In this section, we comment on the more significant tax credits and incentives available in Papua New Guinea, followed by a summary of those with more limited application.
Foreign tax credit
A foreign tax credit may be available to offset foreign tax paid against PNG tax payable. The foreign tax credit is limited to either the foreign tax paid or the average PNG tax payable on that foreign income, whichever is less. There is no mechanism to carry forward excess foreign tax credits for utilisation in a subsequent year.
Primary production incentives
Key incentives that are available with specific application to primary production activities include:
- Outright deductions for certain capital expenditures, including clearing, preparing, or conserving land for agriculture; eradicating pests; providing labourers’ accommodation; and for the conservation and conveyance of water.
- A 100% deduction is available for a new plant used directly for the purposes of agricultural production, and an initial 20% accelerated depreciation deduction is allowed for a new plant with a life exceeding five years.
- Losses incurred in carrying on a primary production business can be carried forward indefinitely; they are not restricted to the 20-year limit that generally applies to company tax losses.
- Agricultural companies may transfer to their shareholders the benefit of the outright tax deduction available for many types of capital expenditures. The total deduction available to shareholders may not exceed the amounts paid on their shares.
- As part of promoting investment in primary production, a 20% tax rate is prescribed in respect of ‘incentive rate primary production income’ derived by a company (as opposed to the normal 30% tax rate for a resident company or 48% for a non-resident company) for up to ten years.
Agricultural production extension services deduction
A 150% deduction is available for expenditure on services provided free of charge to smallholder growers, including the provision of advice, training, and technical assistance in relation to primary production to assist growers with production, processing, packaging, and marketing issues.
Incentive rate for large-scale tourist accommodation facilities
A 20% tax rate applies to income derived by a taxpayer from the operation of a large-scale tourist accommodation facility or a substantially improved large-scale tourist accommodation facility. The concession applies where construction of such facilities commenced between 1 January 2007 and 31 December 2011, expenditure is 7 million United States dollars (USD) or more, and the taxpayer is registered with the IRC. The rate applies for 14 years after the end of the year of income in which the taxpayer first derives income from the facility.
Double deduction for staff training costs
Certain staff training costs, including the cost of full-time training officers and tourism training, are eligible for a double deduction. The total tax saving is limited to 75% of the expenditure incurred.
Double deduction for export market development costs
Expenditure incurred in the promotion for sale outside Papua New Guinea of goods manufactured in Papua New Guinea or tourism promotion is eligible for double deduction. The total tax saving cannot exceed 75% of the expenditure incurred.
Prior to 1 January 2015, the net export income from the export sale of certain types of goods was exempt for the first four years of income, with a partial exemption in the following three years. This exemption is not applicable from 1 January 2015 (except in respect of goods that qualified for the exemption prior to that date).
Tax credit for infrastructure development by agricultural, mining, petroleum, and gas companies
A tax credit is available to agricultural, mining, petroleum, gas, and certain tourism companies that incur expenditure on a prescribed infrastructure development. In the case of taxpayers engaged in mining, petroleum, and gas operations, the credit is limited to 0.75% of the assessable income or the amount of tax payable for the year (in respect of that mining, petroleum, or gas project), whichever is less. Excess expenditure over the 0.75% or tax payable may be included in the following year’s rebate claim.
Unutilised credits or excess expenditure can generally only be carried forward for two years. In the case of taxpayers engaged in agricultural production, the credit is limited to 1.5% of the assessable income or the amount of tax payable for the year, whichever is less.
A prescribed infrastructure development includes a school, aid post, hospital road, and other capital assets that have been approved as such by the Department of National Planning and the IRC. It cannot be an expenditure required under the Mining Act or the Oil and Gas Act.
Other tax incentives in Papua New Guinea
Other tax incentives available in Papua New Guinea include:
- Manufacturers’ wage subsidy.
- Immediate deduction for the costs of acquiring and installing solar heating plant.
- A ten-year tax exemption for qualifying new business located in prescribed remote areas of Papua New Guinea.
- A specific deduction for environmental protection and clean-up costs.
Incentives for petroleum, mining, and gas operations
Special incentives and rules apply to mining, petroleum, and gas exploration, extraction, and production activities. The main aspects are as follows:
Project basis of assessment
A project basis of assessment (ring-fencing) is adopted for all resource projects. This means losses from other operations, regardless of whether or not they are resource related, cannot generally be offset against resource project income from a particular ring-fenced project. However, there are some concessions to the ring-fencing principle in respect of exploration expenditure and expenditure in respect of discontinued projects and losses arising from site restoration costs.
In general, all costs incurred in the exploration and development phases of the project are accumulated and amortised over the life of the project. Once production starts, an immediate deduction is allowed for 'normal' operating and administration expenses. Capital expenditure incurred after the start of production are capitalised and amortised over the life of the project.
Rate of tax
From 1 January 2017, a standardised rate of 30% applies to all companies resident in Papua New Guinea.
Interest is not deductible prior to the commencement of a resource project. Following the issue of a resource development licence, a person carrying on a resource project or exploration in relation to a resource project may claim a deduction against resource income for interest on money borrowed for carrying on the relevant operations or exploration. This is subject to a number of conditions, including the resource company maintaining a debt-to-equity ratio of 3:1 (see Thin capitalisation in the Group taxation section).
Allowable exploration expenditures (AEE) are amortised over the life of the resource project. The deduction is calculated by dividing the unamortised balance by either the remaining life of the project or four, whichever is less. The amount of the deduction is limited to the amount of income remaining after deducting all other deductions, other than deductions for allowable capital expenditure. In other words, the deduction cannot create a tax loss.
Allowable capital expenditures (ACE) are amortised over the life of the resource project. The ACE is split into two categories: capital expenditures with an estimated effective life of more than ten years (long-life ACE) and capital expenditures with an estimated effective life of less than ten years (short-life ACE).
The annual deduction for long-life ACE is claimed on a straight-line basis over ten years.
Where the remaining life of the project is less than ten years, the rate at which the deduction is allowed is calculated by referring to the remaining life of the project. For short-life ACE, the annual deduction is calculated by dividing the unamortised balance by either the remaining life of the project or four, whichever is less. For new mining projects, the deductions for both long-life ACE and short-life ACE are calculated by dividing the unamortised balance by either the remaining life of the project or four, whichever is less.
The amount of the deduction for ACE is limited to the amount of income remaining after deducting all other deductions. In other words, the deduction cannot create a tax loss.
Off-licence exploration expenditure
A major easing of the ring-fencing principle applies to taxpayers that are involved in a producing project where the taxpayer or a related party incurs exploration expenditure outside the area of the productive project. In this situation, the taxpayer can elect (whether or not it is currently involved in a producing project) to add such exploration expenditure to an exploration pool that can be amortised against income from the producing project.
The amount allowable as a deduction from this exploration pool in respect of resource operations carried on by the taxpayer or a related corporation is the lesser of:
- 25% of the total undeducted balance of expenditure in the exploration pool or
- such amount as reduces CIT (other than additional profits tax [see below]) that would, but for this deduction, be payable by the taxpayer and its related corporations in respect of those resource operations for that year of income, by 10% (or 25% for mining projects).
Once a resource project derives assessable income, the deduction for management fees is restricted to 2% of operating expenses other than management fees. During the exploration phase of a project, the amount of management fees that can be treated as allowable exploration expenditure is limited to 2% of the exploration expenditure other than management fees. Furthermore, during the development phase, the amount of management fees that can be treated as allowable capital expenditure is limited to 2% of the allowable capital expenditure other than management fees.
Transfer of expenditure
When interests are transferred from one taxpayer to another, the vendor and purchaser can agree to transfer deduction entitlements for the unamortised balances of allowable exploration expenditure and allowable capital expenditure to the purchaser.
Liquefied natural gas (LNG) project
A number of provisions with specific application to the PNG LNG project have been included in the Income Tax Act, Stamp Duties Act, Goods and Services Tax Act, Customs Act, and Excise Act.
Additional profits tax
From 1 January 2017, a modified additional profits tax applies to all resource projects (mining, petroleum, and gas). The new additional profits tax applies a tax rate of 30% to returns in excess of a 15% hurdle rate.