Withholding Taxes

General Information

Withholding Taxes are levied on several payments: The person making the various payments is to deduct withholding tax which is as

  • Dividends (15%)
  • Interest (15%)
  • Management fees (17%)
  • Foreign contractors (15%)
  • Royalties (30% where recipient is an associate and 10% where recipient is not an associate)
  • Overseas ships (2.4%)
  • Non-resident insurers (4.8%)

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:

  • Non-resident companies or individuals: The dividend withholding tax is a final tax on the dividend.
  • Resident Companies: The dividend withholding tax gives rise to a tax credit, which may be offset against a liability to deduct this tax when the company pays a dividend itself. These tax credits must be used within seven years.
  • Resident individuals: The dividend withholding tax is credited against the individual’s normal tax liability on that dividend income. It is the final tax on dividend as individuals are not required to declare dividend income in their return of income with effect. from 1 January 2006

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

ADMINISTRATION OF MANAGEMENT FEE WITHHOLDING TAX WHERE PAPUA NEW GUINEA (PNG) HAS A DOUBLE TAX AGREEMENT (DTA)

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.

The table below shows the correct tax rate to be applied as per the treaties

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

Non-Treaty  

 

Non-Resident

Yes

17%

Treaty  

 

Canada YES

17%

Australia YES

17%

Singapore YES

17%

New Zealand

YES

17%

China NO

Germany

NO
South Korea NO

UK

YES

10%

Malaysia

YES

10%

Indonesia

YES

10%

Fiji YES

15%

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.

Foreign Contractor Withholding Tax

Introduction:

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.

What is a Foreign Contractor?

A Foreign Contractor is any person who is a party to a prescribed contract and is not-

  • a resident company in Papua New Guinea; or
  • a person, other than a company, who is ordinarily resident in Papua New Guinea; or
  • an employee under the Salary or Wage provisions of the Papua New Guinea Income Tax Act; or
  • a person who derives a Management Fee to which the provisions of the Management Fee (Withholding) tax applies.

IMPORTANT NOTE:

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.

What is a Contract?

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.

What is a Prescribed Contract?

A contract is prescribed where the contract or sub-contract involves the performance of a prescribed purpose.

What is a Prescribed Purpose?

A purpose is prescribed where it is for or in connection with-

  • the installation, maintenance or use in Papua New Guinea of substantial equipment or substantial machinery; or
  • the construction in Papua New Guinea of structural improvements or other works, including-
    1. the construction of roads, including bridges, culverts or similar works forming part of a road;
    2. the erection of buildings, fences or similar improvements;
    3. the cleaning or draining of land;
    4. the construction of ports or port facilities;
    5. the construction of facilities for the provision of water, light, power or communication; and
    6. the provision or improvement of transport facilities of any kind; or
  • the use of, or right to use, in Papua New Guinea, any industrial, commercial or scientific equipment including any machinery or apparatus or appliance, whether fixed or not, and any vehicle, shipping vessel or aircraft, and includes
  • the provision in Papua New Guinea of professional services as an advisor, consultant or manager.

What is the liability of the person making the payments?

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-

  • provide the Commissioner General with a copy of the signed contract or written notification of an agreement within fourteen (14) days of signing;
  • not make any payment to the Foreign Contractor or transfer out of the country any such payment until written confirmation is received from the Commissioner General.

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;

  • Companies, Partnerships, Joint Ventures;
  • Statutory Authorities;
  • Provincial Governments;
  • National Government Departments.

What is the rate of tax applicable?

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.

How do I pay this tax?

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.

When do I pay this tax?

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.

Penalties

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.

Deemed assessments

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.

Alternative system of taxation collection

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.

What is the liability of the Foreign Contractor?

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.

Double Tax implications

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.

Further information.

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:
Write to:

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
Canada 10%
Australia 10%
Singapore 10%
United Kingdom 10%
Malaysia 10%
China 10%
Germany 10%
South Korea 10%
Fiji 10%

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.

Non-Resident Insurer
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.

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