PNG TAX OVERVIEW/MERGERS & ACQUISITIONS
employee’s hand. Distributions where contributions have been made for more than five years but less than ten years may attract a tax rate of 15%.
5.5 Withholding and other taxes 5.5.1 Foreign contractors tax (FCWT) This tax is initially imposed at a flat 12% on the gross revenue of contract work undertaken in PNG. This 12% figure is derived by applying the non-resident company tax rate of 48% to a deemed profit margin of 25%. This rate is reduced to 7.5% in the case of residents of some partner countries by virtue of the relevant DTA provisions. However, the FCWT regime also provides that foreign contractors whose profit margins are below 25% may elect to apply to IRC for approval to lodge annual income tax returns. If such approval is granted, they will then be taxed at the rate of 48% of their taxable (net) income, or in some cases at 30% by virtue of the operative terms in certain DTAs. Where the contractor is subject to FCWT of 12% as a first and final income tax, there are no other lodgement or payment requirements in respect of that contractor’s own tax liability. However, it should be noted that they will most likely still have an obligation to deduct and remit salary and wages tax to the Internal Revenue Commission (IRC) from the relevant earnings of their staff engaged on the contract work in PNG. Where the contractor elects to lodge income tax returns then they are taxed in generally the same way as described in the ‘Company Income Tax’ section above. In all cases it is the PNG entity making the payment who is responsible for deducting and remitting the relevant FCWT amount to IRC, within 21 days of month’s end (as is the rule for all other withholding taxes noted below). Determination of FCWT liability Contracts subject to FCWT are those which are defined to be for ‘prescribed purposes’. This broadly means contracts which are ‘for or in connection with’ the following: > the installation, maintenance or use in PNG of substantial equipment or machinery > the construction in PNG of structural improvements including: roads, bridges, culverts or similar roadworks; buildings, fences or similar improvements; clearing or draining of land; ports or port facilities; facilities for the provision of water, light, power or communication; transport facilities > the use of, or right to use, in PNG any industrial, commercial or scientific equipment including vehicles, ships and aircraft
> the provision in PNG of professional services as an adviser, consultant or manager. This wide definition may draw an entire contract into the FCWT net even where some of the functions covered in the contract may not be for prescribed purposes. The IRC will on occasion accept the segregation of contract activities into separate ‘prescribed’ and ‘non-prescribed’ contracts, provided this does not produce unworkable results and provided that the revenue attached to each contract is commercially realistic. As an example, the IRC has accepted in the past that geophysical data analysis which takes place offshore may be subject to a separate contract, and thus not subject to tax, while the contract covering acquisition or capture of that data onshore is subject to FCWT. It has also accepted the separation of mobilisation and demobilisation costs from the base contract to use certain substantial plant and equipment in PNG.
5.5.2 Interest withholding tax (IWT) IWT is generally levelled on all payments of interest from within PNG, regardless of whether the recipient is a resident or non-resident taxpayer. The flat rate of withholding is 15% though, as already highlighted, this is reduced to 10% for residents of all DTA partner countries, except for Malaysia. There are some limited IWT exemptions, such as for interest derived by non-resident lenders to companies engaged in mining, petroleum or gas operations in PNG or where the interest is payable to a licensed PNG financial institution. Where a taxpayer is required to include interest income in an income tax return lodged with the IRC, they are entitled to claim a tax credit for any IWT already deducted.
5.5.3 Dividend withholding tax (DWT) Imposition of DWT is generally made at a flat rate of 17% under the PNG domestic tax laws. DWT is applied to dividend income receipts of both resident and non-resident taxpayers. This rate is reduced to 15% in the case of residents of Singapore, China, Malaysia, Germany and Korea as a result of a DTA PNG has with those countries. DWT is a final tax liability on dividend income in the case of individuals and trusts resident in PNG, as well for all non-residents of PNG. Exemption from DWT applies for dividends paid by companies engaged in gas or petroleum operations, while those from mining companies are subject to a reduced rate of 10%. Exemption also applies where dividends are received by superannuation funds. As already noted above, at 5.3.2, where dividends are received by other PNG resident companies, these companies are also entitled to a corresponding income tax rebate.
THE PNG INVESTORS’ MANUAL - SECOND EDITION
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