Deloitte guide on tax changes

LEGISLATIVE amendments making additional changes to Papua New Guinea’s taxation law were approved by parliament on February 3.
Deloitte guide on tax changes Deloitte guide on tax changes Deloitte guide on tax changes Deloitte guide on tax changes Deloitte guide on tax changes

Staff Reporter

Accounting firm Deloitte said the changes were designed to address some of the unintended outcomes and uncertainties associated with the tax changes announced in the 2017 National Budget in November of last year.
 
Here is an overview of the amendments:
 
Customs tariff
 
In the 2017 National Budget changes, the existing fixed rate of 28.5% applying on unprocessed old-growth logs was replaced to progressive rate. The merits of this were strongly challenged by the forestry industry, with the new progressive rate being described as excessive and a potential threat to sustainability in the forestry industry. Taking this into consideration the rate has been reverted back to a fixed rate of 32.5%. Plantation logs have now been granted exemption from export duty.
 
Resource industry
 
The definitions within the Additional Profits Tax (APT) regime in the income tax legislation have been amended to clarify that the APT applies to all resource projects and not just designated gas projects. While the intent of the 2017 National Budget was clearly that all resource projects now fall within the APT regime, not all existing definitions in the legislation had been amended to achieve this. It has also been clarified that the changes to Division 10 of the Income Tax Act 1959, including the APT regime, are subject to fiscal stability agreements. In the absence of such fiscal stability agreements there are no transitional provisions otherwise affecting the introduction of the APT from 1 January 2017.
 
Finally, the budget has also clarified that the standardising of the income tax rate at 30% for mining, petroleum and gas operations would be applicable starting with the 2017 income year. This clarifies for taxpayers who have a tax year other than 1 January to 31 December that they may apply the 30% rate to their entire 2017 tax year, and not just to income derived from 1 January 2017.
 
Dividend withholding taxes
 
There were several sections relating to the dividend withholding tax which were repealed in the November 2017 budget. While some of these have now been revived there are important changes.
 
A resident company will only be required to withhold dividend withholding tax if it pays or credits a dividend or an amount that is deemed to be a dividend to a resident individual, a resident trust estate or a non-resident person (which includes an overseas company). A dividend payment from a resident company to another resident company is not subject to dividend withholding tax.
 
Impact on resident individuals, trust estates and non-resident companies
Importantly, any dividend payment to resident individuals, resident trust estates, or non-resident persons (including overseas companies) is restored as a final tax. Therefore, where a dividend has been subject to dividend withholding tax, there are no further requirements by such persons to declare and pay further tax on that dividend income in PNG.
 
Impact on resident companies
 
As announced in the 2017 National Budget, no dividend withholding tax is applicable on a dividend paid by a resident company to a resident company. However, the recipient company must include the dividend in its assessable income (if it's not specifically exempt).
 
Importantly, the dividend rebate applicable to dividends included in a resident company's assessable income has been repealed, effective from 1 January 2017. Therefore, each resident company in the ownership chain will be required to account for that dividend as assessable income, without an offsetting rebate. This means that dividends can no longer flow through to resident companies without further income tax applying at each stage in the ownership chain. Given the negative implications this change has on companies which invest in the shares of other companies within Papua New Guinea, taxing dividend flows in such a manner is either a significant tax policy shift oran unintended consequence of the legislative amendments.
 
Dividend received from foreign companies
 
The changes clarify that dividend income received from a foreign company is not subject to dividend withholding tax in PNG. However, such dividends must be included in the assessable income of the resident company with, from 1 January 2017, no dividend rebate available. These changes do not impact the ability of residents to claim a foreign income tax credit, where available.
 
Refund of dividend withholding tax
 
The refund of dividend withholding tax provisions have been reinstalled, but only applicable to dividend income derived by resident companies prior to 1 January 2017. While this appears to be a transitional measure to retain access to unclaimed dividend withholding tax refunds existing as at 31 December 2016, there remains some potential difficulties in mechanism to achieving this.
 
Collection of dividend withholding tax
 
A new division has now been introduced, covering the collection of dividend withholding tax. This division, to some extent serves as a duplication of existing rules. However, it also raises some additional questions of over legislative intent, including the claiming of credits in respect of deductions made from dividends. Because these are new provisions to the Income Tax Act 1959 the application of these new provisions will need to be monitored and discussed with the Internal Revenue Commission.
 
Country by country reporting
 
The 2017 National Budget proposed a new Division 16A named "Country by Country Reporting" dealing with transfer pricing related issues. This has now been repealed and replaced with Division 16 due to incorrect referencing to provisions of the Income Tax Act 1959 and to increase the minimum financial threshold that triggers the financial reporting requirement. The reporting requirement now does not apply where a group of companies is having a total consolidated group revenue of less than PGK 2.3 billion as of January 2016. This threshold is increased from PGK 2 million as announced in the 2017 National Budget.
 
Foreign contractor withholding taxes
 
The revised foreign contractor withholding tax rate of 15% remains effective from 1 January 2017, which applies to the prescribed contract value. The withdrawal of the ability for foreign contractors to request to lodge income tax returns and pay tax based on net income has not been reinstated.
 
 
Other compliance matters
 
The following annual reconciliations for calendar year 2016 are nearing their due date which forms need to be lodged with the Internal Revenue Commission: Group tax annual reconciliation is due on February 14, 2017; business payment taxes annual reconciliation is due on March 15, 2017; all other withholding taxes annual reconciliations are due on February 28, 2017; and income tax return due date is February 28, 2017 unless tax agent extension has been granted.

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