authority is required to lodge an Annual Income Reporting Statement detailing all contracts where the payments exceed K 500.00 or in relation to any one payee where the total eligible payments of several contracts exceeded K 3,000.00.

This statement is made on a form approved by the Commissioner General and requests the following details;

Amount of payment, Income Tax File Number, Certificate of Compliance Number (if held), and Name & Address of payee

It is also required that a payer make a Declaration in relation to any payment that exceeds K 500.00 that prior to entering into the contract or contracts a valid Certificate of Compliance was produced to him by the payee.

Where a Paying Authority does not make any eligible payments in excess of the above amounts a declaration to that effect is required on the Annual Income Reporting Statement.

A copy of these statements is required to be attached to the relevant Income Tax Return.

A further copy of the statement is required to be kept by the paying Authority for a period of 7 years after the completion of the transactions or contracts involved.

Failure to supply a statement by the 15 March, sign the required declarations or attach the statement to the Income Tax Return may render the Paying Authority liable to a penalty not less than K 200.00 or more than K 2,000.00.

Payee, basically a payee is a person who receives an eligible payment under the Income Reporting System.

Duties Of A Payee

Any payee who proposes to enter into a contract in which the payments are expected to exceed K500.00 shall apply in writing for a Certificate of Compliance to the Commissioner General of Internal Revenue on the approved form.

When the application is received the Commissioner General will make a decision on whether to issue a Certificate of Compliance to the payee. In cases where the Commissioner General decides to issue a Certificate of Compliance he will issue a number of copies, which he considers sufficient for the purpose, to the payee.

Where a Certificate of Compliance is not issued the Commissioner General will give written notice to the Payee with reasons why the Certificate of Compliance was not issued.

Such a decision may be reviewed within the normal objection and appeal framework of the Taxation Act.

A payee issued with a Certificate of Compliance will give the certificate to the Paying Authority at the time of letting of the contract.

A payee who is not issued with a Certificate of Compliance must have Business Payments Tax deducted at the rate of 10% of gross.

Failure to apply for a Certificate of Compliance may render the Payee liable to a penalty not less than K 200.00 or more than K 2,000.00.

Certificate Of Compliance

To obtain a Certificate of Compliance the Commissioner General is required to check on a number of items, IN GENERAL, the items that are verified consist of;

  • Has the person lodged their Income Tax Returns, and
  • Has the Income Tax levied been paid, and
  • Does the person have employees, if so,
    1. are they a registered group employer?
    2. are the group tax payments up to date?
    3. has the group stationery been lodged?

This is not a comprehensive list and some taxpayers with other obligations will be required to have satisfactorily complied with those obligations.

Special Circumstances, the Commissioner General having specific regard to the objectives of the division, may issue to the payee a Certificate of Compliance if he feels that it is unreasonable not to do so.

The likely cases under this provision are where the person has approached the Internal Revenue Commission and has an approved extension of time to comply with the taxation act. For example if a person has been granted an extension of time to pay their Income Tax, the Commissioner General may issue a Certificate of Compliance if all other matters are up to date.

Valid Certificates Of Compliance

A Certificate of Compliance remains in force for a period of time and a Payee is advised to lodge an application for renewal on the approved form between 4 -6 weeks before the Certificate expires. Long term backdating of certificates to account for late applications will generally not be conceded.

FURTHER INFORMATION, further information may be obtained by contacting the Income Reporting System section at the Internal Revenue Commission between 8.00am and 3.45pm, either, in person at Revenue Haus, Champion Parade, Town, Port Moresby, by writing to P.O. Box 777 Port Moresby, or Phone 322 6600 and Fax 321 4249.

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