Papua New Guinea
Taxable income is defined as the sum of assessable income minus allowable deductions. In practice, profits are calculated for tax purposes by reference to the profits reported in the financial accounts. Accounts must be prepared in accordance with PNG accounting principles, which follow the International Financial Reporting Standards (IFRS).
There is no form of stock relief or trading stock valuation adjustment to recognise the effects of inflation in Papua New Guinea. There is a once-only option to adopt the lowest of the cost amount, the market selling value, or the replacement value (which, in practice, may mean that book and tax valuations for trading stock are not aligned). Where the option is not exercised, the value of the stock is deemed to be the cost price; however, neither the income tax law nor the associated regulations provide detailed guidance on what constitutes 'cost price' (the Commissioner General of Internal Revenue has not produced any related guidance to date). It will generally be the case that where a taxpayer has determined a cost price in accordance with IFRS, that cost price will also be accepted for income tax purposes.
In special circumstances, the Commissioner General of Internal Revenue may accept a lower valuation.
There is no general capital gains tax in Papua New Guinea. However, profits arising on the sale of property acquired for the purpose of resale at a profit, or from the carrying out of a profit-making scheme, are taxable as ordinary income.
Unless otherwise exempt from CIT, dividends are included in the assessable income of a shareholder.
Dividends received by a resident company from other companies, whether resident or non-resident, while being assessable to tax, are generally subject to a full tax rebate and are effectively received tax-free. However, where a company has losses on other activities or losses carried over from earlier years, those losses are applied against dividend income before the calculation of the dividend rebate.
In most cases, the payment of a dividend by way of the issue of shares is subject to the same taxation treatment as the payment of a dividend by way of cash or the distribution of other property. However, dividends paid by the issue of shares wholly and exclusively out of profits arising from the sale or revaluation of assets not acquired for the purpose of resale at a profit are exempt from income tax and dividends WHT.
Unless exempt under specific provisions, interest paid or credited by a financial institution, the Central Bank, or a company to a person resident in Papua New Guinea is includable in income, and the person making the payment of or crediting interest in the account is liable to withhold and pay tax upon the amount.
Tax is imposed on royalties and similar payments made to non-residents who do not have a PE in Papua New Guinea. The tax must be withheld by the payer on behalf of the payee and remitted to the IRC. The tax payable on royalties paid to a party who is not an ‘associated person’ is the lesser of:
- 48% of the net royalty (i.e. gross royalty, less applicable expenses), and
- 10% of the gross royalty.
Royalty payments to a non-resident ‘associated person’ are liable for a WHT of 30% of gross payments (subject to any DTT), with no option to adopt the net income basis.
The definition of ‘associated person’ is detailed and widely drawn. Broadly, it encompasses relatives, partners, companies under effective common control, and related trust interests.
There is also a 5% WHT on mining, petroleum, timber, and fishing royalties to landowners.
A partner’s share of the assessable income of the partnership less all allowable deductions to the partnership is includable in the partner’s assessable income for the year of income. Likewise, the partner’s individual interest in a partnership loss incurred in the year of income is an allowable deduction. Further, if income is exempt income to the partnership, this income will be exempt income to the individual partner relative to their individual interest.
Unrealised exchange gains/losses
Generally, foreign exchange gains realised and derived from debts made on or after 11 November 1986 or denominated in a currency other than the Papua New Guinea kina are included in assessable income.
PNG resident companies are liable for CIT on their income from all sources (i.e. including foreign-sourced income). A foreign tax credit may be available to offset foreign tax paid against PNG tax payable (see the Tax credits and incentives section for more information).
There are no provisions in Papua New Guinea that permit the deferral of the taxation of income derived outside Papua New Guinea. Subject to the operation of a DTT, foreign-sourced income derived by a resident of Papua New Guinea is subject to tax in Papua New Guinea in the year in which it is derived, irrespective of whether or not that income is repatriated to Papua New Guinea.