The consultation process for the proposed Capital Gains Tax and Small and Medium Enterprise Tax could change the tax landscape in Papua New Guinea. Karen McEntee, Tax Partner at KPMG, explores the new proposal and what it may mean for taxpayers in the country.
KPMG’s Karen McEntee
Treasury has recently announced that the consultation process for the new proposed Capital Gains Tax and SME tax regimes are to take place in May and June this year.
Treasury has made available draft legislation for the consultation process and has emphasised it is still in development and should not be taken as Government policy.
Capital Gains Tax
PNG does not have a Capital Gains Tax, which means gains arising on investments in capital assets such as land, buildings, and shares are not subject to tax in the country. The CGT regime draft proposes a 15 per cent Capital Gains Tax on gains arising to PNG tax residents or non-residents on the disposal of:
- PNG real property (land and buildings, and interests in mining and petroleum resources including information and the underlying licenses)
- Shares in a company listed on the Port Moresby Stock Exchange (POMSoX)
- Shares in a company that derives more than 50 per cent of its value directly or indirectly from PNG real property
- An option or right to acquire an asset referred to above
Assets not subject to CGT include an individual’s principal place of residence, an interest in customary land, asset of an exempt taxpayer, trading stock or a depreciable asset.
CGT would apply to assets acquired prior to the introduction of the CGT regime, however, under the proposed scheme, the base cost would be taken as the fair market value as at the commencement of the CGT regime, rather than the base cost on acquisition.
The gain for CGT purposes would be calculated as the disposal proceeds minus the base cost on acquisition/construction minus any incidental costs of acquisition or disposal. Capital losses would be ring-fenced against future capital gains, while any CGT would be due for lodgement and payment within 28 days of disposal.
The new proposals also include a requirement for a purchaser to withhold 10 per cent of the sales proceeds from a non-resident vendor, although the vendor and purchaser could apply for a variation to a lower rate if the actual CGT is expected to be lower. Any withholding tax deducted would be available for offset against the final CGT payable.
The proposed legislation also includes provisions around CGT deferrals, replacement assets, roll-overs in group re-organisations and anti-avoidance provisions.
Small and Medium Enterprises
Treasury is proposing a more simplified regime for the taxation of SMEs. The consultation paper outlines a range of options and includes a proposal for an SME annual turnover threshold of K250,000, which is in line with the GST threshold and a two-rate turnover tax regime with a lower rate for trading businesses and a higher rate for non-trading businesses.
It also includes a proposal for a flat rate tax on micro businesses conducted where the turnover is below a certain threshold—the discussion document proposes a tax of K250 on a turnover of less than K60,000 while the draft legislation provided suggests K400 on a turnover of less than K50,000.
Of note is a proposal for quarterly GST and State Withholding Tax (SWT) returns for SMEs to ease their administrative burden.
It will be an interesting few months seeing what comes out of the consultation processes. If either regime is introduced, in whatever form, there will certainly be some major changes to the PNG tax landscape.
Karen McEntee is Partner, Taxation Services at KPMG in Papua New Guinea.
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SME tax threshold of K250,000 is for micro businesses – not SMEs! We need a serious SME tax reform.
How about decreasing Wages and Salary Tax for the middle income earners in PNG??
For years we have seen the increase in the borrowings to fund the Gov’t Expenditure and at the same time the middle income earners are heavily taxed. Where is balance?? If gov’t is borrowing more than reduce collected internally so we have a balance somewhere.
Where is the status of the “Asset Registry Project” that was initiated sometime back?
Further, as there been any concerted effort in progress for putting in a place a Credit Score System in the country where it’s readily available for the public domain as opposed to the current Credit Bureau that is only accessible by industry players?
We should be updated on these before Capital Gains Tax discussions are held.
There’s already a 15% Interest Withholding Tax (IWT) in place for individual investors’ dividend payments from Bank Interest Incomes and securities they hold on companies listed at POMSOX. Such individual investments should be allowed to continue without any IWTs and Capital Gains Tax.
After all, how do you promote wealth creation policies when simple individual investors are taxed at every nook and cranny whereas preferential treatment is dished out to institutional investors only. The latter by the way devise “creative accounting” schemes to minimize and pay zilch tax or avoid paying any at all.