Why Marape's tax grab is set to fail

AN overhang of struggling revenues from the pandemic and the perceived political popularity of targeting large companies are likely to have influenced the decision to tax large companies.
Why Marape's tax grab is set to fail Why Marape's tax grab is set to fail Why Marape's tax grab is set to fail Why Marape's tax grab is set to fail Why Marape's tax grab is set to fail

Greg Pawson

Maholopa Laveil

A former Australian Department of Foreign Affairs and Trade senior official and current adviser to the PNG Treasurer is said to have advocated for the levy, writes Maholopa Laveil for Australian think-tank, the Lowy Institute.
Initially, two non-competitive sectors were targeted.
In the telecommunications sector, Digicel holds 91% of the market share for unique mobile subscribers.
In the banking sector, BSP holds a 65% market share in outstanding loans.
Kina Bank has a 22% market share and the ANZ Group and Westpac shares comprise the remainder.
BSP is listed on the Australian Securities Exchange as is Kina Bank's parent company Kina Securities. Westpac and ANZ are Australian banks.
The dominant player levy was a flat-rate levy applied to any firm that had more than 40% market share and was deemed to be using this advantage to generate excessive profits.
Under the levy, BSP was required to pay K190 million (about $53.9 million) and K350 million (about $99.4 million).
Combined, the levy amounted to a paltry 4.3% of tax revenue.
In place of the dominant player levy, all other banks, along with BSP, are now required to pay a higher corporate income tax (CIT).
The PNG government sparing Digicel in 2023 is consistent with its maintenance of Australia-PNG bilateral relations.
In 2022, Australian telecommunications company Telstra acquired Digicel's arm in the Pacific, in a deal heavily subsidised by the Australian government.
Digicel's Pacific arm covers operations in six Pacific countries - PNG, Fiji, Nauru, Samoa, Tonga and Vanuatu.
Telstra will eventually own Digicel's Pacific operations on a purchase worth $1.4 billion (about K4.9 billion), of which the Australian government paid $1.1 billion (about K3.8 billion).
For PNG, even without the levy, the prices of calls, internet data and other phone services are some of the highest in the world.
Internet prices have not fallen despite the launch of the Australian-funded Coral Sea Cable in 2019. Stubborn high prices reflect Digicel's monopoly at the retail end.
This monopoly has also enabled Digicel to introduce predatory loan schemes for phone credits which have not been subject to regulation.
Digicel occupies a giant share of the mobile market in PNG. Neither of its two main competitors, B-Mobile and Telikom, offer credits on loan and they sell different mobile products which are not fully or immediately substitutable.
The cost of purchasing a new Digicel sim or switching to B-Mobile and Telikom sim cards ranges between K10 and K15 depending on the retail outlet.
Given its dominance, this scheme not only enables Digicel to control a large part of the mobile market but also to control a significant part of the microlending market.
While Digicel escapes taxes, the banks will pay the price.
PNG's 2023 budget has blamed limited competition in the banking sector for the high lending rates and low interest rates on deposits facing bank customers, known as the credit spread.
PNG has one of the highest credit spreads in the region, with the weighted average interest rate on deposits in 2022 at just 0.2% compared to the weighted average interest rate on loans at 8%.
But a higher tax on the banks will not reduce credit spread, only raise fees for customers.
The tax hike only raises government revenue by raising an additional $68.1 million (about K239 million).
Of this, BSP is expected to pay $53.9 million (about K189 million), Kina Bank will pay $11.3 million (about K39 million), and ANZ and Westpac will pay the remaining $2.8 million (about K9.8 million).
Compared to the dominant player levy, this tax hike contributes a low 1.6% of tax revenue.
BSP is unique. The PNG government is a 25% shareholder and BSP is the government's largest domestic creditor.
These connections to the government have done little to shield BSP, which has already announced lower profits for its shareholders - though the government is compensated through the levy and higher tax rate.
Kina Bank is also feeling the heat and has announced it will abandon plans to open new branches nationwide.
It will also suspend its small and medium-sized business and home loan concession interest-rate programmes.
Chief executive of Kina Bank Greg Pawson said the bank was against any rise in corporate tax on the banking industry.
"To put into perspective, it is an additional tax of K40 million for Kina based on our 2023 forecast.
"That is a 50% increase and K40 million that we will now be forced to not invest in future growth. The additional tax is a disincentive for us to invest and grow.
"The unintended consequences of such a move will be detrimental to the banking sector in Papua New Guinea which is already structurally imbalanced," Pawson said.
The tax further hampers financial inclusion efforts in PNG, where up to 80% of the population is unbanked.
A higher tax adds to other banking constraints in PNG.
An International Monetary Fund report found that these constraints include the "country's level of income and economic development, relatively skewed income distribution, a lack of competition in the banking sector and weak contract enforcement".
Constraints also incorporate "customary land ownership that impedes the use of land as collateral, a large rural population with limited access to urban centres and banking services, and the large informal sector".
There is good news.
The higher CIT has not deterred new investors from entering the banking sector, with subsidiaries of two domestic financial institutions, Tisa (Teachers Savings and Loans) and Credit Corporation, awarded provisional commercial bank licences last December and in February respectively.
What is worrying is the ad hoc nature of PNG's fiscal regime.
These new and potentially temporary taxes introduce uncertainty for businesses and potential investors when they make decisions on investment and capital expenditure.
Instead of more taxes on non-competitive sectors, the government would do better to encourage competition by removing barriers to entry and streamlining licence approval processes.
Meanwhile, the government projects that PNG's economy will grow by 4.6% in 2022, and 4.0% in 2023, with a marginal rise in formal sector employment, after doing poorly in 2021 due to the Covid-19.
The non-resource component of PNG's economy - covering sectors such as agriculture, fisheries, forestry and tourism - portrays a more accurate picture of the economic situation, given the enclave nature of the resources sector.
After negative growth in 2020, the non-resource sector is estimated to have grown by 4.8% in 2021.
Projected growth rates for 2022 and 2023 for this sector are 4.5% and 4.6%, respectively, but it remains to be seen whether this will be achieved.
The 2023 budget which was announced in November, increased government spending by more than 10%, leading to a deficit of 5.4% of GDP.
The pre-election 2022 budget also saw a large increase in spending, but promised to start cutting expenditure by 2023.
A strong economy will help Marape's chances of survival but tough decisions like expenditure restraint or ending foreign exchange rationing will harm them. The prime minister will then face a tough decision between prioritising the national interest or his own chances of political survival.
Maholopa Laveil is an FDC Pacific Fellow at the Lowy Institute, currently seconded from the University of Papua New Guinea.



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