To promote the development of new industries outside of the minerals sector, the Papua New Guinea Government offers a number of attractive investment incentives. It is also possible in Papua New Guinea to negotiate other incentives with the Government for a specific investment which could not otherwise proceed without certain conditions being met. Such investments, however, should be commercially viable and in the interests of the people of Papua New Guinea.
Most of incentives currently available target companies in the form of exemptions from company income tax, or deferment of income tax liabilities. There are, however, some incentives administered by the Internal Revenue Commission (IRC), which are not related to company income tax. They include a wage subsidy provision, which is a straight subsidy rather than a tax incentive. A summary of the incentives currently available in Papua New Guinea follow.
(1) Export Income
The export income incentive is available for firms producing new manufactured products and for firms producing certain other specified goods.
The Commissioner-General for Internal Revenue is responsible for declaring a product to be a new manufactured product and also for the issuance of a certificate to a company which intends to produce a new manufactured product. A company which manufactures a product which is subject to either tariff protection or quota protection without import parity pricing may not apply for a New Product Manufacturing Certificate.
Under the incentive, profits made from the export sale of qualifying goods are exempt from company income tax for the first three years of export and for the following four years, the profits on any increase in export sales over the average for the first three years are also exempt.
Goods which qualify for exemption include:
Activated carbon, electrical appliances, motor vehicles, artefacts, essential oils/oleoresins, paint, beverages ready for consumption, fabricated steel, paper products, fibreglass products, plastic products, biscuits, fishing nets, processed and canned meat products, flexible packaging materials, smoked fish, processed ginger, canned fruit and vegetables, flour, refined petroleum, foam products, rubber products, cement and concrete products, mouldings, plywood and laminated products, ceramics, chopsticks, glass products, ship and boat building and repairing products, cigarettes, hand tools, clothing and manufactured textiles, industrial and medical gases, soaps, treated and processed crocodile skins, confectionary, jewellery, dairy products, livestock feeds, wood pulp, dry cell batteries, matches and wooden furniture.
(2) Export Market Development
The market development cost exemption gives a deduction of income from taxable income equal to twice the amount of any expenditure on developing an export market (therefore it is a double deduction).
The incentive is available for the promotion of sales of goods manufactured totally in Papua New Guinea, or where the Papua New Guinea labour cost component exceeds 10 per cent of the sale price of the product. The double deduction is not absorbed by any exempt export sales income (see Export Income above).
It is not available for the sale of unprocessed primary commodities or for the marketing of services, so the tourism industry does not benefit from this incentive.
The types of expenditure to qualify include overseas publicity and advertising, market research, tender preparation, samples, trade fair expenses, overseas sales office expenses and certain travel costs.
(1) Pioneer Industries Scheme
The scheme provides a five year tax holiday for pioneer, or new, industries associated with the development of manufacturing-related activities, mainly downstream processing of Papua New Guinea’s vast wealth of natural resources, in the country.
A pioneer industry refers to any industry producing a product or a service not yet established or in operation in Papua New Guinea or which manufactures goods solely for export. Pioneer status is granted to any industry, other than primary production or the primary processing of timber, or mining or quarrying. A product of any such industry is called a “pioneer product” and a service provided by any such industry is called a “pioneer service”.
(2) Wage Subsidy
The wage subsidy promotes other objectives in addition to the pure development of new industries. The wage subsidy, by subsidising wages, promotes employment. However, the incentive is available only to those firms which possess a new manufactured products certificate.
A firm producing a manufactured product never before manufactured in Papua New Guinea or a product which is manufactured but where import substitution is incomplete may apply for a new products manufacturing certificate from the Commissioner-General for Internal Revenue.
This certificate enables the firm to gain both the wage subsidy and the export income exemption subject to the fulfilment of certain other criteria. To be eligible for the wage subsidy, a firm must not receive quota protection without import parity pricing or tariff protection such that the tariff on the final goods they produce exceeds the weighted average tariff on their imported inputs by more than 15%. The aim of these requirements is to prevent the establishment of inefficient industries which survive due to a combination of a high level of subsidy and protection.
Wage subsidy payments last for five years from the commencement of operations. For each full-time citizen employee, a subsidy is paid which is a proportion of the minimum wage relevant to that area. In the first year, the subsidy is equal to 40% of the prevailing minimum wage. This declines to 30%, 20%, 15% and 10% in subsequent years.
(1) Initial Year Accelerated Depreciation
The initial year accelerated depreciation allows the capital cost of certain new assets, converting existing oil-fired plant to non oil-fired plant, or improving the efficiency of fuel-using plant, to be written down at a faster rate than would otherwise be possible.
(2) Flexible Depreciation for Agriculture and Fishing
As with the accelerated depreciation provisions above, the flexible depreciation provisions allow the capital assets to be written down at a faster rate than would otherwise be possible. In the case of the flexible depreciation for agriculture and fisheries, expenditure on new plant or articles used in agricultural production or commercial fishing activities can be written off 100 per cent in the first year. Boats or ships exceeding seven metres in length are specifically excluded, together with ancillary equipment fitted to such vessels.
(3) Industrial Plant Depreciation
Industrial plant not previously used in Papua New Guinea is eligible for increased depreciation of up to 100 per cent of cost. The taxpayer may elect the amount to be claimed in any year, but not so as to create a loss.
To qualify, the plant must have a life exceeding five years and be used by the taxpayer or any other person (for example a lessee), in a manufacturing process. Expenditure on building housing for such plant, or for storing raw materials or finished products, also qualifies.
(1) Rural Development
The rural development incentive aims to spread development to the less-developed areas of the nation. Any new business activity started since 1 January, 1988, in a designated rural development area can gain a 10-year exemption from corporate income tax, provided it is engaged in one of the following industries:
- Agricultural production
- Manufacturing of any kind
- The restaurant or hotel trade
- Transport, storage or communication
- Real estate and business services (excluding financial institutions and insurance) or,
- Community, social and personal services.
Businesses involved in the exploitation of non-renewable resources (mainly mining and petroleum companies) are specifically excluded from the exemption. Losses arising from those exempt activities are deductible against taxable income from other activities.
(2) Rabaul Incentive
The Government has introduced a tax holiday for businesses in Rabaul. From 1 January 1996 until 31 December 2000, businesses operating in Rabaul will be able to enjoy a five year tax holiday. The tax holiday is aimed at restoring the town following the volcano eruptions in 1994.
(3) Primary Production Investment
Development expenditure by companies on land for primary production is deductible by the shareholders of those companies, if the company transfers the deduction to them. (Primary production development expenditure is defined to include the cost of assets used for agricultural production.)
The incentive is different from other incentives in that it allows the deduction by shareholders against their personal income tax liabilities. The amount surrendered to each shareholder is in proportion to the respective amounts of their paid up capital, (paid on or after 1 January 1987). The total deduction available to a shareholder may not exceed the total amount paid on their shares. Shareholders may waive their entitlement if they wish.
The rationale for this incentive is that some of the agricultural sector is not recording taxable profits so that a deduction against company income tax would be an irrelevance. Outright deductions are allowed for certain capital expenditure including clearing or preparing or conserving land for agriculture, the eradication of pests, labourers’ accommodation and for the conservation and conveyance of water. Also, an initial accelerated depreciation deduction is allowed for new agricultural plant with a life exceeding five years.
Losses incurred in carrying on a primary production business can be carried forward indefinitely – they are not restricted to the seven year limit that applies generally to company tax losses.
(4) Staff Training Deductions
The double deduction for staff training allows a double deduction against company income tax for the payment of salary and wages to:
- Registered apprentices;
- Citizen employees attending a full-time training course at a government training institute or a prescribed place of tertiary education; and,
- Training officers engaged wholly in training or educational activities – not engaged directly in deriving the employer’s income.
The tax saving from these deductions is limited to 75 per cent of actual expenditure incurred.
(5) Staff Training Levy
All businesses whose annual payroll exceeds K100,000 are subject to a two per cent training levy calculated on the taxable salary and wages, including benefits, of all personnel. The levy is assessed on an annual basis. The amount of the levy payable is reduced by qualifying training expenses incurred in the training of citizen employees. Qualifying training expenses are very widely defined.
(6) Solar Heating
This incentive promotes the use of natural resources instead of fossil fuels to provide energy sources. In Papua New Guinea, solar energy is extensively used especially for the heating of domestic water supplies. Expenditure on the acquisition and installation of solar heating plant for use in deriving income is allowable as an outright deduction.
(7) Exemption of Certain Interest Income
Interest income received by persons and corporations, including non-resident companies and individuals, from deposits lodged with licensed financial institutions within Papua New Guinea is exempt from income tax.
(8) Import Duty Drawback
Duty drawback is a rebate paid to exporting manufacturers, when they export goods, equal to the amount of duty already paid on the raw materials. It is offered so that locally-manufactured goods can compete effectively in overseas markets.
Requests for the consideration of duty drawback must include a detailed description of the manufacturing process involved, including the nature and volume of inputs used, accompanied by unit cost data based on import/export documents and commercial invoices.
(9) Assistance for Project Start-Up
Papua New Guinea offers other investment incentives such as the Feasibility Study Grant Scheme and start-up loans for Papua New Guinea entrepreneurs – which is of particular interest to foreign investors who wish to enter into joint ventures with Papua New Guinea companies. Investors interested in obtaining further information about these forms of assistance are encouraged to contact the Investment Promotion Authority for further information.
(10) Market Access Privileges
Papua New Guinea has preferential access to a number of overseas markets. Products of Papua New Guinea origin are allowed duty-free access to Australia, New Zealand and the European Community under the PNG – Australia Trade & Commercial Relations Agreement (PATCRA) and South Pacific Regional Trade & Economic Cooperation Agreement (SPARTECA) and the Lome Convention respectively. Local products also have preferential access to numerous other developed countries including Japan and the United States of America under the GSP system.
Further, Papua New Guinea qualifies as an underdeveloped country entitled to the benefits of the US General System of Preferences and enjoys similar privileges in Japan and Canada. Further information about Papua New Guinea’s market access privileges should be directed, in the first instance, to the Investment Promotion Authority.
(11) Tariff Exemptions or Reductions
Proposals for the consideration of any exemption or reduction in duty are examined on the merit of each case depending upon the overall benefit to the country and revenue implications within the cash-flow estimate by the Government. Such matters are handled by the Internal Revenue Commission, within the Department of Finance, in consultation with other administrative departments when considered necessary.
To assist the IRC and the Department in its decision, any organisation or investor seeking any duty concessions should provide all the cost data with supportive evidence covering broad aspects such as quantum of investment, nature of project, types of materials, machinery, equipment, annual importation and corresponding value at c.i.f. level whether the manufacturing unit is exclusively export orientated by utilising national resources and to what extent locally-procured materials will be utilised.
(12) Imports of Specialised Capital Equipment
The import of certain specialised capital equipment is exempt from duty. Such equipment must not be readily available in Papua New Guinea and can be imported only on a temporary basis for a specific purpose and a specific time. The importers must satisfy the Commissioner-General of Internal Revenue that the equipment will be used on an approved project and a security must be lodged for the period of temporary importation.
The importer must undertake to re-export the equipment at the end of the specified activity. This exemption is expected to be particularly welcome for the mining and petroleum industries, since equipment that they require for exploration is included.
Also eligible for duty exemption are imports of capital equipment which will be used in the establishment of new industries or the expansion of existing industries, provided that approval for importation has been given by the Commissioner General and that the equipment is not available in Papua New Guinea. It applies to manufacturing industry only.
(13) Tax-Free Bank Deposit Interest
All interest paid by registered financial institutions in Papua New Guinea is exempt from tax.
When interest is paid by a Papua New Guinea resident company to an overseas recipient it is generally free of tax but may, in some circumstances, be subject to a withholding tax (45% of the gross amount).