Papua New Guinea Individual Tax Guide

Papua New Guinea

Port Moresby GMT +10

EY

Level 4

Credit House

Cuthbertson Street

P.O. Box 1380

Port Moresby

Papua New Guinea

Executive contacts

Colin Milligan

Brent Ducker

+675 305-4125

Fax: +675 305-4199 Email: colin.milligan@pg.ey.com

+61 (7) 3243-3723 (resident in Brisbane)

Fax: +61 (7) 3011-3190 Email: brent.ducker@au.ey.com

Michael Hennessey +61 (7) 3243-3691 (resident in Brisbane)

Fax: +61 (7) 3011-3190 Email: michael.hennessey@au.ey.com

Immigration contact

Katrin Wilkinson

+61 (2) 9248-5148 (resident in Sydney) Fax: +61 (2) 9248-5505 Email: katrin.wilkinson@au.ey.com

A. Income tax

Who is liable. Residents of Papua New Guinea (PNG) are subject to PNG Salary and Wages Tax (SWT) on worldwide income. Nonresidents are subject to SWT on PNG-source income only.

PNG’s domestic law contains the following definition of a “resi dent” or “resident of Papua New Guinea”:

“(a) in relation to a person, other than a company, means a person who resides in Papua New Guinea, and includes a person

(i) whose domicile is in Papua New Guinea, unless the Chief Collector is satisfied that his permanent place of abode is outside Papua New Guinea; (ii) who has actually been in Papua New Guinea, continuously or intermittently more than one half of the year of income, unless the Chief Collector is satisfied that his usual place of abode is outside Papua New Guinea, and that he does not intend to take up residence in Papua New Guinea; or (iii) who is a contributor to a prescribed superannuation fund or is the spouse, or a child under 16 years of age, or such a contributor…”

If an individual does not satisfy the above definition, he or she is considered to be a nonresident of PNG. The residency of an indi vidual may be affected if PNG has entered into a double tax treaty with a relevant country.

The residence tests, and in particular, the overriding “resides” test (see paragraph [a] of the definition above) can potentially be met relatively easily. The PNG Internal Revenue Commission (IRC) may consider a person who is in PNG for employment purposes for as little as six months to be a resident of PNG for domestic tax purposes. For purposes of the residency tests, a person’s facts and circumstances should be weighed and consid ered appropriately. For example, whether a person has a usual place of abode outside PNG should also be considered. Because PNG has a relatively limited treaty network, the residency test under PNG domestic law can be very important.

Income subject to tax. Except for salary and wages, income is calculated by subtracting deductible expenses and losses from the assessable income of the taxpayer. The taxability of various types of income is discussed below.

Employment income. Salary, wages, allowances and most cash compensation is included in the employee’s assessable income in the year of receipt. Noncash benefits are either taxed in the employee’s hands (often at concessional rates) or are exempt from tax. No specific PNG tax is imposed on employers with respect to the provision of noncash benefits. However, SWT withholding obligations exist for employers to the extent that employees are taxed on such benefits.

Self-employment and business income. Taxable income from selfemployment or from a business is subject to PNG tax. Each partner in a partnership is taxed on his or her share of the partner ship’s taxable income.

Directors’ fees. Directors’ fees are included in assessable income as personal earnings and are taxed in the year of receipt.

Dividends. Dividends paid to resident individuals, resident trust estates and nonresidents by PNG companies are subject to a 15% dividend withholding tax unless the income is expressly exempt.

Dividends that have been subject to dividend withholding tax are excluded from the assessable income of resident persons, resi dent trust estates and nonresidents.

For dividends derived from nonresident sources, a foreign tax credit (FTC) may be allowed for foreign taxes paid. The FTC allowed is equal to the lesser of the foreign tax paid or the amount of PNG tax payable on that income.

Interest, royalties and rental income. Interest, royalties and rental income derived by residents are included in assessable income with a deduction allowed for applicable expenses.

If tax is paid in the foreign country on foreign income, the resi dent may be able to claim an FTC. If the foreign investment results in a tax loss (that is, deductible expenses exceed assessable income), the tax loss is quarantined and can only be offset against other foreign-source investment income.

Interest paid by residents to nonresident lenders is generally subject to a final withholding tax of 15% (subject to any reductions available under an applicable double tax treaty).

Accrued foreign company income. The PNG tax law does not currently contain controlled foreign company rules or any similar measures. Accordingly, income or gains accumulating in foreign companies or foreign trusts are typically only taxed on a receipt basis.

Converting transactions denominated in foreign currency into PNG kina amounts. Taxpayers are generally required to convert income amounts denominated in foreign currency into PNG kina (PGK) amounts at the time of derivation of the income. Likewise, taxpayers must convert expense amounts into kina amounts at the time of payment.

Realized foreign-exchange gains are assessable and realized foreign-exchange losses are allowable deductions, to the extent they relate to the derivation of income assessable in PNG.

Concessions for individuals on short-term assignments. PNG tax legislation does not contain concessions with respect to living away from home allowances. Any such allowances paid in cash are fully taxable to employees.

Taxation of employer-provided stock and stock options. The PNG tax law does not contain any specific rules that deal with the taxation of employer-provided stock options. However, discounts provided to employees on stock or options acquired under an employee stock scheme are generally taxed as ordinary income in the employees’ hands.

Capital gains and losses. Capital gains are generally not subject to tax in PNG. However, the disposal of a capital asset may be subject to tax to the extent the disposal takes place as part of a profit-making scheme or is part of the ordinary business of the taxpayer.

Deductions

Deductible expenses. To claim deductions, an individual must file an income tax return (see Section C). Expenses of a capital, private or domestic nature, and expenses incurred in producing exempt income are not deductible.

Some employment-related expenses may be rebated.

Dependent rebates and personal tax offsets. If a dependent’s declaration has been furnished, a resident individual taxpayer is allowed a rebate for a maximum of three “dependents.” A depen dent is a person who is related to the taxpayer, whose separate net income during the year does not exceed PGK1,040, and who is one of the following:

• A spouse

• An unmarried child who is less than 16 years old

• A full-time student child over 16 years old but under 25 years old

• An invalid relative

• A parent of the taxpayer or of his or her spouse, if the parent is a resident of PNG

For an individual earning salary or wage income, the rebates are built into the SWT tax rate schedule published each year by the IRC. The following are the fixed amounts of the fortnightly rebates:

• One dependent: PGK17.31

Two dependents: PGK28.85

Three or more dependents: PGK40.38

Business deductions. Losses and expenses are generally fully deductible to the extent they are incurred in producing assessable income or are necessarily incurred in carrying on a business for that purpose, and are not capital or of a capital, private or domes tic nature.

Deductions are allowed for salaries and wages paid to employees, as well as for interest, rent, repairs, commissions and similar expenses incurred in carrying on a business.

Specific records must be kept for all business expenses incurred.

Expenditure for the acquisition or improvement of assets is not deductible, but depreciation deductions may be claimed.

Rates. The following are the annual rates for tax residents.

Taxable income Tax rate Tax due Cumulative tax due PGK % PGK PGK

First 12,500 0 0 0

Next 7,500 22 1,650 1,650

Next 13,000 30 3,900 5,550

Next 37,000 35 12,950 18,500 Next 180,000 40 72,000 90,500 Above 250,000 42 —

The following are the rates for tax nonresidents.

Taxable income Tax rate Tax due Cumulative tax due PGK % PGK PGK

First 20,000 22 4,400 4,400

Next 13,000 30 3,900 8,300

Next 37,000 35 12,950 21,250

Next 180,000 40 72,000 93,250

Above 250,000 42 —

B. Social security taxes

Superannuation/pension contributions. Under the Superannuation (General Provision) Act 2000 (PNG Superannuation Act), a PNG employer with 15 or more employees that has employed an employee for 3 months or more must make a minimum contribu tion to an Authorised Superannuation Fund (ASF). An ASF is a PNG resident superannuation fund that has been authorized to operate by the Bank of PNG.

Currently, the requirement to make superannuation contributions into an ASF exists only with respect to PNG-citizen employees. Contributions are currently optional for noncitizen employees. Under certain proposals, contributions would be required with respect to noncitizens.

The compulsory employer contribution is 8.4% of an employee’s gross ordinary time earnings. It is also compulsory for PNGcitizen employees to contribute 6% of their gross ordinary time earnings into an ASF from their post-tax salary. This contribution

is in addition to the compulsory employer contribution of 8.4%. It is deducted and remitted by the employer.

A tax deduction is not available for employers who make contri butions to nonresident superannuation funds.

C. Tax filing and payment procedures

The PNG tax year is the calendar year (1 January to 31 December).

Returns for the year must be filed by 28 February of the follow ing year. Extensions are available if the return is filed by a regis tered tax agent and if a request for extension of time is made. Nonresidents are subject to the same filing requirements as residents. No specific additional filing requirements are imposed on persons arriving in, or persons preparing to depart from, PNG.

Married persons are taxed separately, not jointly, on all types of income. Joint filing of returns by spouses is not permitted.

Individuals who derive employment income only are not required to file an income tax return in PNG. SWT withheld by an em ployer is a final tax. PNG national or expatriate employees who derive income other than employment income must file an income tax return in PNG. No return is required for dividend income that has been subject to PNG dividend withholding tax. An income tax return is required if any of the following circumstances exist:

• The individual has income of more than PGK100 from other sources.

• The individual is claiming a rebate for work-related expenses or donations.

• The individual received a housing allowance, and a variation was granted by the Commissioner General of Internal Revenue for the individual to receive the housing allowance before tax.

The IRC issues a tax assessment after a tax return is filed. After an assessment is issued and served on the taxpayer, the taxpayer must pay the amount of tax due within 30 days. If the taxpayer files an objection, the IRC requires that the amount of tax assessed be paid pending the review of the objection. A taxpayer may request the Commissioner General of Internal Revenue to grant an extension to pay the tax or allow the taxpayer to make the payment in installments.

D. Double tax relief and tax treaties

Foreign tax credit. A foreign tax credit (FTC) may be allowed for foreign taxes paid. The FTC equals the lesser of the foreign tax paid and the amount of PNG tax payable on the relevant income.

For FTC purposes, income derived from treaty and non-treaty countries are treated the same.

Double tax treaties. PNG has entered into double tax treaties with the following jurisdictions.

Australia Germany* New Zealand Canada Indonesia Singapore China Mainland Korea (South) United Kingdom Fiji Malaysia

* This treaty has been signed, but it has not yet been ratified.

E. Temporary visas

Nonresidents seeking entry into PNG must obtain an appropriate visa prior to entry.

Temporary residence visas are granted to individuals whose activities are considered to benefit PNG, including individuals entering for business, skilled employment, cultural or social activities.

The types of temporary residence visas, and the conditions that must be fulfilled prior to such visas being issued, are discussed below.

Visitors. The following are the four categories of visitor visas:

• Tourist (tour package)

Tourist (own itinerary)

Journalist

Yachtsperson

Nonresidents seeking entry into PNG for purposes such as tourism can either obtain the visa at a PNG consulate prior to entry or, for eligible country passport holders, online or on arrival at a designated port of entry.

Business visa. The three types of business visitor visas are described below.

Single-entry business visas. Single-entry business visas allow for a single visit of up to 30 days from the date of arrival (to attend business meetings, board meetings, conferences, conduct an exploratory business visit or participate in a business negotia tion). Employment is prohibited on this visa, and the status may be eligible to be extended depending on certain facts and circum stances. For eligible country passport holders, this visa can be applied for online, on arrival at designated ports of entries or through a PNG consulate prior to travel. Nationals from high-risk jurisdictions must seek approval from the PNG Immigration & Citizenship Authority (PNGICA) before they can apply through a PNG consulate prior to travel.

Restricted Employment Visa. A Restricted Employment Visa (REV) is a temporary visa for foreign specialists or experts urgently required if no such specialist is immediately available in the country to perform short-term, highly specialized work that is not ongoing or to assist in a national emergency relief situa tion.

A REV can be used in the following sectors:

Mining

Gas

Petroleum

Agriculture

Fisheries

Forestry

Building infrastructure

Aviation

The REV has the following restrictions:

• It is limited to a stay of up to 30 days per visit.

• Entry is limited to four times per calendar year.

• Extensions may be permitted in limited circumstances.

• The individual can only work for a sponsoring employer.

The REV must be obtained through the PNGICA and collected at the PNG consulate prior to travel or at port of entry for eligible country passport holders if the individual holds an approval uplift letter issued by the PNGICA.

Asia-Pacific Economic Cooperation Card. Individuals from fully participating Asia-Pacific Economic Cooperation (APEC) economies can be issued a five-year travel card that serves as the entry authority to other fully participating economies that have granted pre-clearance for short-term business travel of up to 60 or 90 days.

Employment. Noncitizens seeking to enter PNG for employment in the private sector may apply for a work and employment per mit. The work permit can be issued for short- or long-term peri ods from six months and up to five years.

The work and employment permit process consists of the follow ing three steps:

• A work permit application must be submitted to the Department of Labour and Industrial Relations (DLIR).

• Once the work permit is approved, an entry permit application must be submitted to the PNGICA.

• Once the work permit and entry permit are approved, the visa will be telexed to the nearest PNG embassy or consulate (or Australian mission if there is no PNG mission) for the consular visa issuance.

Long-term work permits can be renewed in the country or out of the country three months prior to the expiration of the work per mit. However, any changes to the applicant’s employer or occupa tion (including promotion) will require the individual to apply for a new work permit. If individuals repatriate prior to the expira tion of their work permits, they will be required to submit a work permit cancellation application with DLIR.

Applicants may be required to apply for membership and regis tration with professional bodies in PNG prior to the submission of their work permit application. For example, engineers are required to apply for membership with the Institution of Engineers Papua New Guinea (IEPNG), and accountants are required to apply for membership with Chartered Professional Accountants Papua New Guinea (CPA PNG). Spouses (including de facto spouses) and dependents can apply for a dependent entry permit with PNGICA. Family members who are not included in a tem porary resident’s initial visa application may generally apply for a visa at a later date.

F. Permanent residence

To qualify for permanent residence, an individual must have lived in PNG on a valid visa for at least five years and must meet the criteria of one of the following classes of visa (subject to change at any time):

• Chief executive officer of a large company

• Majority owner of a business

• Skilled professional

Missionary and religious worker

Retired persons

Spouses and children of PNG citizen aged 19 years or more

G. Family and personal considerations

Spouses (including de facto spouses) and dependents of tempo rary and permanent visa applicants can be included in the same visa application as the primary applicant and are granted visas for the purpose of residing in PNG with the primary applicant. Family members who are not included in a temporary resident’s initial visa application may generally apply for a visa at a later date.