Papua New Guinea
General deduction provisions provide that all losses and expenditures, to the extent incurred in gaining or producing the assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing that income, are allowable deductions. However, the general deduction provisions do not allow a deduction to the extent a loss or expenditure is an outgoing of capital, or of a capital, private, or domestic nature, or incurred in relation to the gaining or production of exempt income.
Depreciation is allowed for equipment and other assets at prescribed rates. A taxpayer must use the diminishing-value method unless an election is made to use the prime-cost method. The applicable diminishing-value rates are 150% of the prime-cost rates.
Plant, machinery, and equipment
Plant, machinery, and equipment (including buildings) are depreciable at rates according to their estimated lives. A taxpayer other than a taxpayer who derives income from mining, petroleum, or gas operations may elect to claim special accelerated depreciation rates for certain capital items. For example, flexible depreciation rates (up to 100%) may be claimed on new industrial plant with a life exceeding five years that is used for manufacturing purposes. Other new plant and articles used in manufacturing, construction, transport, storage, communication, and agricultural production are eligible for an accelerated deduction equal to 20% of cost in the year of purchase. New plant and articles used for tourism are eligible for an accelerated deduction equal to 55% of cost in the year of purchase.
Motor vehicles are generally depreciable at 20% of prime cost. There is no upper limit in value for depreciation purposes.
Buildings forming an integral part of plant, machinery, and equipment are depreciable at a prime-cost rate of up to 7.5%, depending on the construction materials. Buildings housing plants eligible for the one-year write-off deduction (see comments on new industrial plant under Plant, machinery, and equipment above) can be written off in the year of construction. Other income-producing buildings may qualify for the accelerated deduction of 20% in the year of purchase.
Agricultural and fishing plants
Most items of new agricultural and commercial fishing plants qualify for 100% depreciation, as do boats and ships, including ancillary equipment, used solely as dive boats or for scuba diving by accredited tour operators. Other new items having a life exceeding five years used by a person carrying on agricultural operations are eligible for accelerated depreciation in the initial year of use.
A deduction is not available for goodwill or the amortisation of goodwill in Papua New Guinea (this being an amount not deductible under ordinary concepts and an item for which there is no specific deduction provision).
It will generally be the case that start-up expenses will not be deductible in Papua New Guinea. Such expenses are generally either capital, or of a capital nature, or incurred prior to the derivation of assessable income. There is no specific deduction provision for the deductibility of start-up expenses.
A deduction is generally available for interest incurred on an arm’s-length basis, subject to meeting the general principles for deductibility and the requirements under the thin capitalisation rules (see Thin capitalisation in the Group taxation section). Where interest is incurred in connection with the construction or acquisition of a plant or capital asset, that interest is not immediately deductible. Rather, such interest is deemed to form part of the cost of that asset (and in the case of a plant will then form part of the base from which future depreciation deductions may be claimed).
Bad debts are deductible if they have previously been included in assessable income and written off by year-end or if the bad debt was in respect of money lent in the ordinary course of the taxpayer's business of money lending.
An additional amount equal to the actual amount of expenditure incurred is deductible in respect of certain expenditures (e.g. export market development costs, certain donations). In other words, a ‘double deduction’ is available with respect to these items.
It is considered that donations made by a corporate taxpayer meet the general principles for deductibility and hence will generally be deductible (notwithstanding the specific provision dealing with gifts to charitable bodies has no current effect as there are no charitable bodies approved by the Commissioner General of Internal Revenue for this purpose). There are specific provisions in Papua New Guinea’s taxation law dealing with the deductibility of certain donations, some of which provide a deduction for up to 200% of the value of the amount donated.
Contributions paid to an authorised superannuation fund are tax-deductible to the extent that they do not exceed 15% of the relevant employee’s gross taxable salary. Contributions to non-resident funds are not tax-deductible. See the Other taxes section for more information.
A deduction is not allowable in respect of payments of income tax. Other taxes may be deductible, subject to meeting the general principles for deductibility.
Net operating losses
Trading losses may be offset against all income received in the same accounting period or carried forward and offset against future trading profits. The limitation period on the carryforward of losses is generally 20 years. Losses may not be carried back against prior years’ profits. Primary production losses and resource project losses may be carried forward without a time limitation, although, again, they may not be carried back (see the Tax credits and incentives section for more information).
Note that the carryforward of losses is subject to a 50% or more continuity of shareholding and control test, or a continuity of business test where there is a breach of the ownership test.
Losses incurred by a resident taxpayer from a source outside Papua New Guinea (other than in relation to export market development) are not deductible against assessable income derived within Papua New Guinea. In practice, overseas losses can be carried forward and offset against overseas income for up to 20 years.
Payments to foreign affiliates
The deduction available to a taxpayer for management fees paid to an associated person is limited to the greater of:
- 2% of assessable income derived from PNG sources by the taxpayer or
- 2% of the total allowable deductions, excluding management fees incurred by the taxpayer in Papua New Guinea.
The limitation applies to both resident and non-resident taxpayers. Special rules apply to mining, petroleum, and gas companies. These limits may not apply where the recipient of the management fee is resident in a country with which Papua New Guinea has a DTT or where it can be demonstrated that the management fee arrangements do not have the purposes or effect of avoiding or altering the income tax payable in Papua New Guinea.