Papua New Guinea

Companies are assessed for CIT separately, regardless of whether they are part of a group of associated or related companies. Losses of one company within a group cannot be offset for tax purposes against the profits of another company within that group, except under the specific group relief provisions in ITA2025. 

ITA2025 provides for transfer of corporate losses (Section 66) between resident companies in the same corporate group. This allows a loss-making company to transfer its tax losses to a profitable group company, subject to conditions including: 

• Both companies must be resident in PNG and part of the same group (typically common ownership/control). 

• The transfer must be agreed in writing between the parties before lodging the income tax return. 

• The transferred loss cannot exceed the recipient company's taxable income for the year. 

• The agreement must specify the amount transferred. 

Additionally, corporate reorganisations allow for tax-neutral rollover relief on intra-group transfers of assets where there is at least 95% direct or indirect common ownership. Where a proper election is made (in writing and lodged by the tax return due date or extended time), no gain or loss arises for the transferor, and the transferee acquires the assets at prescribed values (e.g., written-down value for depreciable assets in a pool, or the transferor's cost for other assets). This facilitates restructurings without immediate tax consequences. 

The Companies Act allows two or more companies to amalgamate and continue as one, and provisions are in place to allow this to occur without any adverse CIT consequences (though full amalgamation relief is more limited under the new Act compared to prior law). 

Transfer pricing

Papua New Guinea has transfer pricing provisions that require cross-border transactions with related parties (associates) to be conducted on an arm's length basis, consistent with OECD guidelines and aimed at preventing base erosion. ITA2025 mandates that taxable income, expenditures, gains, losses, and so on from such transactions reflect the arm's-length price.   

ITA2025 contains documentation requirements to support compliance and audit defence. These include:   

• Local File — Detailed records of the PNG entity's controlled transactions, including functional analysis, comparability studies, and economic benchmarking. 

• Master File — High-level overview of the multinational group's global operations, structure, value chain, intangibles, and transfer pricing policies. 

• Country-by-Country Report (CbCR) — Aggregate jurisdictional data on the group's income, taxes paid, economic activity, and indicators (applicable to large multinationals meeting revenue thresholds aligned with BEPS Action 13 standards). 

Disclosure of international related-party transactions is done through the international dealings schedule (IDS), lodged as part of their income tax return. Corporate taxpayers (including companies, superannuation funds, and unit trusts) must prepare and lodge an IDS if: 

• transactions or dealings with international associates exceed PGK 100,000 in the income year or 

•  aggregate loan balances with international associates exceed PGK 2 million at any time during the income year. 

Multinational groups with PNG operations should prepare and maintain contemporaneous Local File, Master File, and CbCR (where thresholds apply) to substantiate arm's length pricing and reduce adjustment risks during IRC reviews. 

Thin capitalisation

Thin capitalisation rules apply to prevent taxpayers from incurring excessive levels of debt. By excessively gearing their investments, companies are able to claim greater tax deductions through the interest expense charged on such debt. Thin capitalisation rules typically feature a debt-to-equity ratio that governs the ratio by which companies can borrow from related parties relative to their equity. Any interest charged on debt that exceeds this ratio will not be deductible for CIT purposes. 

Papua New Guinea's thin capitalisation rules apply a debt-to-equity ratio of 2:1 for foreign controlled PNG  companies (including PNG permanent establishments of non-residents). The ratio is calculated monthly as the average debt-to-equity over the tax year (average debt and average equity at month-end, divided by months in business in PNG during the year). 

"Debt" includes interest-bearing obligations (including finance lease interest) under financial reporting standards (excluding accounts payable outstanding <120 days), and "equity" follows financial reporting standards. 

If the 2:1 threshold is exceeded, deductible interest is reduced proportionally using the formula: 

Disallowed Interest = Total Deductible Interest × (Excess Debt / Average Debt) 

where excess debt is the amount by which average debt exceeds twice average equity. 

The rules apply to all deductible interest expenditure (including domestic interest and finance lease interest). 

These rules do not apply to licensed financial institutions. Exceptions include where the lender is a resident of a DTA country with a non-discrimination clause, and the average debt does not exceed the arm’s length debt (the amount an unrelated financial institution would lend in an arm’s length transaction). 

Controlled foreign companies (CFCs)

PNG's CFC regime targets the use of low-tax entities to prevent deferral of PNG taxation on property (ie. passive) income, rather than broad income inclusion. The rules attribute a proportional share of such income from a qualifying low-tax foreign entity directly to a PNG resident (individual or entity) holding 50% or more direct or indirect interest, making it assessable in PNG in the year the income arises. 

Key conditions for attribution include: (1) the foreign entity being in a "low-tax jurisdiction" (effective corporate tax rate below 15%, territorial/remittance-based systems, or jurisdictions with financial secrecy enabling beneficial ownership concealment); and (2) the income qualifying as "property income," encompassing dividends, interest, royalties, rent, pensions, annuities, and other passive income types. Attribution is calculated based on the resident's ownership percentage, with self-assessment requiring taxpayers to identify, compute, and declare the liability.