Papua New Guinea

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. FTCs are calculated separately for foreign business income and foreign property income pools (preventing cross-utilization), and claimants must provide evidence of foreign tax payment within two years from the end of the tax year in which the foreign income arose.  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 – allowable in full under Section 123 in the tax year incurred, as primary production expenditure. 

• Losses incurred in carrying on a primary production business can be carried forward for 20 seven years. 

Tax credit for infrastructure development by agricultural, mining, petroleum, and gas companies

A tax credit is available to primary production, mining, petroleum and gas companies that incur expenditure on a prescribed infrastructure development. The credit is limited to 3% 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 3% or tax payable may be included in the following year’s rebate claim. Unutilised credits or excess expenditure can generally be carried forward for up to seven years from the year it was incurred.  

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

A standardised rate of 30% applies to all companies resident in Papua New Guinea.

Interest deductions

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 2:1 (see Thin capitalisation in the Group taxation section).

Exploration and development expenditures 

Exploration expenditure is expenditure incurred by a licensee in undertaking or in connection with exploration operations. A deduction is allowed for exploration expenditure incurred by the licensee during the tax year. Development expenditures are capital expenditures incurred by a licensee in undertaking or in connection with development operations.  A depreciable asset used in development operations is split into two categories:  depreciable asset with an estimated effective life of less than ten years and for any other depreciable asset (i.e. effective useful life of ten years or more). 

Depreciable assets with effective useful life of less than ten years are depreciated using diminishing value basis at a depreciation rate of 25% while for any other depreciable asset, it is depreciated based on a straight-line basis over ten years. 

Where the remaining life of the resource project is less than four years, the rate at which the depreciation claim is allowed for depreciable assets with useful life of less than 10 years is calculated by referring to the remaining life of the project. The same applies to any other depreciable assets where the remaining life of the resource project is less than ten years. 

Transfer of losses 

Where the licensee’s right to undertake the resource project has been terminated, transferred or expired, losses can be transferred to another resource project held by the licensee or to another licensee that is a group company. 

Commenced projects 

The Division 10 provisions of the repealed ITA 1959 continue to apply to existing resource projects that commenced prior to the commencement date of ITA 2025. The term “commencement” is not defined in ITA 2025. 

Fiscal stability 

The repealed ITA 1959 continues to apply to ensure the fiscal stability guaranteed by the terms of a fiscal stability agreement entered prior to the commencement date of ITA 2025. If there is any conflict between the continued operation of the repealed legislation and the ITA 2025, the continued operation of the repealed legislation has priority. 

Additional profits tax

A modified additional profits tax applies to all resource projects (mining, petroleum, and gas). The additional profits tax applies a tax rate of 30% to returns in excess of a 15% hurdle rate.