Withholding Taxes are levied on several payments: The person making the various payments is to deduct withholding tax which is as
Dividend Withholding Tax (DWT)
Whenever a Papua New Guinean resident company, other than a company engaged in Petroleum and Mining operations, pays a dividend it must deduct 15% Dividend Withholding Tax and remit it to the Internal Revenue Commission by the 21st day of the following month.
The withholding tax is legally a tax on the receipt of the dividend. Its subsequent status therefore depends on the status of the recipient:
Interest Withholding Tax (IWT)
Most interest derived by residents or from sources within PNG is subject to withholding tax at a rate of 15%. This tax is an interim tax except in the case of non-resident recipients.
Management Fees Withholding Tax
Management Fee Withholding Tax (MFWT) is imposed on non-resident entities who receive payments made either by a resident of PNG or by non-resident companies with a permanent establishment in PNG for tax purposes, of taxable management fees.
“Taxable management fee” means that part of a management fee that is an allowable deduction after the applicationof Section 68AD or Section 155M of the Income Tax Act 1959 (as amended) (ITA), as the case may be.
Where a DTA with PNG contains specific provisions which provide for management fees or technical fees, IRC will automatically apply the limits imposed by sections 68AD and 155M of the ITA, as the case may be, and allow theexcess only after the transaction is proven to be at armʼs length by the taxpayer, consistent with the Associated Enterprises articles in the treaty.
The armʼs length principle is provided for in most of PNGʼs DTAs, under either the Business Profits or AssociatedEnterprises articles. Where that is the case, the excess amount of management fees will not necessarily be limited under section 68AD and 155M. MFWT will only apply to the amount allowable as a deduction. However, it will be up to the taxpayer, who claims the application of a treaty to prove to the satisfaction of the Commissioner General in each case that the amounts claimed do legitimately reflect an armʼs length amount.
Any management fees paid by a resident to a non-resident for management services performed outside PNG is subject to MFWT at the rate of 17% of the gross taxable management fees. This rate is reduced if the non-resident is a resident of a country with which PNG has a DTA. .
We have realized that a number of PNGʼs DTAs have been misinterpreted by exempting the application of MFWT chargeable on management fees paid to certain jurisdictions.
We have now reviewed this position to have the correct tax rate applied on management fees paid to residents of certain jurisdictions where PNG has a DTA with. This notice supersedes any previous advice etc. issued by the IRC on this subject.
Name of the Country, where the recipient is Resident
|Whether Management fee Withholding tax be deducted||
If yes, at what rate it is to be deducted
Effective 01 February 2021, all management fees paid to non-residents will be taxed at the applicable witholding tax rates as shown in table above.
The object of these provisions is to assist in the collection of Income Tax from Foreign Contractors in relation to certain types of income derived by them. This tax is described as Foreign Contractor Withholding Tax (FCWT).
Broadly, this tax applies when a non-resident contractor is engaged by a PNG resident to perform a contract for ‘prescribed purposes’. The PNG resident payer is required to deduct tax at a flat rate of 15% FCWT on all payments it makes to the foreign contractor under the prescribed contract.
A non-resident contractor, as at 1 January 2017 no longer has the option to lodge an annual income tax return and be assessed on an actual net profit or loss basis. Prescribed purposes include construction, installation, use of industrial equipment, or provision of professional or consultancy services.
A Foreign Contractor is any person who is a party to a prescribed contract and is not-
Any individual carrying out personal service in Papua New Guinea would normally be deemed to be an employee as such and subject to Salary or Wages Tax . In these cases, the Salary or Wages Tax provisions over ride the Foreign Contractor provisions.
A contract is an agreement, whether express or implied, whether in writing or not, and even, whether or not enforceable or intended to be enforceable.
A contract is prescribed where the contract or sub-contract involves the performance of a prescribed purpose.
A purpose is prescribed where it is for or in connection with-
Any person carrying on business in Papua New Guinea, who enters into a contract for prescribed purposes with a Foreign Contractor is considered to be the agent of that Foreign Contractor, and is then required to-
Such confirmation will state that arrangements have been made to his satisfaction for the payment of any income tax that has been assessed, or may be assessed, to that Foreign Contractor.
Some of those persons liable to the above include;
Currently the withholding rate is 15% of the gross payment and applies to non-residents who are earning income from a prescribed contract entered into with a resident company. This prescribed contract income once taxed is a final tax and therefore should not be included in the non-resident’s income tax return where they are required to file a tax return for other income in PNG through diversified business operations.
The person making the payments will be forwarded Remittance Advice Forms by this office.
These forms have spaces for the name of the Foreign Contractor, amount of payment and Tax File Number as allocated to that Foreign Contractor.
The file number will be supplied with the notification that tax is to be deducted along with the remittance forms.
Tax is to be deducted at the time that payment is made to the Foreign Contractor.
This tax is then paid to the Internal Revenue Commission, on the Remittance Advice provided, by the 21st day of the following month.
Late payment of tax deducted may lead to additional tax being imposed by way of penalty at a rate of 20% per annum on the amount remaining unpaid.
The Income Tax Act also provides for a wide range of penalties and fines to enable enforcement of these provisions of the Act.
One provision the payer should note, not only may he be fined between K 400.00 and K 2,000.00 for failure to deduct tax from a prescribed contract, he may also be liable for the amount of tax not deducted.
At the end of each financial year a deemed assessment is raised which makes the amounts of Prescribed Withholding Tax equal to the amount of instalments paid.
This notice is available on request and may be used by Foreign Contractors as evidence of payment of taxation. See Double Tax Implications below.
The Foreign Contractor, with the express approval of the Commissioner General of Internal Revenue, may lodge an Income Tax Return showing income derived from Papua New Guinea operations and expenditure relevant to that income.
Where approval to lodge a return has been granted the Foreign Contractor is required to pay Income Tax assessed on the actual profit disclosed in the return.
Provided that return is acceptable to the Commissioner General an exemption from Withholding Tax normally required to be deducted may be granted.
In some cases where approval has been granted to lodge an Income Tax Return an exemption from the Withholding Tax is granted at the same time.
In all these cases the payer of monies to a Foreign Contractor is to await written confirmation of the liability of the Contractor to Withholding Tax before making any payments.
It is the responsibility of the Foreign Contractor to deduct and forward to the Internal Revenue Commission the Salary and Wages Tax due in respect of staff employed in Papua New Guinea.
If the Foreign Contractor is carrying out work in Papua New Guinea there must be employees involved and the Foreign Contractor MUST apply for registration as a Group Employer.
An application for registration as a Group Employer is forwarded by this office on initial notification as a Foreign Contractor. If a Foreign Contractor does not submit a completed Group Employer Registration form, then the Foreign Contractor must explain the circumstances whereby they believe they are not required to register.
The Foreign Contractor may obtain credit in his/her home country for the Withholding Tax deducted from the Contract payments.
This is done by either including a copy of the deemed notice of assessment or a letter of verification of payment obtainable from this office.
Either of these are to be included with the tax return lodged by the Foreign Contractor in his/her country of residence for Taxation purposes.
More detailed information Link to detailed information page if there is more information available
A more detailed kit including relevant sections of the Act is also available from the IRC.
If you require further information:
The Commissioner General
Internal Revenue Commission
Attention: Senior Advising Officer, Foreign Contractors Section
P.O. Box 777
PORT MORESBY NCD
T: +675 322 6600
F: +675 321 7621
Royalty withholding tax
Royalties paid to non-residents for provision of technical know-how, trademarks, secret formulas, patent, design or model, copyright etc would be subject to tax at the rate of 10%, if paid to an unassociated person and 30% if paid to an associate person. This rate is reduced if the non-resident associate is a resident of a country, which Papua New Guinea has a Double Tax Agreements with, as follows:
|Country||Withholding tax rate|
The person making payment to the non-resident is required to deduct the withholding tax and remit it to the Internal Revenue Commission within 21 days of the following month. Late payment of tax deducted may lead to additional tax being imposed by way of penalty at the rate of 20% per annum on the amount remaining unpaid.
An attached statement (Section 357(1) Statement) must be completed and forwarded to this Officer, every time a royalty payment is made. Copies of Agreements entered into must be provided to the Commissioner General for her determination.
Overseas Ship Owner or Charterer
Ship belonging to or chartered by a non-resident to carry cargo from Papua New Guinea ports for overseas destinations is liable to tax on 5% of the gross freight taxed at the non-resident tax rate of 48%. The effective tax rate is 2.4% or, at the option of the recipient, 48% of the actual net profit.
A non-resident insurer who derived premiums under an insurance contract from an insured person in Papua New Guinea is liable to tax on 10% of the gross premiums taxed at the non-resident tax rate of 48%. The effective tax rate is 4.8% or, at the option of the recipient, 48% of actual net profit.