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The case for reforming PNG’s tax regime

After two years of research and hearings, the PNG Tax Review Committee is due to present its final report to Government next month. PricewaterhouseCoopers PNG’s Jason Ellis looks at the tax reform measures it is likely to recommend.

The Committee is expected to recommend the reductions in tax rates be funded by an increase in the GST rate, introduction of a capital gains tax to broaden the tax base, and restrictions on tax concessions.
The Chairman of the Committee, Sir Nagora Bogan, spoke to business organisations in Port Moresby and Lae and outlined the following proposed reductions in tax rates:

  • a reduction in the corporate tax rate to 25%,
  • a reduction in the dividend withholding tax rate to 15%
  • a reduction in personal marginal tax rates

It is of course a difficult time for tax reform. With global commodity prices low, and the current challenging fiscal position in PNG, it seems likely that any reforms will only be supported by the Government if they are at least revenue neutral.

In commenting on the PNG fiscal position at the 2015 PNG Advantage Investment Summit in Brisbane, Prime Minister Peter O’Neill said his Government has no intention of increasing taxes or introducing new taxes, and if this is the case tax rate cuts would need to be funded by increased collection and compliance enforcement activity by the IRC.

In our view there is considerable scope for improvement in tax administration.

Notwithstanding the difficult fiscal times, PwC believes that tax reform is essential if PNG is to remain competitive in the global economy. Many jurisdictions are reducing income tax rates to encourage greater levels of investment by the corporate sector.

In addition PNG has a very high reliance on salary or wages tax, which is borne by a relatively small proportion of the population, and personal tax rates are very high at the low and middle income levels.

One of the key factors we are concerned about at PwC is that middle income earners are not ignored in the reform process.

Middle-income earners
There is a temptation to focus on low income earners, and corporates, but the middle income range (K50,000-K150,000) is the engine for growth in employment and development in PNG.

People in this range would bear the brunt of an increase in the GST, and introduction of broad capital gains tax, and they need to be properly compensated when personal income tax rates are reduced.

It is also important that if tax concessions are wound back this does not affect the affordability of education and housing in PNG, both of which are currently concessionally taxed.

PwC believe there is a clear need for comprehensive tax reform–done the right way.

The ‘right way’ means increasing those taxes that have the least effect on investment and employment, and at the same time reducing reliance on taxes that distort incentives to work, invest and transact business.

It also means addressing those factors which increase the complexity of the tax system and the cost of compliance.

Following the work of the Tax Review Committee, it is important that the opportunity is taken to implement real tax reform to position PNG for future growth, and to ensure the tax system is appropriately designed to deliver future revenues to the Government in a changing economy.