http://irc.gov.pg/

Taxation of Companies

Financial Period

Companies must lodge their tax returns based on a 31 December year end unless they have permission from the Commissioner General to adopt an alternative period.

Residence

A company will normally be treated as a resident of Papua New Guinea in a particular year if the company is:

  • Incorporated in Papua New Guinea; or
  • Carries on business in Papua New Guinea and has either its central management and control or its voting power is controlled by PNG residents shareholders.

Liability of Resident Companies

A resident company is taxed in Papua New Guinea on its world-wide income. Non-resident companies pay tax only on their Papua New Guinea income.

Calculation of taxable income
There are special rules applying to certain companies such as mining, petroleum and gas companies. In most cases, however, taxable income is generally equivalent to accounting income except where the income tax law requires specific calculations to be made.

Major areas where there are specific rules for working out amounts to include in taxable income or claim as deductions etc are as follows:

Tax rates

2009 Tax Rates for Companies are:

Resident companies: 30 percent; and
Non resident companies: 48 percent.

However, there are different tax rates for income from mining, petroleum and gas. In addition, companies may also liable to other taxes such as dividend withholding tax or additional profits tax.

Dividends and Deemed Dividends
Dividends received by a resident company from any other resident company are included in the assessable income of the recipient. The company receiving the dividends will be entitled to a rebate against tax otherwise payable on the dividends received.

A resident company that has paid dividend withholding tax (make link to below**) on Papua New Guinea sourced dividends received can offset the amount against withholding tax payable on dividends it pays. Unapplied dividend withholding tax at the end of the financial year can be carried forward 7 years towards future withholding tax on dividends paid.

All dividends paid by a resident company are normally subject to dividend withholding tax at 17% of the dividend paid (or 10% for mining companies). This applies to dividends paid to residents and non residents. The rate of dividend withholding tax may also be modified as a result of the operation of a double tax treaty (LINK for more information)

Dividend withholding tax does not apply in a number of circumstances: Broadly, the following types of dividends are exempt:

  • Dividends paid to exempt bodies such as sporting or charitable bodies, etc;
  • Dividends paid to superannuation funds established for the benefit of employees;
  • Dividends paid out of pioneer income;
  • Dividends paid out of capital profits from non-redeemable bonus shares.

Dividend withholding tax is payable on deemed dividends including:

  • Liquidator distributions of accumulated revenue profits;
  • Loans to shareholders of private companies ;
  • Excessive remuneration of directors (or their relatives) of private companies;
  • Shares sold as part of a tax avoidance scheme.

Foreign Losses
Losses incurred in deriving income from sources outside of Papua New Guinea are not an allowable deduction from income sourced in PNG. Overseas losses are offset only against foreign source income. These losses can be carried forward for up to 20 years.

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Provisional Tax
Provisional tax may be paid by companies to ensure that income tax that is expected to be payable on their income in a particular fiscal year will be collected during that year. This is done by the Commissioner General issuing a provisional tax assessment based on the last income tax return lodged. If no tax was payable on the prior year return (or one was not lodged) the Commissioner General can estimate the tax that should be payable.

Provisional tax is payable in three equal installments on or before 30 April, 31 July and 31 October. The amounts paid will reduce the company’s tax bill when it lodges its income tax return for that year. If the taxpayer believes that the tax due for a particular year will be less than the provisional tax assessed by the Commissioner General it may apply to have the provisional tax assessment reduced to reflect the taxpayer’s estimated tax due. Penalties may apply for variations which are significantly below what is ultimately payable by the company.

Mining, Petroleum and Gas Projects (Resource Projects)

Project Basis of Assessment – Ring-Fence principle
Income earned from a resource project is assessed as if it were the only income of the taxpayer. Deductions are restricted to expenditure exclusively connected with the project, except for limited exceptions. Where there is deductible expenditure or income not relating solely to the project, then expenditure or income is apportioned on a reasonable basis.

Income Tax Rate for Resource Projects
Different rates of tax apply for different types of resource projects as shown in the table below:

Type of Project Rate of Income Tax Rate of DWT
Petroleum (project in production prior to 31/12/2000) 50% none
Petroleum (project commencing production from or after 01/01/2001) 45% none
Petroleum (PPL granted between 01/01/03 & 31/12/07 and production licence granted before or by 31/12/2017.) 30% none
Gas 30% none
Mining – resident

– non- resident

30%
40%
10%
none

The rate of income tax for petroleum projects was reduced from 50% to 45%, commencing in 2001. The tax rates for the non-resident mining companies have been reduced to 40% from 48% with effect from 1 January 2006.

For petroleum and gas, there is no distinction between a resident and non-resident company.

Advance Payment Tax
A taxpayer who derives assessable income from mining, oil or gas operations is liable to pay the income tax liability for a year of income, based on its estimate of taxable income for that year. The taxpayer is required to furnish the estimate of its taxable income by 31 March of that year and pay the income tax calculated on the estimate of taxable income in three installments; on 30 April, 31 July and 31 October of that year.

Variation of Advance Payment Tax Estimate
Taxpayer who request a review of the estimated taxable income previously furnished can apply on payment of the installment due.

Project Basis of Assessment Ring-Fence Principle
Income earned from a resource project is assessed as if it were the only income of the taxpayer. Deductions are restricted to expenditure exclusively connected with the project, except for limited exceptions. Where there is deductible expenditure or income not relating solely to the project, then expenditure or income is apportioned on a reasonable basis.

Capital and Exploration Expenditure: Allowable Deductions

Allowable Capital Expenditure (ACE)
Expenditure on long life assets, with a normal useful life of 10 years or more, is amortised on a straight line basis over 10 years. For other capital expenditure, residual balance is divided by the lesser of four or the remaining life of the project. However, the amount of deduction which can be claimed is limited to the amount of taxable income remaining after all other deductions have been claimed and cannot create a loss.

Exploration Expenditure
Exploration expenditure may be carried forward for a period of 20 years (for income tax returns before Jan 2001, the carry forward limit was 11 years). If the exploration expenditure is not claimed within a period of 20 years from the granting of a Resource Development Licence the expenditure cannot be claimed in future years.

Allowable Exploration Expenditure (AEE)
Deductions for AEE are calculated by dividing the residual exploration expenditure at the end of a year of income by the lesser of four or the remaining life of the project. The amount calculated is available as a deduction in the year of income however, it can only be claimed up and to the amount of taxable income remaining after all other deductions have been claimed (other than allowable capital expenditure deductions) and cannot create a loss.

Immediate Deductions for Certain Capital Expenditure
Where the cost of a capital item incurred on a resource project is not greater than K1000. 00 the full cost is an allowable deduction in the year incurred

Additional Exploration Deductions
A Company carrying out resource operations may elect to ‘pool’ exploration expenditure it incurs in other exploration licence areas. The company is then entitled to claim 25% of the residual value of the exploration pool, in addition to normal allowable exploration expenditure deductions.

The deduction may not create a tax loss, and may not reduce tax payable by the taxpayer on combined resource operations by more than 10%.

For a company carrying on mining operation and exploring for minerals, the deduction limit is such amount as would reduce tax payable by 25% .

Accelerated Deductions
It should be noted that accelerated deductions are, from Jan 2001, no longer available.

Operating Expenses
Companies are entitled to deductions for their share of operating expenses incurred by the operators in a resource project. They are also entitled to deductions for sole costs incurred by themselves in accordance with provisions applying to resource projects under Division 10 and under general tax provisions.

Interest Deductions
If in any year, the debt/equity ratio is greater than 3:1 for a resource project, the deduction allowed for interest in that year is limited to the amount which would have been payable if the debt/equity ratio had been 3:1.

Additional Royalty and Levies

Royalty
Royalty for petroleum companies is calculated at 2% of well-head value and is treated as a deduction. However, where development levy also applies, royalty is treated as a tax credit.

Development Levy
Development levy is also calculated at 2% of well-head value and is allowable as a tax deduction.

Infrastructure tax credit
Resource companies are allowed a full credit for the cost of any approved infrastructure developments which they undertake for the benefit of the community in which they operate (or other areas). The deduction is limited to the lesser of 0.75% (reduced from 2% from Jan 2001) of assessable income or tax payable for the year.

Unused expenditure deemed tax credits must be utilised within the next two years from the date the expenditure was incurred

Special Infrastructure Tax Credit
Resource companies are allowed a full credit for the cost of any approved infrastructure developments which they undertake for the benefit of the community in which they operate (or other areas). The deduction is limited to the lesser of 0.75% (reduced from 2% from Jan 2001) of assessable income or tax payable for the year.

Unused expenditure deemed tax credits must be utilised within the next twenty years from the date the expenditure was incurred

Incentives for Mining and Petroleum Designated Gas Projects

Double deduction of Exploration Expenditure for mining operations: A double deduction is allowable on exploration expenditure pursuant to an exploration license issued under the Mining Act 1992 from which a mining development license was drawn on or after 1 January 2003.

Loss Carry Forward: Loss incurred by a taxpayer in carrying out resource operations can be carried forward indefinitely.

Pooling of Exploration Expenditure: Resource companies can make election to put all Exploration expenditure incurred outside of a resource project into a pool and claim 25% of the pooled expenditure as a deduction against income from the project. The deduction is limited to 25% of tax payable for mining companies and 10% of tax payable in the case of petroleum companies.

Incentive Rate for Petroleum Operations:
An incentive tax rate of 30% is available to petroleum operations arising out of a petroleum prospecting license (PPL) granted between 1 January 2003 and 31 December 2007 and from which a petroleum development license (PDL) was granted on or before 31 December 2017.

Additional Provision for Allowable Capital Expenditure
As of 1 January 2003, capital expenditure incurred by a company carrying on mining project will be pooled and the deduction allowed will be 25% of the value of the pool at the end of the year. This applies to projects in which a mining lease or special mining lease was issued on or after 1 January 2003.

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