Papua New Guinea Taxation Review (2013-2015)

Issues Paper No.5: An examination of the advantages and

disadvantages of tax incentives

Prepared by the Taxation Review Committee

12 December 2014

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Consultation Process The Tax Review Committee (Committee) is seeking your feedback and comments on this Issues Paper. This and other issues papers will be released throughout 2014 and the first quarter of 2015 and are designed to promote targeted discussion and debate on particular areas subject to Review. Consultation questions are included throughout the paper to guide responses but stakeholders should feel free to raise any issue of relevance.

Feedback in response to this Issues Paper will help to inform the development of the Committee’s draft recommendations to Government, which will be subject to a further round of consultation before being finalized.

To ensure that there is transparency in the consultation process, all submissions are published on the Tax Review website (www.taxreview.gov.pg) unless the submission is by justification, marked ‘CONFIDENTIAL’.

Submissions in response to this paper are due by 13 February 2015.

All submissions should be sent via mail and/or email to:

Head of Secretariat Tax Review Secretariat c/- Department of Treasury PO Box 542, Waigani, NCD

Email: papers@taxreview.gov.pg

For any other general enquiries, email: info@taxreview.gov.pg or call the Tax Review Secretariat on (675) 325 3775 or (675) 325 5977.

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TABLE OF CONTENTS

TABLE OF CONTENTS .......................................................................... I

FOREWORD ...................................................................................... IV

EXECUTIVE SUMMARY ...................................................................... VI

Consultation Questions ............................................................................... vii Overview of Tax Incentives Regime in PNG .................................................... vii The Advantages and Disadvantages of Tax Incentives ..................................... vii Tax Incentives in PNG – Possible Directions for Reform .................................. vii Other issues .................................................................................................... viii

CHAPTER 1: OVERVIEW OF TAX INCENTIVES REGIME IN PNG 1

What are tax incentives? ................................................................................1

Tax Incentives Offered in PNG .....................................................................1 General incentives ............................................................................................. 1 Taxpayer and project-specific incentives ............................................................ 7

Policy framework governing the award of tax incentives in PNG .............8 Compliance with World Trade Organisation obligations ................................. 10

Process for the awarding of tax incentives ................................................ 10

Reporting on and valuation of tax incentives ........................................... 11

CHAPTER 2: THE ADVANTAGES AND DISADVANTAGES OF TAX INCENTIVES 14

Advantages of tax incentives...................................................................... 14

Disadvantages of Tax Incentives ................................................................ 15

Strengths and weaknesses of particular incentives .................................. 18

International experience with tax incentives............................................. 19

CHAPTER 3 – VIEWS FROM CONSULTATION& PRIOR TAX REVIEW .......................................................................................... 21

Comments in relation to the Mining and Petroleum Taxation ................ 21

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Comments as part of a broader “Blue Sky” consultation ......................... 22 Sector/taxpayer-specific issues ........................................................................ 23 General issues ................................................................................................. 24 Industrial Development (Pioneer Status) Act ................................................... 24 Administrative and legislative framework applying to incentives .................... 25

Consideration of tax incentives in the 2000 Tax Review .......................... 26

CHAPTER 4: TAX INCENTIVES IN PNG – POSSIBLE DIRECTIONS FOR REFORM ................................................................ 27

A whole-of-tax-system approach to incentives ......................................... 28

A Framework for Tax Incentives in PNG .................................................. 30 The process for granting tax incentives ............................................................ 30 The policy basis upon which incentives are granted ........................................ 32 The legislative framework underpinning tax incentives ................................... 34 Ongoing reporting and monitoring of tax incentives ........................................ 35

CHAPTER 5 – OTHER ISSUES ............................................................. 37

Mining and Petroleum Sector ..................................................................... 37

Infrastructure Tax Credit ............................................................................ 37

Research & Development Incentive ........................................................... 40

Pioneer Act................................................................................................... 41

Special Economic Zones.............................................................................. 42

Incentives relating to GST/Import Duties/Excise.................................... 43

Exemptions provided to aid organisations and workers ......................... 43

Project agreements ...................................................................................... 45

ATTACHMENT A: SUMMARY OF GENERAL TAX INCENTIVES OFFERED IN PNG ............................................................................ 46

ATTACHMENT B: SUMMARY OF KEY FINDINGS AND RECOMMENDATIONS FROM THE NATIONAL INVESTMENT POLICY, VOLUME II (1999)............................................................... 66

ATTACHMENT C: VALUE OF INCOME TAX INCENTIVES (2015 BUDGET) ......................................................................................... 73

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ATTACHMENT D:STRENGTHS AND WEAKNESSES OF DIFFERENT TYPES OF TAX INCENTIVES ............................................. 74

ATTACHMENT E – INTERNATIONAL CASE STUDIES ON EXPERIENCE WITH TAX INCENTIVES.................................................. 76

REFERENCES ................................................................................... 78

ABBREVIATIONS .............................................................................. 80

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FOREWORD

In 2013, the Government committed to comprehensively review PNG’s revenue regime. The primary reason for the Review is to ensure that it remains relevant, efficient and effective.

Government revenue is critical to funding essential services and infrastructure for Papua New Guinea, to share the benefits of prosperity across families, communities and regions and to lay the foundations for future growth. Consequently, this Review is a high priority of the Government and an important platform of the Government’s economic and fiscal strategy. The last comprehensive taxation review was undertaken in 2000 and given the substantial economic, fiscal and technological developments over the past 14 years, it is timely that another review is undertaken to ensure that the country’s tax system is modern, robust and is able to support the country’s medium and long-term economic and social development objectives. While formally titled a ‘Tax Review’, the Review will consider other sources of revenue, including non-taxation revenues. The terms of reference to the Review have called on the Tax Review Committee to examine the advantages and disadvantages of tax incentives. The Review began this work as part of Issues Paper 3, the Broad Directions Paper. This Issues Paper considers the use of tax incentives in PNG in more detail, providing an overview of the existing regime, highlighting the advantages and limitations of tax incentives and discussing the overall framework in place to guide the awarding and management of incentives. Trying to incentivise certain activities or help particular sectors of the economy to grow can be important public policy goals. However, as is explored in this paper, there are limitations on the ability of the tax system to achieve this. In particular, PNG’s experiences with the research and development incentive and the infrastructure tax credit have highlighted the challenges of implementing or effectively monitoring particular incentives in the absence of sufficient administrative or technical capacity. Whilst tax incentives have their limitations, the overall design of the tax system does play an important role in the economy of a country and can provide significant incentives, and disincentives with respect to certain activities. The rates of personal income taxes, if set too high, can act as a real disincentive to work. Corporate income taxes also need to remain competitive internationally in order to attract foreign investment. Where the tax system itself is acting as a barrier to growth, such as with the challenges that small and medium enterprises face in entering the formal economy, then creative approaches to tax design may be required. Given its terms of reference, this Review provides an opportunity to take a broad view of the tax system, and to the issue of incentives more generally. To the extent that specific tax incentives remain a feature of PNG’s tax system, it is important that these are granted and managed within a clear and transparent framework. However,

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perhaps more importantly, opportunities for more comprehensive and substantive tax reform should be pursued so that, as a whole, the tax system is fairer, simpler and more competitive. Whilst the paper suggests that this should be the ultimate goal for PNG’s tax system, in the short term there is an urgent need to improve the way that tax incentives are managed and, in particular, to more effectively and accurately assess the value of revenues foregone from the incentives. In particular, PNG’s experience with the R&D tax concession highlights a critical need to evaluate the ongoing merit of significant incentives in the tax system, including their ongoing policy rationale and risk to revenue. The Committee looks forward to receiving submissions on this paper and to future engagement with interested stakeholders on the future of Papua New Guinea’s tax system.

Sir Nagora Bogan, KBE Chairman, Tax Review Committee

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EXECUTIVE SUMMARY

A ‘tax incentive’ is a type of concessional tax treatment used to achieve some type of policy goal – usually the promotion of growth of a particular industry or sector of the economy. A range of different types of tax incentives are used in PNG, resulting in eligible taxpayers paying either less tax that they would have or paying tax later than they would have under ‘standard’ tax rules.

This paper provides an overview of the incentives used in PNG including a number of significant tax incentive measures that are or have been applied in PNG. It highlights that tax incentives have been and continue to be a key feature of PNG’s tax system.

Consistent with the terms of reference for the Review the paper then considers both the advantages and disadvantages of tax incentives. Whilst tax incentives are often implemented in pursuit of good public policy goals, the paper highlights a number of disadvantages of tax incentives, drawing on extensive international experience and writing on the issue.

First and foremost, tax incentives can undermine the tax system’s primary function which is to generate revenue to fund the provision of government services and infrastructure. Treating taxpayers differently also undermines the equity of the tax system and, if poorly targeted, can simply generate an unfair competitive advantage. Of significant concern in the PNG context is the additional complexity that tax incentives can create, placing greater demand on already limited tax administration resources.

International experience, and PNG’s experience with some of its own tax incentive regimes (in particular the R&D incentive), also highlights that incentives are often ineffective in achieving their desired policy outcome or in contributing to economic growth more broadly.

The paper then puts forward, for discussion, a proposed approach for PNG to take on the issue of tax incentives. The central position put forward by the paper is that, rather than focus on sector or industry specific incentives, PNG should focus on creating an overall tax system that is simpler, fairer and more competitive. Such an approach may have a strong impact on ‘incentives’ – for example, a move by PNG to maintain a corporate income tax rate that is internationally competitive is likely to have a far greater impact on attracting foreign investment compared to any sector specific incentive.

Whilst suggesting that such a ‘whole of tax system’ approach should be the goal for PNG, the paper recognises that incentives are likely to remain a feature of PNG’s tax system to some extent. Accordingly the paper puts forward a framework, for discussion, for the management and award of these incentives. The framework includes the process for granting tax incentives, the policy basis on which they are granted, the legislative framework for incentives as well as a framework for the

Executive Summary

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ongoing reporting and monitoring. Finally the paper suggests that there is an urgent need to adequately assess the value of incentives and to review significant incentives in the law.

Consultation Questions Below are the various consultation questions posed throughout the paper. As noted above, they are intended to act as prompts only and stakeholders should feel free to raise any other related views/issues.

Overview of Tax Incentives Regime in PNG

Question 1.1 – are stakeholders aware of any other tax incentives not captured in the table?

Question 1.2 – do stakeholders agree with the stated purpose of each incentive, as provided for by the Review?

Question 1.3 - are relevant stakeholders able to indicate how individual incentives helped to achieve the stated policy goal?

The Advantages and Disadvantages of Tax Incentives

Question 2-1 – what other advantages do tax incentives have, particularly in the PNG context?

Question 2-2 – what other disadvantages do tax incentives have, particularly in the PNG context?

Question 2-3 – do stakeholders have any other views about the merits of particular types of tax incentives?

Tax Incentives in PNG – Possible Directions for Reform

Question 4.1 – do stakeholders agree that PNG should focus on creating a tax system that is overall simpler, fairer and more competitive?

Question 4.2 – would stakeholders agree to a trade-off between removing existing incentives with other reforms that focused on making the tax system simpler, and more competitive overall?

Question 4.3 – do stakeholders agree that there is a need for a framework to guide the granting and management of tax incentives?

Question 4.4 –should PNG consider formalizing the process for the granting of tax incentives, similar to the process adopted recently in the Solomon Islands?

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Question 4.5 – do stakeholders consider that there is a need to create a new body for the carriage and formulation of National Strategic Economic Development Plans in PNG, with part of its role being to ensure that consideration of targeted interventions using the tax system are placed in a broader economic context?

Question 4.6 –what are stakeholder’s views on the proposed principles to guide the award of tax incentives in PNG? Are there any other principles that should be included?

Question 4.7 –do stakeholders consider that there is any merit in amalgamating existing incentives into a single piece of legislation or into a part of existing legislation, such as the income tax act?

Question 4.8 –which Government portfolio is best placed to have ultimate responsibility for tax incentives?

Question 4.9 – do stakeholders agree that the tax incentive report should be given greater prominence in the annual Budget, and include the policy rationale for each incentive? Should a separate report be prepared?

Question 4.10 – how can PNG most simply estimate the value of the tax incentives it provided?

Question 4.11 – do stakeholders agree that the annual report on the value of tax incentives should include the value of any taxpayer of project specific incentive?

Question 4.12 – do stakeholders agree that there needs to be some effort in evaluating the ongoing value of revenue incentives provided in PNG? Which incentives are most in critical need of evaluation?

Other issues

Question 5.1 – do stakeholders agree that, before any decision is taken to substantially change the ITC scheme (including guidelines) an independent, third-party audit of the scheme is requires?

Question 5.2 – for firms that have utilised the enhanced deduction for R&D that was previously available, how did the incentive promote investment in research and development that would not have otherwise occurred? What broader benefits to PNG and the PNG economy did that research and development produce? How might a future R&D concession be framed differently?

Question 5.3 – what value, if any, do the existing research and development incentives (available under section 95) continue to provide?

Question 5.4 – do stakeholders agree that reform of the corporate income tax, with a view to making PNG more attractive to international investment, should focus on a

Executive Summary

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reduction in overall rates rather than the provision of targeted tax holidays to specific sectors?

Question 5.5 – on what basis should consideration be given to providing exemptions/reductions to GST/Import Duties/Excise?

Question 5.6 – is there value in clarifying, in law, the limitation on tax exemptions available to aid organisations (for example, in clarifying that exemptions apply to the organization and its employees only)?

Question 5.7 – what are stakeholders views about the value of GST exemptions provided for individuals employed in relation to aid projects?

Question 5.8 – should project agreements not include a reference to incentives already available in legislation?

Question 5.9 – do stakeholder’s agree that any provisions in a project agreement purporting to provide tax treatment not generally available under the tax law should be published?

* * * * *

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CHAPTER 1: OVERVIEW OF TAX INCENTIVES REGIME IN PNG

What are tax incentives? A ‘tax incentive’ is a type of concessional tax treatment (i.e. treatment that is better than the ‘standard’ tax treatment) used to help to achieve a policy outcome. The term ‘incentives’ is usually linked to achieving the policy goal of promoting investment or growth in relation to a particular sector of the economy. However, concessional tax treatment is often provided to achieve broader policy goals (such as encouraging donations to charities). For the purposes of this paper, ‘tax incentive’ is used to describe all concessional tax treatment, regardless of the policy goal being pursued.

There are many ways that the tax system can provide such concessional treatment and usually involves the taxpayer paying less tax or paying tax later than they otherwise would have. The types of tax incentives provided in PNG and elsewhere are described further below.

Tax Incentives Offered in PNG

General incentives

PNG offers a range of incentives. A list of a number of these incentives is found at Attachment A. The table also includes the purpose of each incentive, based on the research and analysis of the Review team.

Question 1.1 – are stakeholders aware of any other tax incentives not captured in the table?

Question 1.2 – do stakeholders agree with the stated purpose of each incentive, as provided for by the Review?

Question 1.3 - are relevant stakeholders able to indicate how individual incentives helped to achieve the stated policy goal?

The types of incentives offered are varied and are summarised in the following table.

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Table 1: Summary of the types of tax incentives offered in PNG

Type of incentive Description Accelerated Depreciation (e.g. available to fishing and tourism sectors)

Depreciation at a faster rate than available for the rest of the economy. In PNG this include higher first year depreciation rates or increased depreciation rates over many years (allowing the asset to be fully depreciated more quickly). Accelerated depreciation does not impact the overall tax payments, just the timing of those payments.

Investment allowances (e.g. double deduction for mining exploration)

Provides for a deduction for an investment above the value of that investment. Unlike a credit the allowance is calculated before tax is calculated meaning its value is the product of the allowance and the tax rate.

Investment tax credit (e.g. infrastructure tax credit)

Deduction of a certain fraction of an investment from the tax liability (i.e. it is applied after the tax liability is calculated so the full value is received).

Tax holidays (e.g. Ramu Nickel tax holiday)

Temporary exemption of a new firm or investment from certain specified taxes, typically at least corporate income tax. Sometimes administrative requirements are also waived, notably the need to lodge tax returns.

Reduced tax rates (e.g. reduced CIT rate available for construction of large scale tourist facilities)

Reduction in a tax rate, typically the corporate income tax rate.

Exemptions from various other taxes (e.g. exemptions available via gazettal for excise/import duties and import GST)

Exemption from certain taxes, often those collected at the border such as tariffs, excises and GST on imported inputs.

Financing Incentives (e.g. interest income exemption/reduced dividend withholding rates)

Reductions in tax rates applying to tax providers of funds

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In addition, certain fundamental features of PNG’s tax system, such as an absence of taxes on capital gains, can be seen as a significant concession.

As is illustrated in Attachment A, the types of activities trying to be incentivized through the tax system are broad. There has been a particular focus on providing incentives to the manufacturing, tourism, agricultural and extractive sectors. A number of incentives have also been provided to promote the development of areas outside the main urban centres. Similar to other jurisdictions, the tax system has also been used to assist the work of charities and other like non-government organisations.

A number of significant incentives are discussed in more detail below.

Infrastructure Tax Credit

A discussion on the Infrastructure Tax Credit (ITC) scheme was included in Issues Paper 1, in the context of the Mining and Petroleum Sector.

Under the ITC scheme, eligible companies receive a tax credit for funds expended on approved infrastructure projects – this means that tax payable by the company is reduced by the expenditure and, as a result, there is no cost to the company. The scheme was first introduced in 1992 as a means of utilising mining and petroleum companies as contractors to build infrastructure without the need for an appropriation from Treasury. This would ensure that communities impacted by the resource project would be able to receive tangible benefits from the use extraction of resources in their areas. The scheme recognised both that:

• the National and Provincial Governments lacked the skills and capacity to deliver infrastructure, particularly in remote areas where mining and petroleum activities took place; and

• that resource companies were well placed in these areas to deliver such projects both given their management and construction capacity.

The scheme has undergone a number of changes since its introduction. Key features of the regime are:

• whilst initially only applicable to the mining and petroleum sector, it has subsequently been extended to the tourism and agriculture sectors;

• the amount that can be expended under the scheme in any income year is limited to the lesser of the amount of tax payable or:

- for the mining and petroleum sectors (in general) – to .75 per cent of assessable income;

- for the primary production sector – to 1.5% of assessable income - for the tourism sector – to 1.5% of assessable income.

• companies working on the PNG-LNG project can access an additional 1.25% (making 2% in total);

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• unused credits can be carried forward for two years; • whilst initially implemented to ensure the delivery of infrastructure in areas

impacted by resource projects, this is not a requirement and “developers are strongly encouraged to undertake projects in parts of the country other than the province or area of impact in which the development is located”;

• whilst initially focused on the construction of infrastructure, the scheme was subsequently extended to maintenance – a response to the recommendations of the 2000 Tax Review.

In addition to the tax credit provisions included in the Income Tax Act (see section 219C) the scheme is governed by the Tax Credit Scheme Guidelines, overseen by the Department of National Planning and Monitoring and last updated in 2001. The guidelines set down the scope of projects that can be funded under the scheme and also the process of having projects approved under the scheme. Efforts are currently underway to update those guidelines, subject to the outcomes of the Tax Review.

Amendments made in 2013 created a new national infrastructure tax credit scheme, allowing projects of national significance to be approved at the discretion of the National Executive Council (NEC) (rather than under the guidelines) with any limits also to be set by NEC. Subsequent amendment were made in the 2014 Budget to remove this aspect of the scheme in response to concerns about the open ended expenditure that it represented. The Review understands that prior to its repeal a number of infrastructure projects in Port Moresby were approved.

Consistent with recommendations made in the 2000 Tax Review, the value of ITC credits (including projected value) is included in each year’s Budget. This is reflected in Chart 1 below which shows both the ongoing value of the ordinary ITC scheme and the value of projects approved by NEC under the national infrastructure tax credit scheme.

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Chart 1: Value of Infrastructure Tax Credits and National Infrastructure Tax Credits

Source: 2015 Budget and data from the Departments of Treasury and National Planning & Monitoring Note: Data for 2014 onwards are estimates

Research and Development Incentive

PNG has had in place since independence certain tax incentives designed to encourage research and development in the country (section 95 ITA). These provisions were adopted in whole from the Australian Income Tax Legislation existing in 1959, which were themselves introduced in Australia immediately following World War II (see section 73A of the Income Tax Assessment Act 1936 (Australia)). Broadly the provision provides for special allowances in relation to expenditure on scientific research that is not deductible under any other provision in the Act. This includes:

• payments to approved research institutions (para 95(1)(a)); • capital expenditure on scientific research undertaken by the taxpayer (para

95(1)(b)); • expenditure on research buildings (subsection 95(2))

Amendments made in 2003 introduced an increased (150%) deduction (s 95(9)), for a subset of expenditure already allowable as a deduction under subsection 95(1). The Review understands that this was originally introduced as part of a host of “green revolution” measures intended to support the agricultural sector but was extended to other sectors, including the extractive sector, when the measure was being finalised.

0

50

100

150

200

250

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Kina

(Mill

ion)

NITC

ITC

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Broadly, the enhanced deduction was for research involving innovation or high degrees of technical risk, undertaken under a plan approved by a Committee. The Committee was to consist of the Commissioner-General as well as two business and two technical experts.

The 2014 Budget removed the 150 percent deduction because of the challenges in administering the highly technical provisions and in obtaining individuals with the necessary skills and experience to effectively assess applications. It was also removed on the basis that the concession had failed to fulfil its policy intent – that is to promote research and development that had broader economic spin-offs where that research would not have been undertaken in the absence of thee concession. The 2014 Budget papers stated that:

While the concept of the R&D incentive is sound, its administration in Papua New Guinea is not feasible at this time. R&D concessions are always difficult to target, and lack of targeting has led to the Government funding R&D expenditures that would have occurred without the R&D tax concession.

Whilst removing the enhanced deduction aspect (i.e. extra 50%) of the regime for expenditure after 1 January 2014, the changes did not remove other concessional aspects of the regime. In addition, there remains the legacy issue of pre January 2014 claims awaiting approval from a Committee that is not currently established. From a tax system perspective these legacy issues are significant – the 2014 Budget noted that these claims represented a K2.4 billion contingent liability - or almost 30% of total Government tax revenue in any given year (based on 2013 amounts). The Review also understands that a significant proportion of the claims relate to research and development undertaken by the oil and gas sector.

Industrial Development (Pioneer Status) Act

Whilst long repealed it is worth noting the Industrial Development (Pioneer Status) Act, given that a number of submissions to the Review have argued for its reinstatement (this is considered further in Chapters 3 & 4 below). Introduced in the 1990s and administered by the then Ministry of Commerce and Industry, the Act provided a five-year corporate income tax holiday to ‘pioneer’ firms investing in manufacturing/pioneering activities in PNG. The Act was repealed in 1999 as part of the Structural Adjustment Program (SAP) for two key reasons1:

• to restore fiscal stability through expanding the tax base; and

• the legislation was in conflict with the Multilateral Trade Agreement on Subsidies

1 See Department of Trade, Commerce & Industry, 2014, ‘Submission to the PNG Tax Review – Re-Introduction of the Industrial Development (Pioneer Status) Act

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and Countervailing Measures – this was because the Act applied only to a firm that proposed to manufacture goods solely for export which was regarded as a ‘subsidy’ under the agreement.

Free Trade Zone Act

In July 2000, Parliament passed the Free Trade Zone (FTZ) Act 2000 establishing the framework and mechanism for the creation and operation of free trade zone. The purpose of establishing FTZ was to bring investment and to set up processing industries with export and employment creation potential in the less developed border provinces, particularly, Sandown, Western, Gulf and North Solomon’s Province.

Following the enactment of the legislation, it was recognised that having a FTZ in those border provinces would be challenging given the absence of sufficient infrastructure. The Government subsequently decided to develop the concept of a Special Economic Zone, incorporating this into its overall economic development strategy in 2008. The Pacific Marine Industrial Zone in Madang is the first project to be implemented under the SEZ concept.

Tax issues associated with SEZ’s are discussed further in Chapter 5 below.

Taxpayer and project-specific incentives

In addition to the range of general incentives available in the law, PNG has also provided a series of taxpayer-specific or project specific tax incentives.

In the Mining sector this includes the Ramu Nickel Project which was given a 10 year tax holiday. Whilst initially included in the relevant project agreement this incentive was also incorporated into legislation in the Income Tax, Dividend (Withholding) Tax and Interest (Withholding) Tax Act (see section 6C).

Similarly, the PNG-LNG Project has been granted a series of exemptions that have been prescribed in legislation. This includes, for example, an exemption from import duties provided for under section 9B of the Customs Tariff Act 1990 Customs Tariff Act). Special accelerated depreciation rules are also applicable to the Project (section 158J ITA)

In addition, a number of pieces of tax legislation allow for the Governor General, acting on advice and through a gazettal notice, to provide for an exemption (or reduction) from the relevant tax or duty in specific circumstances. This includes:

• in relation to import duties, under section 9 of the Customs Tariff Act (however exemptions by gazettal cannot be provided in relation to commercial projects);

• in relation to excise, under section 3 of the Excise Tariff Act 1956; • in relation to the Goods and Services Tax (GST), under subsection 25(8) of the

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GST Act; and • in relation to income tax, a charitable organization can be prescribed under

subsection 25A(3) of the Income Tax Act

The Review team has been unable to identify a comprehensive list of projects or entities that have been provided exemptions or reduced rates under these provisions.

The Review has, however, been able to identify a number of project agreements between PNG and various companies. These agreements include clauses relating to the provision of investment incentives, including tax incentives. In some cases these simply restate the ability of the company to be able to access incentives generally available in the law. In other cases they provide for the company or project to be granted specific incentives such as those that can be made available by gazettal as identified above. Under these agreements the State has an obligation to ensure that the required authorisation for the relevant incentive (for example, gazettal) is put in place.

The Review is aware also that a number of agreements may have been signed with fishing operators, providing valuable fishing licenses in exchange for an undertaking to develop some downstream processing facility (such as a canning facility). Whilst not strictly a tax incentive this can be seen in the same light as a tax incentive (revenue is foregone in exchange for pursuing some other policy goal such as encouraging value adding and downstream processing) particularly given the role that fishing license fees play in the absence of being able to effectively apply the corporate income tax regime to offshore fishing vessels (this was discussed in Issues Paper 2).

Policy framework governing the award of tax incentives in PNG The Review has been unable to identify any recent, clear overall government policy framework governing the granting of tax incentives in PNG. The closest document is the National Investment Policy (Volume 2), produced by the then Department of Commerce and Industry and approved in 1999. The Review understands that this document continues to be used by the now Department of Trade, Commerce and Industry to guide its work in this area.

Of note, five key points are highlighted by the paper in relation to tax incentives:

• The investment regime must be seen as stable

• Tax incentives should be properly targeted

• Incentives should take into account limitations in administrative capabilities

• Tax holidays do not necessarily encourage investment

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• The investment regime should have few distortions

The policy notes that “company specific negotiations are seen as the major disincentive to investing in PNG, and should therefore be avoided in favour of the rules based system of incentives”. A number of these themes are again picked up in Chapter 2 below.

As well as providing a high level policy guide, the Policy also represents the most recent attempt to assess the effectiveness of various incentives existing at the time. Findings and recommendations in relation to specific incentives are summarised at Attachment B together with an indication of whether those recommendations were subsequently adopted.

In addition to the National Investment Policy, PNG also has a range of development and fiscal policies that form part of the existing policy framework that could be considered relevant to the provision of incentives. These plans and policies, and their relevance to the tax reform process, were discussed in detail in Issues Paper 3 issued by the Committee. Relevantly, the development plans set forth an ambitious agenda for economic growth and development. In addition the recently published National Strategy for Responsible Sustainable, from the Department of National Planning and Monitoring, seeks to place these development plans on a sustainable footing. This development, to be sustained, needs to be funded in large part through PNG’s revenue system. The cost (in terms of foregone revenue) of tax incentives need to be considered in that context.

The Medium Term Fiscal Strategy specifically considers tax incentives. It identifies the need to ‘restrict taxation exemptions and special arrangements’ with a particular focus on eliminating special tax concessions for all new resource projects.

Sector-specific plans, such as the National Agriculture Development Plan (2007-2016) have also had a role in suggesting tax incentives for particular areas of the economy.

A number of specific incentives in the law also have guidelines that govern their award. As noted above, the Infrastructure Tax Credit is governed by its own guidelines. These guidelines are currently under Review by the Department of National Planning and Monitoring.

The Review also understands that there may be informal policy frameworks guiding the provision of incentives. For example, the Review understands from the Department of Trade, Commerce and Industry, that in the context of project-specific agreements, excise duty exemptions will generally only be provided:

• in relation to machinery during the construction phase of a project;

• where such goods cannot be source locally;

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• in relation to new of stagnant sectors of the economy; and

• after an assessment of the benefits to be provided by the project, measured against the revenue foregone from the provision of the incentive.

Compliance with World Trade Organisation obligations

One important consideration for PNG, as with all World Trade Organisation (WTO) members, is that any incentives need to be compliant with their WTO obligations. A number of disputes considered by the WTO’s Dispute Settlement Body have confirmed that the principles and rules underlying the WTO (including but not limited to the principle of non-discrimination) can impact a country’s direct and indirect taxes (Daly 2005, p25). With respect to indirect taxes (for example excise) this will be an issue where the tax system provides for different treatment between imported and locally produced products.

Similarly direct tax measures may contravene WTO rules where they discriminate between investors – this could include measures designed to provide assistance for export activities, provide protection against imports or to support domestic production. In PNG, the export sales exemption currently available under the Income Tax Act2 is an example of one such direct tax measure – this tax incentive will cease to apply from 1 January 2015 to ensure that PNG is compliant with its WTO obligations.

Process for the awarding of tax incentives The idea for the provision of a new incentive may arise in a number of different ways. It may arise as part of the general deliberations of Government, as part of a Department’s work in trying to identify a means of assisting a particular group or sector of the economy or through a direct request from a particular taxpayer or sector.

Whichever way the idea for the incentive arises, as the provision of tax incentives requires either the amendment of existing law, or the issuing of a gazettal notice (by the Governor-General acting on advice), the decision to provide a tax incentive is one for Government (through the key decision making body – the National Executive Council (NEC)) and, where amendments to legislation are required, Parliament.

The Government, through the NEC, needs to make a decision on whether to grant an incentive based on the perspective provided by various agencies. These perspectives

2 See attachment for more information. Broadly incentive provides that income from export sales of qualifying goods are exempted for the first three years. For the following four years, an exemption is provided for that portion of export sales that exceeds the average over the preceding three years

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may be different but equally important in assessing the merits of a particular incentive. Notably:

• the Department of Treasury has overarching policy responsibility for the tax system and for considerations of fiscal sustainability going forward;

• the Department of Trade, Commerce and Industry has responsibility for promoting investment and trade;

• the IRC and Customs have an interest in both the impact of any incentive on the overall revenue system and on its ability to be effectively administered; and

• the Department of National Planning and Monitoring has an interest in the sustainability of the revenue system going forward to fund development.

In addition, particular Departments and agencies will have an interest in incentives relevant to their portfolios (for example, the agencies responsible for the extractive sectors in relation to incentives sought by mining and petroleum companies, or the Department of Foreign Affairs regarding exemptions for international organisations or aid purposes).

However, with the exception of the ITC (which has in place a formal process), there does not appear to be a clear and defined process for relevant Government agencies to come together to assess the merits of particular incentives and provide advice to Government3. This is in contrast to the approach taken in other countries, most recently in the Solomon Islands as discussed further below in Chapter 2 below.

As a result of this, the Review understands that the process for analysing, advising on and ultimately deciding on the provision of tax incentives is often ad hoc which is perhaps reflected in the scope and type of incentives found in PNG (see Attachment A).

Reporting on and valuation of tax incentives As will be discussed in Chapter 4 below, a number of jurisdictions around the world do report the type and cost of their tax incentives. This helps to promote the overall transparency of the tax incentives regime and to provide a clear picture to Government of the revenue consequences of providing the incentive.

3 Although the Review understands that an inter-Departmental working group had previously been established for a similar purpose.

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Some limited reporting of incentives is provided for each year as part of PNG’s Budget documents. The recent 2015 Budget, for example, included tables outlining the costs of the infrastructure tax credit scheme, certain incentives provided under the Income Tax Act (both resulting in a permanent loss as well a deferral of revenue) as well as the value of exemptions provided under the Stamp Duties Act.

The table outlining the estimated revenue foregone as a consequence of incentives provided under the income tax law is extracted at Attachment C. It estimates that, since 2005, the value of incentives in terms of revenue foregone is estimated to be K214 million. Much of the information in relation to these is taken from income tax returns4. However, this information is unlikely to reflect the true value of the incentive being provided as it relies on the voluntary disclosure by the relevant taxpayer. The information is also incomplete as it does not include the value of revenue foregone from all incentives available under the income tax law, including those applying to specific taxpayers such as Ramu Nickel Project or the PNG LNG Project (this may reflect restrictions previously imposed by the tax secrecy provisions but which have been addressed as part of changes made in the 2015 Budget).

The Review has also obtained some information from PNG Customs Service (PNGCS) regarding the revenue foregone for various exemptions available in relation to the revenue streams that they collect – namely, GST (Import), Import Duties (i.e. tariffs) and Import Excise Duties.

The revenue foregone from GST (Imports) was estimated at K434 million in 2013. However, it would be incorrect to see this as an ‘incentive’ as much of this would relate to exemptions available to natural resource projects. As will be explored further in the issues paper relating to GST, providing an exemption from GST for enterprises engaged wholly in exports (such as extractive companies) is a basic feature of many GST systems. This highlights the importance of distinguishing between tax treatment that is an ‘incentive’ and one that is simply a standard feature of the tax system.

Chart 2 below illustrates the estimated value of revenue foregone from exemptions available for import duties and excise. The large increase in import duty exemptions are a consequence of imports made during the construction phase of the PNG-LNG Project.

4 In particular, see Form C (Company Return), available at http://www.irc.gov.pg/tax_form.html

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Chart 2: Revenue foregone (import duties and excise on imports)

Source: PNG Customs Service

0

20

40

60

80

100

120

Reve

nue

Fore

gone

(K M

illio

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Import Duties

Excise (on Imports)

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CHAPTER 2: THE ADVANTAGES AND DISADVANTAGES OF TAX INCENTIVES

The terms of reference to the Review specifically request the Tax Review Committee to consider the advantages and disadvantages of tax incentives. Some consideration was given to this in Issues Paper 1 (in that context, incentives specific to the mining and petroleum sector) and in the Broad Directions Paper (Issues Paper 3). The points raised in those papers are expanded on here.

Of note, this paper does not look at the merits of otherwise of incentivising particular activities. In many cases, there are clear justifications for Government trying to find ways of achieving a particular policy outcome (such as helping to grow a particular sector of the economy or encouraging the training of staff). Rather, this paper looks at the role that the tax system can play in this, and the advantages and limitations that it has in playing such a role.

This Chapter also looks at a number of international examples of how other countries have approached tax incentives.

Advantages of tax incentives Many countries, developed and developing alike, use their tax system to incentivise particular activities. There may be a number of reasons for this. This includes:

• Producing broader benefits: Incentives may aim to encourage activities that produce benefits for society that the private market does not fully take into account (“positive externalities”). Incentives for training for research and development are often justified on this basis.

• Increasing competitiveness: Incentives may also be justified on the basis that they make a country more competitive, allowing it to compete for foreign direct investment with its neighbours.

• Compensation for other costs: Tax incentives may also be used to compensate businesses for other costs of doing business in the country such as poor infrastructure, crime problems, corruption, or unnecessary red tape.

Question 2-1 – what other advantages do tax incentives have, particularly in the PNG context?

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Disadvantages of Tax Incentives Much has been written about the disadvantages of tax incentives and, in particular, the challenges they pose to developing countries such as PNG5. A number of these issues were considered in Issues Papers 1 and 3 released by the Committee.

However, it is worth reflecting on these limitations in the context of the broad principles for good tax policy outlined in Issues Paper 3. These are listed in Table 1 on the following page.

In addition to the issues that tax incentives pose in relation to good tax policy principles, there is a very real question as to whether using the tax system is effective in achieving the desired policy goal. As was noted in the National Investment Policy, tax incentives may be redundant as they do not lead to a change (or a limited change) in the intended behaviour, with the incentive simply providing a windfall gain for firms that were going to undertake the activity anyway. This appears to have been the case with the R&D concession.

Where the policy problem trying to be addressed is a non-tax problem then there may be a more direct means of fixing the problem. For example, if the problem is simply the broader cost of doing business, a more direct means of assisting taxpayers is through direct grants – this has the same effect as a tax incentive designed to reduce a tax burden but allows for greater control on costs because overall spending is limited by the budget allocation.

Another example may be the tourism sector. The tax system is unlikely to be a significant reason why tourists do not choose PNG as their holiday destination. Rather this is more likely to relate to issues such as law and order and cost of travel.

There have been a number of international studies undertaken on the value of tax incentives, including with respect to developing countries. The evidence suggests that tax incentives rarely have any significant effect on investments. A recent study of 40 developing countries found that tax incentives had no effect on economic growth and aggregate investment (Klemm & Van Parys, 2009).

5 See a list of references at the end of this Issues Paper

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Table 1: Issues posed by tax incentive for the principles of good tax policy

Principle of good tax policy Issues posed by tax incentives

Revenue A good tax system should raise sufficient revenue to ensure that the government can deliver services that meet the community’s needs.

Tax incentives cause a loss in current and future revenue. Another threat to revenue when providing exemptions to one group of taxpayers is that this creates pressure from other taxpayers for the same exemption (“exemption creep”).

Competitiveness and efficiency A good tax system should promote economic growth and thus drive more jobs, higher incomes, more services, lower prices and less poverty.

Tax incentives are inefficient as they create different tax treatments between and within sectors. This can lead to distortions in the allocation of workers or investment to different activities. Furthermore, tax incentives mean that, if the government is to achieve its revenue target, taxes must be higher for other activities, which has the potential to harm economic efficiency and compliance, and causes inequities. It also limits a Government’s ability to reduce overall tax rates, benefitting a broader range of taxpayers and increasing the competitiveness of the tax system overall.

Fairness A good tax system should be fair: it should create a level playing field for businesses and it should ensure that taxpayers each pay their fair share.

Incentives targeting a particular sector, or even taxpayer, mean that other taxpayers have to bear a higher revenue burden.

Where incentives are provided to one particular taxpayer in a sector, this creates an unfair competitive advantage over others operating in the same sector.

For individuals, incentives built into the system generally advantage higher income earners more – they are also better placed to obtain the tax advice often required to access concessions.

Simplicity A good tax system should be simple enough for

Special tax treatment complicates tax administration and compliance. These complications often arise because of the need to monitor the incentives due to concerns with abuse. The administration and compliance difficulties are especially likely where the tax administration

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taxpayers to understand and meet their tax obligations. It should also minimise the administrative costs for government and for the taxpayer.

is also weak.

The inability of PNG to effectively implement the R&D incentive, as highlighted above, is an example of this. Complexity is a particular concern in PNG. Discussions with IRC and PNGCS have confirmed that significant resources need to be devoted to administering incentives.

Tax incentives can also complicate the affairs of taxpayers as it encourages tax planning.

Trust in and accountability of government A good tax system including a reliable tax administration should build trust and confidence in government and should be transparent and encourage greater government accountability and integrity.

Tax incentives can create opportunities for tax abuse and corruption. An example of such abuse can be transfer pricing between related parties to ensure profits are made in exempt activities and deductions in fully taxable activities.

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It is worth noting also that a recent analysis of the key reform priorities for business conducted by the Institute of National Affairs in conjunction with the Asian Development Bank (INA 2014) confirmed that the top areas of reform from a business perspective were law and order and corruption. Tackling these will involve, amongst other things, a steady revenue base to pursue reforms.

Of note from a revenue perspective:

• Reform of the company tax rate was the fifth in order of priority • Stability of rules was the seventh in order of priority • Subsidy/tariff support was ninth in order of priority • Local level government taxes and rules were tenth in order of priority • The GST was twentieth in order of priority

Question 2-2 – what other disadvantages do tax incentives have, particularly in the PNG context?

Strengths and weaknesses of particular incentives In addition to the advantages and disadvantages of tax incentives generally, certain types of incentives have particular strengths and weaknesses. A list of these is at Attachment D.

As noted in Issues Paper 1, there are particular concerns around the use of tax holidays. To the extent that they are of any value, they tend to attract footloose firms that leave as soon as the incentive expires, without lasting employment benefits. This was the finding in the National Investment Policy in relation to the 5-year corporate income tax holidays available under the Pioneer Status Act. The Policy found that:

The incentive failed to meets its intended purpose as businesses granted the incentive ceased operating on expiry of the incentive period.

In other circumstances, a tax holiday may actually be of little use in promoting investment in new enterprises which are often unprofitable in the early years and unlikely to benefit from the incentive.

In addition, tax holidays are arguably poorly targeted as they are not generally linked to any level of investment, which is what they are trying to promote. This can be contrasted to other incentives such as accelerated depreciation and investment allowances which, by their nature, require some investment by the taxpayer.

In general accelerated depreciation is the preferred (and least harmful) form of tax incentive. It is less costly for revenue collections than income tax holidays, investment allowances or tax credits and generally provides less scope for tax abuse.

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As a second-best alternative, investment allowances and investment tax credits are more cost effective than income tax holidays. As indicated above, unlike tax holidays, these credits/allowances require actual investment by the business. They also allow better targeting of particular types of investment, and their fiscal costs are more transparent and easier to control.

The provision of ‘border taxes’ such as import duties, excise and import GST has some drawbacks. If not appropriately targeted they can generate an unfair competitive advantage to those firms receiving the incentive and may be open to abuse or leakage into the domestic economy (with goods being onsold for lower prices or used for purposes other than which the incentive was provided).

Question 2-3 – do stakeholders have any other views about the merits of particular types of tax incentives?

International experience with tax incentives Most countries in the world provide some form of tax incentive. Details on incentives provided in the Asian region, for example, are available on the Asian Development Bank website.6

As noted above, much has also been written about the challenges posed by tax incentives to developing countries in particular and PNG can learn much from the experiences of like countries. This was most recently highlighted in a report to the G20’s Development Working Group which stated that (OECD 2014, p22):

The damage to the revenue base that erodes the resources for the real drivers of investment decisions — infrastructure, education and security — is compounded by the lack of transparency and clarity in the provision, administration, and governance of tax incentives in developing countries.

A recommendation to the G20 for the IMF, OECD, UN and World Bank to develop a report in 2015 to develop a guide on how best to balance investment and public revenue priorities and to estimate the costs of tax incentives should be followed closely in PNG.

Attachment E also contains case studies on tax incentive issues that have arisen in a number of jurisdictions.

Given its proximity, it is worth reflecting in particular on the recent experience in the Solomon Islands.

Prior to changes enacted in 2012, legislation relating to Import Duties, Excise, GST, Income Tax, Sales Tax and Stamp Duties included broad provisions allowing the

6 See the ADB’s Asian Region Integration Centre database (http://aric.adb.org/taxincentives)

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Commissioner of Taxation to provide exemptions. Changes made in 20127 altered the process by which such exemptions were provided. The changes created a formal “Exemption Committee” whose role it is to provide advice to the Minister (in this case the Minister for Treasury and Finance) where a request has been made for an exemption. The Committee consists of representatives of the revenue administrators, the Ministry of Development Planning and the Ministry of Commerce.

The Committee’s recommendations to the Minister are based on national interest criteria, to be outlined in Regulations. The Minister can only agree to an exemption where recommended by the Committee however the Minister retains the ability to decline an exemption application, even if it is recommended by the committee.

The purpose of the changes was to:

• to combine the pre-existing exemption committees (tax and customs); • provide largely uniform criteria for the assessment of the merits of exemption

applications; • to provide a balance between ministerial discretion and professional

bureaucratic advice; and • to increase levels of transparency and accountability.

7 See the Customs and Excise (Amendment) No. 2 Act 2012 (No. 8 of 2012)

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CHAPTER 3 – VIEWS FROM CONSULTATION& PRIOR TAX REVIEW

The Tax Review Committee has received a number of comments from interested stakeholders on the issue of tax incentives. This is both in response to specific questions posed in Issues Paper 1 on Mining and Petroleum Taxation as well as part of the broader “Blue Sky” consultation process.

This Chapter provides a summary of these views. It also provides a summary of the comments and recommendations made in relation to tax incentives as part of the 2000 Tax Review.

Comments in relation to the Mining and Petroleum Taxation Issues Paper 1 sought stakeholder’s views on the provision of tax incentives for the mining and petroleum sector and, in particular, asked whether special reductions in the main fiscal rates should not be granted to new mining or petroleum projects.

Stakeholders in the extractives sector largely supported the need for project specific tax incentives, noting that there were peculiarities with the mining and gas sector that justified such incentives. The Chamber of Mines and Petroleum, for example, noted that:

Some flexibility in the resources tax regime is desirable. This is due to the inherent risks and challenges of operating in the resources sector (capital intensive, upfront costs, long project lives, etc)…8

However, there was some support of applying incentives on a sector basis, rather than on a project specific basis. Exxon Mobil stated that:

…incentives could be provided in the petroleum and gas sector as a whole, but not on a project specific basis.9

In particular, Exxon Mobil argued for the need for incentives to encourage high cost exploration.

8 PNG Chamber of Mines and Petroleum 2014, ‘Chamber Submission to the Tax Review Committee on Mining and Petroleum Taxation in PNG’, 30 May 2014, available at www.taxreview.gov.pg/submissions.

9Exxon Mobil, 2014, ‘PNG Tax Review – EMPNG Response to Consultation Questions’, 30 May 2014, available at www.taxreview.gov.pg/submissions.

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A number of submissions also noted the importance of incentives being used to make marginal projects viable. In the absence of incentives, it is argued, some projects would not proceed or would be delayed. This would be to the detriment of the broader benefits that result from significant investment such as community investment, employment opportunities and the development of infrastructure.

In addition to the feedback received in response to Issues Paper 1, a number of other comments were received as part of the broader consultation process that are relevant to mining and petroleum taxation. Notably, a number of representations raised concerns around the provision of incentives, such as tax holidays, in the mining and petroleum sector. This sentiment was also expressed during the Tax Symposium held in Port Moresby in May. There was a view in a number of submissions that the incentives provided to the sector were ‘unfair’ when compared to the treatment provided to other sectors. One submission stated:

[The] Mineral sector gets favourable treatment like tax breaks and holidays and tax credit schemes, while the non-mineral sector where the bulk of the population lives does not have such favours. Such privileges should be minimal and applies across different sectors. Taxes should be favourable to the non-mineral sector where the bulk of our population is engaged to increase the tax base, encourage wider participation and enable benefits to flow down to our people.10

Some submissions suggested that incentives such as tax holidays and “investment concessions” for the sector should not be entertained. One representation raised a more specific concern – that the exemption from import duties available to the sector for the importation of items such as food meant that locally produced food was uncompetitive and that, as a consequence, local economic development opportunities were lost.

Comments as part of a broader “Blue Sky” consultation In addition to the specific feedback received in response to Issues Paper 1, through its “Blue Sky consultation” and other outreach activities the Review has received a range of other views from stakeholders on tax incentives offered in PNG. Some representations were sector specific and others more general.

10 See BPNG, 2014, ‘Submission to the Tax Review Committee’, available at www.taxreview.gov.pg/submissions.

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Sector/taxpayer-specific issues

Agriculture

In addition to those comments directed at the incentives provided to the Mining and Petroleum sector, a number of submissions were also received in relation to incentives provided to the agriculture sector (of which, as noted in Chapter 1, there are numerous). PNG Palm Oil Council, for example, argued that the existing incentives were necessary for the sector, as a means of compensating for the higher cost of doing business when compared to competitor countries such as Indonesia and Malaysia11. There was also a call for additional incentives for the sector including:

• broad tax breaks for the sector and allowing the carry back of losses12 • the reactivation of the ‘Green Revolution’ program13 • full (100%) depreciation (in the year of purchase) for all plant, equipment,

machinery and vehicles for those engaged in growing commodity crops14; and • full (100%) depreciation (in the year of purchase) for companies and businesses

involved in manufacturing bee hives, wax foundation15.

Small Business

The need for a tax system that was more favourable to PNG’s small businesses was also raised in a number of submissions. This ranged from outright tax exemptions for a period of time16 to measures that seek to address the high levels of compliance costs being faced by smaller businesses17.

Tourism

In the course of discussions with representatives of the tourism sector, the Review was provided with a 2009 report entitled Review of Tourism Investment Incentives in PNG. Given the number of existing incentives aimed at the tourism sector (as noted in Chapter 1) it is worth noting some of the key findings in the report.

11 See PriceWaterhouseCoopers (on behalf of Palm Oil Industry Association) Submission, 2014, ‘Incentives for the Palm Oil Industry – Submission to the Tax Review Committee’, p. 4 available at www.taxreview.gov.pg/submissions.

12 See Basil, S, 2014, ‘Taxation Review Committee – Public Consultation Presentation’, available at www.taxreview.gov.pg/submissions.

13 Ibid. 14 Ibid. 15Farmers and Settlers Association Inc, 2014, ‘Submission to the PNG Tax Review’ (via email),

available at www.taxreview.gov.pg/submissions. 16 See JAJ & Associates, 2014, ‘Submission to the PNG Tax Review’, 30 April 2014, available at

www.taxreview.gov.pg/submissions. 17 See KPMG, 2014, ‘Submission to the PNG Tax Review’, 15 May 2014, available at

www.taxreview.gov.pg/submissions

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In particular the report highlights the failure of a number of incentives that were introduced in 2006 (double deduction for marketing expenses, accelerated depreciation for capital investments, tariff and duty exemptions for hospitality related items) to achieve their policy goal of stimulating major new tourism investments.

General issues

A number of stakeholders also raised concerns about the granting of incentives more generally. Some questioned whether incentives had actually been effective, despite their long history in PNG whilst others questioned their fairness, suggesting that any ‘incentives’ should be provided to all businesses18.

In support of the Government’s stated policy, some submissions called for incentives provided at a project or company level to stop being provided and for those, not currently authorised under the Income Tax Law, to be repealed19. The same submission also called for other administrative concessions to be withdrawn, such as exemptions from lodgement of tax returns and documentation and allowing taxpayers to keep books and records in a foreign currency.

Of interest PricewaterhouseCoopers’ submission in response to Issues Paper 2 (Corporate & International Taxation) included the results of a simple survey of around 100 businesses in PNG. Two results from this survey are worth noting. Some 73% of respondents answered in the affirmative when asked whether tax concessions affected their business decision making. However an even higher majority of respondents (some 78%) indicated that they would be willing to forego tax concessions in exchange for a simpler system overall20.

Industrial Development (Pioneer Status) Act

Two submissions to the Review also recommended the re-introduction of the Industrial Development (Pioneer Status) Act which, as noted in Chapter 1, was repealed in 1999. The Department of Trade, Commerce and Industry in particular provided a comprehensive submission to the Review arguing for the reintroduction of the Act to promote investment in the manufacturing sector in PNG21. The submission notes the role of the corporate income tax in influencing the return on capital and hence the

18 See Gabori R, 2014, ‘Submission to the PNG Tax Review’, 25 March 2014, available at www.taxreview.gov.pg/submissions.

19 See Adam Smith International, 2014, ‘Submission to the Tax Review Committee – Recommended Tax Reforms for Papua New Guinea’, April 2014, www.taxreview.gov.pg/submissions

20 See PricewaterhouseCoopers, 2014, ‘Submission: Issues Paper No. 2 – Corporate & International Taxation’, 29 August 2014, available at www.taxreview.gov.pg/submissions

21 See Department of Trade, Commerce & Industry, 2014, ‘Submission to the PNG Tax Review – Re-Introduction of the Industrial Development (Pioneer Status) Act available at www.taxreview.gov.pg/submissions.

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inflow of international capital. This point was also made in the Committee’s second issues paper on Corporate & International Taxation.

Administrative and legislative framework applying to incentives

A number of submissions raised issues about the way that incentives were granted and administered and the legislative framework that underpins them. A number argued that there did not appear to be a clear policy framework under which the granting of incentives took place and that they simply created an uneven playing field. One submission suggested that incentives needed to be reviewed annually22.

The Department of Trade, Commerce and Industry’s submission also put forward a number of suggestions regarding the legislative framework underpinning incentives. They argue that, consistent with international best practice, all investment incentives should be placed into a single piece of legislation and administered by a single agency. The current system, in which incentives are administered by different agencies and with a different legislative basis, creates a “complex implementation system, non-transparency, possible corrupt practice, ad hoc and unfair or discriminative practices.”

To address this they recommend that existing incentives be codified into a reintroduced Industrial Development Act to be administered by the Department of Trade, Commerce and Industry. This would recognise that:

…the duties, responsibilities and powers of the administration of the investment incentives fall within the jurisdiction of the Ministry of Commerce and Industry or an equivalent body and not the Ministry of Treasury or Revenue collection entities.

One submission raised concerns about the legislative basis on which PNG provides tax exemptions to various aid organisations. It was noted that these exemptions are provided for under specific legislation (notably the Aid Status (Privileges and Immunities) Act) or under specific agreements but without any clear basis in the income tax laws. It was suggested that all exemptions and concessions provided to aid organisations under bilateral agreements and /or aid legislation to be incorporated in PNG tax laws via a new ‘catch–all’ provision23.

A related concern, raised by the PNGCS, was that it was unclear at what point aid-related exemptions ceased where aid-project work had been contracted and sub-contracted out.

22 See Nipuru, F, 2014, ‘Submission to the PNG Tax Review’, available at www.taxreview.gov.pg/submissions.

23 See Deloitte, 2014, ‘Submission to the PNG Tax Review’, 14 May 2014, available at www.taxreview.gov.pg/submissions

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Consideration of tax incentives in the 2000 Tax Review The issue of tax incentives was also considered as part of the last Tax Review24. The Final Report from that Review highlighted a number of concerns about the extensive use of tax incentives to support activities. Whilst acknowledging that the underlying purpose of the incentive was usually positive, it noted that some were “self-serving and accord benefits to a small sector of the economy rather than benefiting the masses”. Even for those that supported desirable activities it found that:

The main problem is that many categories of tax benefits/incentives are extraordinarily inefficient because much of the revenue given up does little or nothing to advance the targeted activities. In the context of the current tax regime, most of the tax incentives embodied in the present law has (sic) evolved on an ad hoc basis and have yet to be critically analyzed to determine their effectiveness.

With that in mind any new incentives will complicate the tax regime, create opportunities to conduct favored activities only for tax benefit, and add to the feeling that the tax regime is a maze that can profitably be navigated only by those who are well to do or well instructed. Even more so there is the grave risk that the process will feed on itself.

The Review went on to recommend that the recommendations from the National Investment Policy Volume 2 (discussed in Chapter 1) be implemented. Details of recommendations regarding specific incentives, and their status (in terms of implementation) are found at Attachment B.

24 A complete copy of final report from this Review can be found at www.taxreview.gov.pg/publications (see pages 21 & 22 for the discussion on tax incentives)

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CHAPTER 4: TAX INCENTIVES IN PNG – POSSIBLE DIRECTIONS FOR REFORM

This Chapter brings together the background and issues raised in the previous Chapters and sets forth possible reform directions for tax incentives in PNG. Feedback is sought from stakeholders on these proposed directions and questions are posed throughout this Chapter to guide this feedback.

Before considering possible reform directions it is worth reflecting on the key findings that have arisen from the previous Chapters:

Key findings on tax incentives in PNG

• PNG has in place a range of different tax incentives, seeking to achieve a variety of policy objectives. However, there is an absence of a clear and recent policy framework guiding the award of these incentives.

• Since 1999, no attempt has been made to assess the ongoing effectiveness of existing incentives although the repeal/amendment of certain incentives highlights a number of limitations.

• There is no consistent and consolidated legal framework for tax incentives in PNG, creating confusion for taxpayers and their advisers.

• Taxpayer and project specific incentives continue to be a feature of PNG’s taxation regime.

• There is no clearly defined process for the consideration of and granting of tax incentives.

• Overall, there is limited transparency in the management of tax incentives. Of particular concern is the inability of the Review to clearly identify a comprehensive list of tax incentives provides either in project agreements or through gazettal notice.

• There is some reporting of the revenue foregone from tax incentives but this is limited by the accuracy of the data and the operation of the tax secrecy provisions.

• As a result there is currently no clear picture of the cost to revenue of tax incentives PNG.

• There are concerns in the community about the fairness of concessions provided to particular sectors of the economy, in particular the mining and petroleum sector.

• At the same time, recipients of tax incentives continue to highlight their ongoing importance and value.

• International experience and evidence suggests that there is no clear link between the provision of tax incentives and economic growth.

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Relevantly, in their submission to the Review, the Department of Trade, Commerce and Industry made the observation that:

PNG’s current incentives administration and enforcement system does not result in an efficient outcome but is subject to a complex implementation system, non-transparency, possible corrupt practice, ad hoc and unfair or discriminative practices.25

A whole-of-tax-system approach to incentives As noted in Chapter 1, tax incentives represent a departure from the ‘standard’ tax treatment generally available under the law. In this way, tax systems can be seen to exist along a spectrum

On one end, a tax system is open to negotiation on a taxpayer by taxpayer or project by project basis. This significantly increases the complexity of the system and undermines the ability of the system to generate revenue. As noted in the 1999 National Investment Policy, “company-specific negotiations…not only create inefficient monopolies but are also seen as the major disincentive to investing in PNG” (Department of Commerce 1999, p 31).

On the other end of the spectrum, the ‘standard’ tax system applies to all. In the middle, which is where most tax systems sit, incentives are provided for specific purposes preferably within a clear policy and management framework.

Clearly the left hand side of the spectrum, a system that is negotiable on a case by case basis is not ideal. It is also inconsistent with existing Government policy.

The Review considers that the goal of the PNG tax system should be to move towards the right hand side of the spectrum, consistent with the reform direction identified in Issues Paper 3.

25 See Department of Trade, Commerce & Industry, 2014, ‘Submission to the PNG Tax Review – Re-Introduction of the Industrial Development (Pioneer Status) Act available at www.taxreview.gov.pg/submissions.

A tax system that is open to negotiation on a case by case basis

Tax system that provides general or sector specific incentives within a clear policy and management framework

A tax system that is overall simpler, fairer and more competitive

Complexity& reduced ability to raise revenue

Simplicity, increased ability for system to raise revenues

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For one, the Review has identified efforts to increase the capacity and effectiveness of the revenue administrators as one of the key priorities going forward. A tax system dominated by exceptions increases complexity and undermines efforts in this area.

In addition, such an approach does not mean that the tax system cannot or should not be used to incentivise particular activities – rather it allows greater focus on how fundamental features of the system (such as rates) can be changed to create the right incentives more broadly. For example:

• the rates of personal income tax can have a significant impact on an individual’s incentive to work and work additional hours;

• as explored in Issues Paper 2, the rate of the Corporate Income Tax does influence the ability of a country to attract international investment; and

• the basic features of a mining and petroleum taxation system (the instruments used and the rates applied) can have a significant impact on the attractiveness of the country to investment.

In addition, a tax system can and should seek to address problems that it itself causes in relation to particular sectors of the economy. A key example here is in relation to small businesses. As will be outlined in a following Issues Paper, one of the key limitations on small business growth in PNG is the challenges that small businesses face in entering the formal economy. The complexity of the tax system, designed predominantly for larger taxpayers, is a contributing factor to this. The Small Business taxation issues paper will ways that the tax system can be redesigned to suit small businesses to overcome these problems.

Question 4.1 – do stakeholders agree that PNG should focus on creating a tax system that is overall simpler, fairer and more competitive?

Consistent with this, and as suggested in Issues Paper 3, consideration could also be given to removing some existing concessions and applying any savings into improving the existing system. This could include, for example, reducing tax rates or introducing other structural reforms to the tax system that involve a cost to revenue (for example, transfer of loss provisions discussed in Issues Paper 2).

This would require a more accurate assessment of the costs of existing tax incentives – this is discussed further below.

Question 4.2 – would stakeholders agree to a trade-off between removing existing incentives with other reforms that focused on making the tax system simpler, and more competitive overall?

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A Framework for Tax Incentives in PNG Whilst the Review sees significant merit in focusing tax reform efforts on improving the tax system as a whole (including broadening the base and lowering rates), it also recognizes that, as with other tax systems, PNG’s system is and is likely to remain somewhere in the middle of the spectrum.

Given this, and given the findings outlined above, the Review considers that there is scope for PNG to develop a framework to better guide how it determines and manages its tax incentives regime. Such a framework would ideally cover:

• The process for granting tax incentives • The policy basis upon which incentives are granted • The legislative framework underpinning tax incentives • Ongoing reporting and monitoring of tax incentives

Question 4.3 – do stakeholders agree that there is a need for a framework to guide the granting and management of tax incentives?

The process for granting tax incentives

One of the findings from the Review is that the process for the granting of incentives appears unclear. Having numerous agencies involved, without reference to any clear and public framework, is likely to mean that over time the coherence of the tax system will be (further) undermined.

A Tax Incentive Committee?

The approach recently adopted by the Solomon Islands could provide a model for PNG. As identified in Chapter 2, the Solomon Islands has legislated for a formal “Exemption Committee” whose role it is to provide advice to the Minister (in that case the Minister for Treasury and Finance) where a request has been made for an exemption. This covers exemptions for import duties, excise, GST, income tax, sales tax and stamp duties. The Committee consists of representatives of the revenue administrators, the Ministry of Development Planning and the Ministry of Commerce.

The recommendation of the Committee is partially binding on the Minister26.

In the PNG context, a similar Committee could be established, certainly with respect to those exemptions that are currently permitted to be made via a gazettal notice. The Committee could also play a role in providing advice to Government regarding other incentives, such as those that are required to be implemented through a change in principle legislation.

26Although there is scope for the Minister to disagree with the Committee and request the Committee to reconsider the case.

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Similar to the Solomon Island’s model, the process could also involve taxpayers completing a form applying for a particular incentive, which clearly outlines both the incentive being sought and the reason for it being sought. This application, any recommendation by the Committee and the criteria against which the provision of incentives is assessed (see below) could be published, to enhance the overall transparency of the process.

Question 4.4 –should PNG consider formalizing the process for the granting of tax incentives, similar to the process adopted recently in the Solomon Islands?

One of the benefits for this approach is that it would recognize the legitimate interests of different agencies when it comes to incentives. For example it could formalize the role of the revenue agencies, the Treasury and the Department of Trade, Commerce & Industry who would all bring relevant perspectives to the issue of incentives. Where relevant, other agencies could be asked to provide information to the Committee on an as required basis.

One issue with the creation of such a new process is how it fits within other processes already in place. Notably all submissions to the National Executive Council must first go through the Ministerial Economic Committee. The suggested process would arguably not duplicate this process but could instead ensure that any recommendations to Ministers coming from the bureaucracy is based on a broad range of views.

Ensuring consideration of tax incentives fits within a broader sustainable development agenda

Whilst the process highlighted above provides an avenue by which key agencies can be brought together to consider the issue of incentives, at a higher level it is important that the issue of tax incentives is considered as part of an overarching plan for the sustainable economic development of the country (see Principle 9 below).

As noted in Chapter 1, PNG already has a number of development plans in place, consisting of long, medium and short term plans. In addition, the recently published National Strategy for Responsible Sustainable Development for Papua New Guinea, developed by the Department of National Planning and Monitoring, seeks to place this development agenda on a sustainable footing. These plans play an important role in articulating the vision for PNG. However, arguably what PNG lacks is an effective institutional and workable administrative framework to translate this Vision into tangible measures.

One means of addressing this broader issue would be for PNG to develop a clear institutional framework and administrative body with a clear mandate for the carriage and formulation of National Strategic Economic Development Plans. Such a body could comprise a good mix of public sector, private sector and civil society members with experience and standing in the community.

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The advantages of creating such a body, and in institutionalizing national economic development planning, generally is that:

• it would provide an effective institutional and administrative tool for making policy choices and decisions in identifying and selecting priority economic sectors;

• it will enable better utilization, deployment and mobilization of public and private resources to incrementally grow and expand the priority economic sectors;

• it will provide a robust and disciplined process of building a sound foundation for the gradual diversification from the non-sustainable resource to other sectors;

• it will promote targeted policy intervention

As with the last point, this body could play an important role in placing the consideration of tax incentives, or any other targeted use of the tax system (such as a the use of environmental taxes), into a broader economic and sustainable development context.

Question 4.5 – do stakeholders consider that there is a need to create a new body for the carriage and formulation of National Strategic Economic Development Plans in PNG, with part of its role being to ensure that consideration of targeted interventions using the tax system are placed in a broader economic context?

The policy basis upon which incentives are granted

To guide the work of the Committee (or in the absence of a Committee to guide decision making on incentives more generally), the Review considers that there is a need for a clear and transparent policy framework.

The 1999 National Investment Policy (Volume 2) already provides a useful starting point27. Having regard to this and the other issues identified above, the Review considers that the following principles could help to guide the award of tax incentives going forward:

Proposed principles for the granting of tax incentives in PNG going forward:

Principle 1

As a starting point, tax incentives should be used only rarely with a preference for creating a tax system that is overall fairer, simpler and more competitive.

27 The Review notes that a copy of the Policy is not available online. With the consent of the Department of Trade, Commerce and Industry, the Review has published a copy of the Policy on its own website (www.taxreview.gov.pg)

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Principle 2:

Consideration of tax incentives should be made with a clear sense of how the tax system is best placed to achieve the desired policy outcome. If the outcome being sought is simply to reduce costs, consideration should be given to providing a direct subsidy or grant.

Principle 3:

Consideration of an incentive should have regard to limited administrative capacities in PNG. Incentives that require complex determinations to be made or ongoing monitoring that requires a significant commitment of resources, should be avoided.

Principle 4:

Project-specific and taxpayer specific incentives should be avoided

Principle 5:

Where a tax incentive is to be used, it should be appropriately targeted.

Principle 6:

Any tax incentive should only be for a set period of time (for example, 5 years). Any extension of the incentive should be subject to analysis of the effectiveness of the incentive.

Principle 7:

Accelerated depreciation is the least harmful income tax incentive. Tax holidays or reduced rates should be avoided.

Principle 8:

Taxpayers using a tax incentive should be required to report to the IRC, the value of that incentive on an annual basis. This should be a condition of accessing the incentive. Principle 9: The granting of any tax incentive needs to be considered in the context of, and be consistent with, the broader development priorities of the country. Principle 10:

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Any other criteria used to assess whether an incentive is provided should be publicly available, consistent with maintaining the overall transparency of the process. Question 4.6 –what are stakeholder’s views on the proposed principles to guide the award of tax incentives in PNG? Are there any other principles that should be included?

Consistent with Principle 10, at a minimum consideration could be given to publishing the criteria current used by the Department of Trade, Commerce and Industry to assess the provision of tax incentives. In addition, consistent with Principle 10, criteria could be developed for the use of the tax system to intervene in environmental issues impacting PNG. The issue of environmental taxes will be addressed later in the Review.

The legislative framework underpinning tax incentives

As noted above, tax incentives in PNG are found in many different laws. This complicates the tax system and also makes it harder for taxpayers to identify whether they could access a particular incentive.

In their submission the Department of Trade, Commerce and Industry recommended amalgamating all incentives (focussing on investment incentives) into a single piece of legislation. This approach also has some international support (see for example, OECD 2012 p3 and IMF 2014, p 51). A similar approach is to incorporate all incentives into a new section of existing legislation, most commonly the income tax law.

Where the ‘incentive’ is found outside the tax laws (for example, in PNG, in relation to aid organisations) one option would not be to move the provision but, rather, to simply mirror the provision in any new incentive Act or schedule. This would address, for example, concerns expressed in the Review about the uncertain legal basis of tax exemptions provided outside of the operation of the income tax laws.

As part of this process, and as suggested above, any new law or part of a law (or Regulations under that law) could contain clear guidelines for the granting of incentives.

Question 4.7 –do stakeholders consider that there is any merit in amalgamating existing incentives into a single piece of legislation or into a part of existing legislation, such as the income tax act?

If the tax incentive provisions were brought into a single piece of legislation, then one issue would be which Department and ultimately Minister, should be responsible for the legislation. In their submission, the Department of Trade, Commerce and Industry has argued that the responsibility for administering such legislation should fall to them. Their submission notes a number of other countries in the region (notably the Philippine and Malaysia) where a similar approach is taken.

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On other hand, there is international support for ensuring that the ultimate responsibility for such incentive falls within the Ministry ultimately responsible for the tax system more generally – usually the Ministry of Finance/Treasury or its equivalent (see OECD, 2012, p 3 and IMF 2014, p 51). This recognises that the overriding purpose of the tax system is to generate revenues for Government and tax incentives can impact on the ability of a tax system to do this.

Moreover, it may not necessarily be advisable for PNG to follow some of the examples highlighted by the Department. Notably, recent reviews by the IMF into the Philippines tax system has highlighted the complexity and revenue impact of the country’s tax incentive regime as one of the biggest challenges facing its tax system. The IMF has recommended that the Philippines look at rationalising and simplifying its tax incentive regime, as well as providing a more prominent and centralised role for the Department of Finance (IMF 2012).

If the proposal for an Exemption Committee were adopted one option would be to have the Treasury portfolio retain ultimate responsibility for tax incentives, but to formalise the role of other key agencies such as the Department of Trade, Commerce and Industry in the decision making process.

Question 4.8 –which Government portfolio is best placed to have ultimate responsibility for tax incentives?

Ongoing reporting and monitoring of tax incentives

As with direct Government expenditure programs it is important that tax incentives are managed in a transparent manner and are subject to ongoing monitoring and evaluation. Ensuring that incentives are provided only for a limited period of time, as recommended above, should help to support this.

As noted above, PNG already publishes an annual statement in the Budget of the value of some existing tax incentives. However the report is based on incomplete data and does not accurately reflect the true value of the incentive being provided.

Again, proposed principle 8 above, which proposes that taxpayer reporting on the value of an incentive be a precondition on accessing that incentive, should help to address this issue. Guidelines could be prepared by the IRC, in consultation with Treasury, helping taxpayers to clearly identify the cost of the incentive.

An alternative would be to put in place a more sophisticated process for evaluating the cost of a particular incentive, similar to that used in a number of other countries. Whilst different countries take different approaches28, the most common method is to estimate the revenue foregone, having regard to a ‘benchmark’ tax treatment (i.e. so

28 For a full discussion of these various approaches see Burton & Stewart 2011

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that there is a clear sense of what actual ‘incentive’ is being provided.). This would require some work in clearly identifying what the ‘benchmark’ system was.

To the extent possible, the annual statement in the Budget should be given more prominence. Another approach would be to amend the Fiscal Responsibility Act 2006 to require the publication of a separate tax expenditure report.

In addition to the name and value of the incentive it should also include a description of the policy goal being sought. The rationale suggested by the Review in relation to existing incentives at Attachment A provides a starting point for this.

Question 4.9 – do stakeholders agree that the tax incentive report should be given greater prominence in the annual Budget, and include the policy rationale for each incentive? Should a separate report be prepared?

Question 4.10 – how can PNG most simply estimate the value of the tax incentives it provided?

The report should ideally include the value of any taxpayer specific incentives, including incentives provided in relation to revenue streams (such as fishing licenses) that act as a proxy for the tax system. Recent amendments to the tax secrecy provisions announced in the 2015 Budget go some way to achieving this.

Question 4.11 –do stakeholders agree that the annual report on the value of tax incentives should include the value of any taxpayer of project specific incentive?

In the short term, efforts should be made to evaluate the ongoing usefuleness of existing tax incentives – this could be undertaken by key agencies such as Treasury, Department of Trade, Commerce and Industry and, where relevant, IRC and PNGCS. The priority of Review should in large part be governed by the estimated cost to revenue for the particular incentive. However, the Review considers that there may be particular merit in examining:

• Rural Development Incentive • Tax Credit of Banks • 20% income tax rate for new primary production project • Double deduction for staff training • Provision of fishing license under various agreements

Question 4.12 –do stakeholders agree that there needs to be some effort in evaluating the ongoing value of revenue incentives provided in PNG? Which incentives are most in critical need of evaluation.

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CHAPTER 5 – OTHER ISSUES

This Chapter explores and where relevant seeks feedback on a number of other specific incentive issues that have been raised as part of the Review.

Mining and Petroleum Sector As noted above, the issue of the provision of tax incentives to the Mining and Petroleum sector was raised in Issues Paper 1 as well as Issues Paper 3. The Review is continuing to work through these issues, recognising the importance of ensuring that any changes to the Mining and Petroleum Taxation regime are considered as a package.

However, it is worth commenting on the issues of tax incentives to this sector as part of this paper. As highlighted in Chapter 3 there exist a number of concerns in the community about the provision of tax incentives to the sector. There is a sense of ‘unfairness’ about the concessional treatment apparently being provided to some of the country’s largest taxpayers – particularly at a time when there is an increasing recognition of the importance of broadening the economic base of the country away from the extractive sectors.

Perceptions about the tax system are important. A broad perception that certain taxpayers or certain groups of taxpayers are getting special treatment can erode attempts to build trust and confidence in the tax system and encourage voluntary compliance. This will be a particular issue going forward for PNG as it continues to try to broaden its tax base to include current non-compliant taxpayers.

Extractive companies in PNG are and will continue to be a significant part of PNG's tax system. In addition, they can expect that PNG will have in place a tax system that recognises their legitimate expectation for a fair return on the significant capital investments – as can the people of PNG justifiably expect a fair return from the use of their resources. However, from the Review's perspective, Industry’s expectation is best met through the development of an overall mining and petroleum tax system that is competitive, fair and sustainable rather than one that relies heavily on specific concessions. The use of specific concessions for the sector, or providing an exception to the general principle that the tax system should not be negotiated on a project by project basis, will undermine the credibility of efforts to apply similar principles to other sector of the economy.

Infrastructure Tax Credit The ITC scheme was discussed in Issues Paper 1 with views sought on whether or not the credit scheme should be changed into a 150% deduction, along with an increase in the annual cap of assessable income. Industry was against such a change, arguing that

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such a shift would significantly reduce the projects undertaken under the scheme. They instead argued that the scheme should be retained as a tax credit and indeed expanded given that it provides “an extremely effective means of developing infrastructure in the areas of PNG which need it most”(Chamber of Mines etc. 2014)

The Review has also received a number of representations arguing that the ITC scheme is not accurately described as a tax incentive – but, rather, is a delivery mechanism for public infrastructure. Whilst the Review accepts that the ITC scheme is unlike incentives that are designed to primarily benefit the recipient (with broader spin-off benefits, for example, to the economy), in the Review’s view it is still appropriate to view the ITC scheme as an incentive. As outlined in Issues Paper 1, the ITC scheme does provide some private benefits. The development of infrastructure by resource companies (albeit funded by the State) undoubtedly generates significant local goodwill for the company which is of significant value. Some companies using the ITC scheme may also derive direct benefits from the use of the infrastructure – the ITC guidelines exclude only projects the benefits of which ‘mostly’ go to the developer or its employees. Indeed, at least one representation to the Review raised this as a concern (although in the absence of any independent third-party audit of the scheme since its inception it is difficult for the Review to assess this).

The Review acknowledges that there is some strong support for the scheme (particularly from Industry) and that partnering with private industry is likely to be an effective means of delivering infrastructure in PNG. As noted above, although there has been no independent audit of the scheme, the view in the 2000 Tax Review that “the scheme almost certainly represents value for money for the State” is acknowledged, particularly having regard to the known challenges facing PNG in delivering infrastructure projects. It also acknowledged that the purpose of the scheme (delivering infrastructure) is directly aligned with the country’s development needs, both now and likely for many years into the future.

Notwithstanding this, it is appropriate for the Review to reflect on the particular issues that the scheme continues poses in relation to tax incentives and the tax system more broadly.

First and foremost, as with all tax incentives, the ITC scheme reduces revenues available to Government in the Budget process. The main objective of the tax system is and should be to generate revenues for the Government, to be allocated to deliver services and infrastructure through a process of prioritisation and appropriation via the Budget process.

The Review is also concerned with the issue of ‘incentive creep’, evidenced by the ITC scheme. The original policy basis of the ITC was that resource companies were better placed than Government to deliver infrastructure in remote areas, given both their management and construction capacity in those areas. This has expanded over time.

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The ITC scheme now encompasses both the primary production and tourism sectors, notwithstanding the 2000 Review’s recommendations that it not be expanded given that the original policy intent of the measure did not fit as comfortably with those sectors.

In addition, the fact that projects need not be provided in areas where resource development is occurring is another extension of the regime beyond its original policy intent. This departure from the policy intent is particularly illustrated by the creation of the national infrastructure tax credit scheme which was used to support the construction of infrastructure in Port Moresby.

As with other tax incentives it is also important to be clear about if and why the tax system (through the ITC scheme) produces a better outcome than other means of delivering infrastructure. The ‘other means’ would be the appropriation of funds through the Budget and the commissioning of work, either directly undertaken by Government or by the private sector following a tender process approved by the Central Supplies and Tenders Board (CSTB).

Arguably one of the ‘strengths’ of the ITC scheme is that it can be used to deliver infrastructure given challenges both in ensuring adequate allocations of funding for infrastructure in the Budget and also the challenges associated with tendering processes in PNG. To the extent that this is the case, the medium to long term goal for PNG must be to address these problems rather than to rely (in part) on the ITC scheme.

Overall, whilst more effort has been made to review the policy outcomes of the ITC scheme29 relative to other incentives, the Review is nonetheless concerned about the minimal monitoring, evaluation and reporting on the scheme. At a minimum there is a critical need for an independent third party audit of the scheme (also a recommendation of the PNG Chamber of Mines and Petroleum) with such a review also considering:

• the effectiveness of the ITC scheme in delivering infrastructure projects, relative to ‘traditional’ means of infrastructure delivery in PNG; and

• the extent to which ‘private benefits’ have been accrued under the various ITC projects.

The results of this audit could then better inform decisions regarding either increasing the scheme or changing the credit into an investment allowance (i.e. enhanced deduction) scheme as suggested in Issues Paper 1.

29 A brief report commissioned by the Department of National Planning and Monitoring was tabled in Parliament in 2013 and the Review understands that another report is currently being prepared

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Question 5.1 – do stakeholder’s agree that, before any decision is taken to substantially change the ITC scheme (including guidelines) an independent, third-party audit of the scheme is requires?

The Review also considers that the Departments of Treasury and National Planning and Monitoring should discuss whether there are administrative means of ensuring the better alignment of approving ITC projects and the Budget process.

Research & Development Incentive Tax incentives to encourage research and development are used in many (mostly developed) jurisdictions. The basic idea behind such incentives is that the Government needs to intervene to encourage R&D which would not have occurred in the absence of the incentive. This is because, whilst the R&D generates broader economic benefits to the country (for instance, the knowledge generated ‘spills’ over to other firms and organisations) the firm undertaking the R&D must incur the cost without receiving these full benefits.

There have been a number of studies on the effectiveness of R&D tax incentives, though these have largely focused on incentives available in developed countries. Results are varied but these studies have generally showed that for every dollar of revenue foregone, it has resulted in a dollar (or more) in additional R&D expenditure (Mercer-Blackman 2008, p8). By contrast, the few studies focusing on R&D incentives in developing countries have generally shown such incentives to be ineffective. The study by Mercer-Blackman into the role of incentives in Columbia also demonstrated that one of the problems with these incentives is that they tend to be poorly targeted, benefiting larger firms rather than small and medium businesses which are ‘most likely to need and benefit from the R&D incentives’.

Similarly, PNG’s experience with the R&D concession highlight challenges of effectively applying such an incentive in a developing country context. The limited administrative and technical capacity in PNG has made it challenging to put in place the necessary arrangements to process applications for the enhanced deduction. There is also a question as to whether the concession was successful in achieving its policy goal – that is, facilitating R&D that would not have happened in the absence of the incentive and which generates broader spillover benefits for the PNG economy. The potential value of the incentive, in terms of revenue foregone, could also have a significant impact on PNG’s revenue base. If ultimately approved, the value of outstanding claims as suggested in the 2014 Budget would place the level of Government subsidy on research and development in PNG above many developed countries with tax incentives for R&D with far larger revenue bases (OECD 2010, p 3).

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In addition to the Government’s commitment to seek to resolve the R&D legacy issues, as outlined in the 2015 Budget, reflecting on PNG’s experience with the R&D concession may provide some salient lessons in considering the provision of significant tax incentives going forward.

In addition, the Review would also be interested to hear from stakeholders on the ongoing value of the remaining R&D concessions available under section 95. As an exact copy of provisions introduced in Australia in 1946, there is a question as to whether they provide any value in the modern PNG context.

Question 5.2 – for firms that have utilised the enhanced deduction for R&D that was previously available, how did the incentive promote investment in research and development that would not have otherwise occurred? What broader benefits to PNG and the PNG economy did that research and development produce? How might a future R&D concession be framed differently?

Question 5.3 – what value, if any, do the existing research and development incentives (available under section 95) continue to provide?

Pioneer Act The submission from the Department of Trade, Commerce and Industry argues for the reintroduction of the Pioneer Status Act, to provide 5 year tax holidays from corporate income tax for certain 'pioneer' manufacturing investments.

Issues with Tax Holidays are outlined in Chapter 2 and the Review has proposed, as a general principle guiding the award of tax incentives, that tax holidays be avoided. This is consistent with the position under the latest National Investment Policy.

However, it is worth noting that the Department's submission does make a number of valuable points about the role of the corporate income tax in influencing investment decisions and, in particular in influencing foreign investment into a country. This general position has significant international support and was also noted in Issues Paper 2 on Corporate and International Taxation.

Given the special tax regime that applies to the extractive sector (that is, it does not rely just on the corporate income tax), the rate of corporate income tax can influence the level of foreign investment in other sectors of the economy, all else being equal. However, in the view of the Review, moves to increase the competitiveness of non-extractive sectors of the economy should be extended to all non-extractive sectors - manufacturing, tourism, transport, communications alike - through a move to reduce the company income tax in the medium to longer term. Taking a broad approach also removes any potential conflict that the provision of tax holidays to particular projects may present for PNG’s World Trade Organisation obligations.

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Question 5.4 – do stakeholders agree that reform of the corporate income tax, with a view to making PNG more attractive to international investment, should focus on a reduction in overall rates rather than the provision of targeted tax holidays to specific sectors?

Special Economic Zones Special Economic Zones (SEZ) are specially designated areas that provide policies and infrastructure that are attractive to export-oriented investment. SEZs have relatively high-quality physical infrastructure such as roads, electricity, and telecommunications. They also offer clear, streamlined custom clearance procedures (for both imports and exports) and reduced business entry and operating costs that boost an investment’s competitiveness and encourage firms to locate there.

SEZs are one way that countries can attract investment. To be successful, however, they need to be supported by the appropriate legislative and regulatory frameworks that protect local interests and ensure the developers and investors meet international best practice.

As noted in Chapter 1, PNG is in the process of developing its SEZ policy. The Pacific Marine Industrial Zone in Madang is the first project being undertaken under the SEZ concept. The project, being undertaken with collaboration between the PNG Government (through the Department of Trade, Commerce and Industry), Provincial Governments, National Fisheries Authority and industry players, has the objective of making the area and tuna shipment and processing hub for the broader Western and Central Pacific region.

The International Finance Corporation provided some preliminary assistance to the Department on these issues. Regarding tax incentives and the proposed Industrial Zone, the IFC’s position is that companies operating in the zone should not be afforded any special tax treatment. The IFC stated that “international best practice is for zones to compete on the basis of facilitation, facilities and services rather than on the provision of special fiscal incentives”30. Consistent with the general theme in this paper, the Review’s is disposed to agree with the IFC. To the extent that the tax system can influence the level of foreign investment in a country (such as through the reduction in corporate income tax) the Review considers that the focus should be undertaking this on a PNG and economy-wide basis.

30See http://www.ifc.org/wps/wcm/connect/region__ext_content/regions/east+asia+and+the+pacific/countries/png+special+economic+zone+-+qanda#2

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Incentives relating to GST/Import Duties/Excise The extensive provision of exemptions for ‘border taxes’, such as Import GST, Import Duties and Excise through the issuance of a gazettal notice is of concern to the Review. In particular the Review is concerned that such exemptions are provided in the absence of a clear and public criteria for assessing such applications.

The establishment of a Committee to consider such requests, bound by legislated guidelines, should help to address this issue. At the very least, these guidelines could perhaps clarify publicly the criteria currently used by the Department of Trade, Commerce and Industry to assess applications for the granting of such exemptions (see above).

There are of course appropriate circumstances where certain exemptions are given, such as an exemption from GST for inputs that will ultimately be exported (as in the case of resource projects). As noted above, such exemptions should be seen more as a structural part of the tax system rather than a specific incentive.

The Review is interested in stakeholder’s views about the merits of providing exemptions (or reductions) in relation to these border taxes. However, to the extent that exemptions are provided in order to reduce the costs of doing business for new operations, there is a strong preference for reducing these costs for all businesses (for example, through a general reduction in tariffs) rather than just select businesses.

Question 5.5 – on what basis should consideration be given to providing exemptions/reductions to GST/Import Duties/Excise?

The Review also has some concern about the legal basis of some of the import duty exemption purported to be provided via gazettal notice, given such notices cannot be provided in relation to “commercial projects”. This is an issue that needs to be examined by PNGCS in conjunction with the Department of Trade, Commerce and Industry.

A list of all projects that enjoy exemptions via gazettal notices, along with the reasons for that exemption, should be included in the annual tax incentive report identified above or at least maintained on a relevant website.

Exemptions provided to aid organisations and workers The provision of tax exemptions to international and donor organisations is a common feature of many developing countries’ tax systems. By reducing the costs of such operations, it is argued, more resources can be applied to more projects.

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There have been some growing movements internationally to reexamine the appropriateness of providing such exemptions. Such exemptions, indeed as with all exemptions, can create distortions in the tax system and reduce economic efficiency (UN, 2005). They also increase the complexity of the system, placing further strain on already limited tax administration resources.

These issues remain contested and an international consensus on a way forward has yet to be reached. However, any international efforts for reform in this area would likely impact PNG given its reliance on donor funding.

There are, however, two minor related issues that have been raised as part of the Review, both going to the complexity that such exemptions can result in.

The first is the extent to which such exemptions apply. It is not uncommon for aid organisations (the key recipients of any exemption) to contract out the work to be performed (and often this work is further sub-contracted out). This can create confusion where a commercial enterprise and its employees, perhaps a few steps removed from the aid organization itself, claim the exemption. As well as increasing complexity, this can significantly increase economic distortions where commercial operators seek to take advantage of exemptions not available to competitors in the market.

While a practical approach taken by the revenue administrators would be to limit any exemption request to the organization itself and its direct employees, further certainty could be provided by making this clear either in the relevant agreement itself or in legislation.

Question 5.6 – is there value in clarifying, in law, the limitation on tax exemptions available to aid organisations (for example, in clarifying that exemptions apply to the organization and its employees only)?

Another issue is the type of exemption that is provided. Exemptions that directly facilitate the work of the organization (such as exemptions for the organization itself, the salary and wages of its employees and exemptions related to the importation of goods required to undertake the relevant work) appear appropriate on the basis of the current policy position. However the justification for exemptions that are only incidentally associated with the work of the organization or its employees, such as exemptions from GST for individuals in relation to their day to day expenditure, is less clear. They also increase compliance costs for both the individual and the IRC (in needing to keep receipts and process claims).

Question 5.7 – what are stakeholders views about the value of GST exemptions provided for individuals employed in relation to aid projects?

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Project agreements In discussions with key Government agencies, a consistent issue emerging is the challenges in effectively consulting and coordinating the views of agencies generally, and in the negotiation or project agreements in particular31. In the tax context, this highlights one of the risks and challenge of providing tax incentives through a process other than through legislation.

As noted above, project agreements signed in PNG often restate the availability of incentives generally available in the law. These provisions should be removed as they create confusion and are of no legal effect.

Question 5.8 – should project agreements not include a reference to incentives already available in legislation?

In addition, if a new process is adopted for the awarding of GST, excise or import duty exemptions, such exemptions should be provided through that process rather than through project specific agreements.

Consistent with the Government’s stated policy position, project-specific incentives should generally be avoided. Similarly, standard form agreement for projects operating across sectors, as suggested in Issues Paper 1 in the context of the Mining and Petroleum sector, are preferred.

To the extent that any incentives are provided for in a project agreement these should be dealt with transparently. The provisions of a tax system need to be readily accessible by all and this extends to any deviation from the general tax treatment that is agreed. Ideally any tax incentive provisions contained in project agreements should be published (consistent with the principles in the Extractive Industries Transparency Initiative) and confidentiality provisions in these agreements should accommodate this. To enhance transparency one option would be to publish the tax provisions of any such agreements online or as part of the broader tax incentive annual publication discussed above.

Question 5.9 – do stakeholders agree that any provisions in a project agreement purporting to provide tax treatment not generally available under the tax law should be published?

31 IRC, Customs and Treasury all raised concerns that they were either not involved in project agreement negotiations or that their views were sought at the last minute.

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ATTACHMENT A: SUMMARY OF GENERAL TAX INCENTIVES OFFERED IN PNG

Incentive Name and Legislation Provisions

Types of Incentive

Description Policy Rationale/Comments

General Business Incentives

Exemption for construction of defence housing – section 23 ITA (This exemption is now expired)

Exemption from various taxes

Provided an outright tax exemption for the company Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd and its foreign staff in the building of defence housing to give effect to an agreement signed by the Government.

To facilitate the construction of defence housing

Accelerated & Flexible Depreciation - Section 73-78, Income Tax Act

Section 155F, Income Tax Act

(provisions introduced incrementally between 1981 and 2000).

Accelerated Depreciation

Provides for accelerated depreciation in a range of circumstances. This includes:

- For the purchase of new capital assets in the manufacturing, transport, construction and tourism sectors

- For improving or extending fuel conservation plant

- For converting an oil-fired plant or constructing a new one

- For new industrial plant in the manufacturing sector

- For property used in the

Broadly these incentives promote capital investment in PNG.

Incentives were initially introduced relating to oil/fuel in response to the oil shock in late 1970s in order to encourage the conversion of expensive fuel using plant into non-fuel plants (it is not clear whether these incentives were ever used).

Similar incentives were extended to the fishing, agriculture, tourism and manufacturing sector to promote capital investment in those sectors.

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agricultural sector - For property used for fishing by

residents - Boats & ships used by an

accredited dive/snorkeling operator

Rural Development Incentive - Sections 45I-45M (Part III, Division 1B), Income Tax Act (1987)

s6AA, Income Tax Regulation

Tax Holidays

Provides for a 10 year income tax exemption on set up of new businesses in specifically designed under-developed areas that are not dependent on the exploitation of natural resources.

Was implemented in response to a general request by the United Nations to promote investment in the poorest parts of the country (note that the UN did not specifically suggest the use of a tax holiday)

The Review understands that this has been largely unsuccessful in motivating businesses to set up in PNG’s poorest provinces. This likely reflects other, more fundamental barriers to business activity in such areas (e.g. infrastructure, consumer demand & law and order)

s. 11 Free Trade Zones Act 2000 Administered by the Minister for Trade and Commerce Provides for the exemption from “any customs or excise duty or other tax imposed under a relevant Applicable Law” for goods that are imported into, exported from, produced, purchased or sold in a free trade zone.

These provisions have never applied because of challenges in applying the framework. There is some consideration currently being given to revising this legislation.

Fishing

Exemption of certain income Exemption This provides for the exemption from Ensured that PNG complied with the requirement

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from fishing operations - Section 35A (1993)

from various taxes

income tax for foreign companies and their employees undertaking fishing activities under certain agreements signed before 1992. The Review understands this provision to no longer have any effect.

of the agreement. This recognized that payments for fishing rights were not made through the tax system but, rather, through the licensing system

Accelerated & Flexible Depreciation

Accelerated Depreciation

See above – provides accelerated depreciation for property used for fishing by residents

Financial Incentives/Financial Services

Tax credits of Banks Community Service obligation - Section 219D Income Tax Act (2002)

Investment Tax Credit

Cost of expenditure on providing extended and new banking facilities or services in areas not adequately supplied with banking services is income tax paid which can be offset against income tax liability for the year the cost was incurred. Any excess is carried forward to be offset against the succeeding years tax liability.

This amendment was sought by the Bank of PNG which wanted to extend banking services to rural areas, in particular basic banking services. Private banks had indicated that this was not cost effective and sought a means of cost recovery through the income tax legislation.

Non-resident income from the sale of shares – section 36B of the Income Tax Act (introduced in 1999)

Exemption from various taxes

Exempts from income tax, income earned by a non-resident who sells shares on the Port Moresby stock exchange.

Manufacturing-specific Incentives

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Export Sales Incentive - Section 45A-H Income Tax Act (1984)

Tax Holiday This incentives offers exemption on income from sale of qualified export goods prescribed under the Income Tax Regulation (Regulation 10A).

The incentive will cease to apply from 1 January 2015 but will continue to apply to income derived from export sales earned prior to 1 January 2015.

This provision was drafted at the request of the Department of Trade and Commerce to encourage local manufacturing companies to export goods.

Double deduction for export market development cost - Section 72C Income Tax Act (2005)

Investment Allowance

Provides for double deduction for export market development expenditure for export of goods manufactured in PNG.

Introduced at the request of the Department of Trade and Commerce to encourage PNG businesses to develop export markets.

Agricultural-specific Incentives

Certain Expenditure on Land used for primary production - Section 97 Income Tax Act (1959 – taken from Australian Tax legislation)

Accelerated Depreciation

The incentive provides for 100% deduction (i.e. an immediate write-off) for development and capital expenditure in the year of income by a taxpayer engaged in primary production on any land in Papua New Guinea.

To encourage the preparation of land to be used for primary production.

Pass through tax deductions to shareholders - Section 97A Income Tax Act (1987)

Accelerated Depreciation

• Provides for 100% tax deductions available to agriculture companies for expenditure on agriculture development under Section 97 of the ITA and for depreciation of agricultural plant and equipment can

Introduced based on concerns from a shareholder in a agricultural company that the benefits of immediate deductions available under section 97 could not be used in circumstances where the agricultural company itself was not deriving any

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be passed through directly to shareholders for deduction in proportion to monies paid on shares.

• The company must declare to the Commissioner General that it is relinquishing the deduction in favour of its shareholders.

income.

Deduction for agriculture extension services –

Section 97B Income Tax Act and Income Tax Regulation 5M (2003)

Investment Allowances

Provides for 150% deduction for expenditure on agriculture extension services undertaken under a plan approved by a committee chaired by the Department of Agriculture and Livestock

Introduced to promote the development of agricultural extension services in PNG (e.g. advice on agricultural issues). The incentive recognises that there were limitations on Government agencies to provide this advice and this effective subsidy was introduced to encourage the private sector to provide such services.

20% income tax rate for new primary production project

Section 1, Income Tax Dividend (Withholding) Tax and Interest (Withholding) Rates Tax Act.

(2003)

Reduced Tax Rate

This incentive provides for concessional tax rate of 20% on taxable income from new primary production development projects that commence construction, clearing or planting between 1 January 2004 to 31 December 2011 that is- (a) a project with a capital cost not less than K1 million; (b) located in an area where production of the crop/livestock has not previously

Introduced in response to a request for assistance by the Palm Oil Industry to assist in the establishment of new areas of the development of palm oil (i.e. outside existing areas).

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occurred (or has only occurred in a marginal way); and (c) The project must not be an extension of an existing primary production facility. Note that whilst this incentive applies only to eligible projects that began construction within a designated period of time, the reduce corporate income tax applies to these projects for all years going forward.

Exemption of certain travel benefits - Section 40AA Income Tax Act (1998)

Exemption from various taxes

Ensures that certain fringe benefits (that is the provision of leave fares) provided to an employee are not included in an employee’s assessable income.

Additional leave fares are available for people employed in the extractive sector.

Ordinarily available for fares for return to place of origin but can also be applied to other destinations provided this is limited to the value of a fare to the place of origin.

Note that there is no limit on the class of airfare that is purchased.

Previously these fares were being taxed as fringe benefits in PNG. Concern initially from the mining sector, and subsequently from the agricultural sector, resulted in these amendments.

Introduced to help reduce labour costs in PNG.

Infrastructure Tax Credit. - Section 219C, Income Tax Act,

Investment See below (under Resource incentives) See below (under Resource incentives)

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Income Tax Regulation 10F (2005)

Tax Credit

Tourism Sector Specific Incentives

Concessional tax rate for new or substantially improved large scale tourist accommodation facility - Section 154E-154G, Income Tax Act

Section 6D, Income Tax Dividend (Withholding) Tax and Interest (Withholding) Tax Rate Act (2008)

Reduced Tax Rate

Provides for a tax rate of 20% to taxpayers whose sole income is derived from the operation of such a facility and who are registered for such purposes with IRC. This tax rate only applied for 10 years from the time income is first derived and is for the provision of temporary accommodation in PNG and must:

(a) have construction commenced between 1 January 2007 and 31 December 2011; and

(b) involved expenditure of US$7 million or more; and

(c) provides 100 rooms or more.

To encourage the development of the tourism sector in PNG.

Double Tax Deduction for Export Market Development Cost - Section 72C Income Tax Act (2005)

Investment Allowance

Provides for 200% deduction for specified outgoings incurred in export market expenditure in the development of tourism in Papua New Guinea.

To encourage the promotion of the tourism market in PNG

Accelerated Depreciation - Section 73-78, Income Tax Act

Accelerated Depreciation

Provides for accelerated depreciation for the purchase of new capital assets in the tourism sectors and boats & ships used by

To encourage the growth and development of tourism sector

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an accredited dive/snorkelling operator.

Tourism Staff training cost - Section 72A, Income Tax Act (2005)

Investment Allowance

Provides for 200% double deduction to tourism operators for staff training costs.

To increase investment in human resource development within the tourism sector

Infrastructure Tax Credit. - Section 219C, Income Tax Act, Income Tax Regulation 10F (2005)

Investment Tax Credit

See below (under Resource incentives) See below (under Resource incentives)

Zero rating Customs Tariff Duties and Excise duties on products imported by the tourism sector - Customs Act (2005)

Exemption from various taxes

Zero rated customs tariff duties on interior furnishings, wetsuits, photographic film and stock

Introduced in response to concerns from the tourism sector regarding the cost of importation of certain goods.

Mining and Petroleum Sector Incentives

Interest income - Section 35 (1959)

Exemptions from various taxes

This provides for exemptions on certain interest income.

Initial purpose of exemption was to make funding available for development in PNG. Section 35 now largely applies only to exempt payments of Interest Withholding Taxes by mining, petroleum or gas operators.

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10% reduced rate applied to dividend withholding tax - Section 42(3) Income Tax Act

Financing Incentives

Profits distributed by mining operators To encourage investment in the mining sector in PNG.

Infrastructure tax credit - Section 219C, Income Tax Act, Income Tax Regulation 10F

Investment Tax Credit

Provides for a fixed amount of investment in non- business areas to be offset against income tax. These schemes are usually used to encourage companies to invest in public infrastructure. Since the cost of the investment can be offset against any tax liabilities it is of no cost to the companies.

“Emergency repairs” of Highlands Highways - Section 219C (7), Section 219C (9), Income Tax Act (new subsection) (2011)

Investment Tax Credit

Provides for a 1.25% credit on expenditure for emergency repairs to the Highlands Highway from Lae to Koroba and Togoba to Wabag which may applied to all eligible tax payers

Expenditure on construction, upgrading or repairs of a road defined in the Gas Agreement as State Road Commitment

Increased the amount that could be applied under the ITC scheme, to encourage extractive sector companies to undertake repairs to the highlands highway.

Amortization- Exploration expenditure - Section 155N Income Tax Act (2000)

Investment Allowance

This incentive provides for additional deduction for Exploration expenditure incurred outside the resource project.

Introduced in response to a recommendation of the IMF.

(allows exploration expenditure to be deducted outside of the ring fence) – introduced to encourage exploration.

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Amortization – Mining Exploration expenditure Section 156D Income Tax Act

Investment Allowance

Provides to additional deduction for exploration expenditure incurred outside the mining project.

Amortization – Allowable Capital expenditure - Section 158J

Investment Allowance

Provides for allowable capital expenditure for taxpayers in a LNG Project Company

Exemption of certain travel benefits - Section 40AA Income Tax Act (1998)

Exemption from various taxes

See above (under agricultural incentives) See above (under agricultural incentives)

Infrastructure tax credit - Section 219C Income tax Act

Income Tax Regulation 10F

(first introduced in 1992)

Investment Tax Credit

Tax credit schemes allow for a fixed amount of investment in non- business areas to be offset against income tax. These schemes are usually used to encourage companies to invest in public infrastructure. Since the cost of the investment can be offset against any tax liabilities it is of no cost to the companies.

To encourage private sector investment into providing public infrastructure in specific areas.

ITC scheme was introduced in response to concerns from landowners not receiving benefits from the mines themselves. Initially was only available for Misima but was eventually extended to all mines.

Was extended to agriculture sector based on a request from palm oil industry and subsequently extended to the tourism sector as part of broader incentives aimed at the sector.

Tax Holiday for Ramu Nickel project – Section 6C Income Tax, Dividend (Withholding) Tax and Interest (Withholding) Tax Act 1984

Tax Holiday Provides for a 0 per cent tax rate for the Ramu Nickel Project “for the period of the tax holiday”

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Import duty exemptions for PNG/LNG Project – Section 9B Customs Tariff Act 1990

Exemption from various taxes

Provides an exemption from import duties for the PNG/LNG Project companies broad ranging exemption from “any of their affiliates or any person engaged by an LNG Project Company” where the goods are to be used or consumed for the initial construction of the project and “any subsequent phase of the project whose total cost exceeds USD50 million”

Introduced as part of a broad suit of measure to facilitate the development of the PNG/LNG Project.

Zero rate of GST supplied to resource companies - Section 7(f) & 20(d) of Goods and Services Tax Act

Exemptions from various taxes

Provides tax exemptions of imported Goods or services other than cars, supplied to a resource company for use in resource operation are zero-rated for GST

(Query whether this is accurately described as an incentive as compared to a structural feature of the GST system)

Lihir business incentive – section 46BA Income Tax Act

Exemption from various taxes

Exempts the income earned by businesses whose primary income is from doing business with the Lihir mine.

This exemption is now expired (related to income earned up until April 2000)

Stamp Duties Incentives

Stamp duties Concession - Stamp duties Act, Schedule

Exemption from various stamp duties

This provides for various available concessions on transfer of mining information, of exploration licences and of development licences.

Brought in at various time for various purposes. Partly a response to an IMF recommendation that most stamp duties on mining activities be reduced/removed.

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Personal Income Tax Exemptions

Exemption of certain income/allowances from salary and wages tax – section 29 of Income Tax Act (various dates

Exemption from various taxes

Provides for an exception from the general rule that the value of all benefits of a taxpayer be subject to salary and wages tax (section 65E). These include:

- Various allowance/s pensions paid under various pre-independence Acts

- Allowances provided by the State for the education of dependants

- Allowances otherwise paid to help meet the cost of educating an employee’s child (not including tertiary study)

- The retirement benefits of Members of Parliament

- Subsidies provided by an employer to assist the employee to buy their first home.

Exemption of scholarship income – section 40 Income Tax Act

Exemption from various taxes

Exempts income received by way of scholarship, bursary of other educational allowance

Exemption of certain travel benefits – section 40AA Income Tax Act

Exemption from various taxes

As with section 29 provides an exception to the general rule that benefits are included in an individual’s assessable income where an individual is provided

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with:

- One annual leave fair (for an employee and their family) from his place of employment to place of origin or recruitment.

- Additional leave fares for workers in the Mining and Petroleum sector.

- Additional leave fares for those, to the satisfaction of the Commissioner, are working in remote and hostile conditions

- (as an alternative to the above) Recreational fares and accommodation not exceeding the value of those above.

Incentives for “Public Good” purposes, including exemptions for International Organisations/Aid-related exemptions

Exemption for non-residents assisting a Commission of Inquiry – section 20 of the Income Tax Act

Exemption from various taxes

Exempts income from salary and wages tax earned by a foreign resident in PNG in assisting a Commission of Inquiry.

Exemption for 2015 Pacific Games – section 22B of the Income Tax Act

Exemption from various taxes

Exempts from income tax the 2015 Pacific Games Limited and exempts income of competitors.

To facilitate the hosting of the 2015 Pacific Games.

Income Tax Exemptions of Religious, Scientific or Public

Exemptions from various

The incentive provides for an exemption on income from religious, scientific or

To assist and promote the work of Non-profit organization in the country’s social, spiritual and

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Educational Institutions, Hospitals Charitable bodies - Section 25, Section 25A income Tax Act (1959 – taken straight from Australian tax legislation in 1959)

Taxes public educational institute, public hospitals and approved charitable bodies.

economic growth and development.

This was taken straight from Australia’s law as it existed in 1959 – this itself was derived from a British law (Exemption of Charities from Taxation) of 1643.

Exemption of bodies involved in providing aid to victims of Manam Island volcanic disaster and Asian Tsunami – section 25B (introduced in 2005)

Exemption from various taxes

Provided an exemption for institutions established to assist victims of these disasters.

Now expired (valid until end of 2005)

Exemption of trade unions – section 26 Income Tax Act

Exemption from various taxes

Exempts trade unions, or similar associations of employees, from income taxes.

Exemption of Certain Non Profit bodies - Section 27, Income Tax Act (1959 – taken straight from Australian tax legislation in 1959)

Exemptions from various Taxes

Provides for exemptions from Income of a society, association or club that is not carried on for the purposes of profit or gain to its individual members.

This provision is based on the concept of ‘mutuality’, developed initially through British case law. The principle is that an organisation cannot derive income from itself.

Exemption for scientific research funds – section 28

(introduced in 1980)

Exemption from various taxes

Exempts from income tax, a fund that is established to assist a public university or hospital to undertake scientific research.

Exemptions for certain international trade financial

Exemption from various

Exempts the income of

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institutions – section 31 Income Tax Act

taxes - The Multilateral Investment Guarantee Agency (part of the World Bank Group)

- The Export Finance Insurance Corporation of Australia

- European Investment Bank Exemption of Savings and Loans societies – section 40A Income Tax Act

Exemption from various taxes

Exempts from income tax the income of Savings and Loans societies

Tax deduction for gifts- Sections 69,69A,69C,69E,69H,69I,69K& 69M, Income Tax Act (various dates)

Ordinary deduction not otherwise allowable.

Provides for allowable deduction for gift to accredited political parties, sporting bodies, Law Order and Justice, prescribed charitable bodies, National Day Celebration and hosting of Island Forum. It Should be noted that exemption on gifts for National Day Celebrations, the 30th Independence anniversary celebrations and hosting of the Island Forum has been expired.

To encourage individuals and businesses to make donations to organisations that are pursuing a ‘public good’

Volcano affected area incentive Exemption from various taxes

Exempts income from businesses in the Rabaul area.

This exemption has expired and applies only to income up until 31 December 2000

To assist businesses impacted by the Rabaul volcanic eruption.

Exemptions to facilitate loan or assistance agreements

s. 8 Loans and Assistance

Exemption from various taxes

Administered by the Treasurer Provides for an exemption from any ‘rate, charge, tax, duty, levy, fee or imposition’ where provided for under a loan or assistance

Aid agreements—this is about concessional loans provided by donor agencies.

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(International Agencies) Act 1971

agreement.

Exemptions to facilitate loan or assistance agreements

s. 6, Loans (Overseas Borrowings) Act 1973 s. 6, Loans (Overseas Borrowings) (No. 2) Act 1976

Exemption from various taxes

Administered by Treasurer. Provides for an exemption from any ‘rate, charge , tax, duty, levy, fee or imposition’ where provided for under a loan agreement.

Commercial borrowings. Facilitates overseas borrowing by the PNG Government.

Exemption for the United Nations s. 7 & 8 United Nations and Specialized Agencies (Privileges and Immunities) Act 1975

Exemption from various taxes

Administered by the Minister for Foreign Affairs and Immigration Provides for the exemption of the United Nations and its property, direct taxes, import duties as well as from excise duties and taxes on the sale of property in certain circumstances.

Facillitates the UN’s operations in PNG.

Exemption for the Asian Development Bank s. 4 Asian Development Bank Act 1971 See also the Asian Development Bank (Privileges and Immunities) Regulation 1976

Exemption from various taxes

This legislation incorporates the Agreement to Establish ADB into Papua New Guinean Law. This includes broad exemptions from taxation under Article 56: • exemption, for the Bank,from all

taxation and customs duties • exemption from taxation the salaries

of ADB employees • exemption from taxes any obligations

and securities issued or guaranteed by the Bank and of interest and dividends on those obligations and securities.

Facilitates ADB’s operations in PNG

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Exemptions for the IMF s. 8 International Financial Organizations Act 1975

Exemption from various taxes

Incorporates the International Monetary Fund Agreement into PNG Law. Article IX includes the Fund’s immunities from taxation. This includes: • exemption, for the Fund,from all

taxation and customs duties • exemption from taxation the salaries

of Fund employees • exemption from taxes any obligations

and securities issued or guaranteed by the Fund and of interest and dividends on those obligations and securities.

Facilitates the IMF’s operations in PNG

Exemptions for other International Organisations International Organizations (Privileges and Immunities) Act 1975

Exemption from various taxes

Administered by the Minister for Foreign Affairs and Immigration. Provides exemptions for international organizations listed in the Regulations. The exemptions are laid down in the Schedules to the Act and, relevantly, may include (if prescribed in the Regulations): • Schedule 1: exemption of the

organization from the liability to pay or collect taxes other than duties on the importation or exportation of goods

• Schedule 1: exemption from taxes of obligations and securities issued or guaranteed by the organization and of interest and dividends on those obligations and securities.

For the organisation and its staff

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• Schedule 3: exemption from taxation of (high office) representatives of the organization but not including exemptions from excise duties, sales taxes or the ‘duties on the importation or exportation of goods not forming part of personal baggage’

• Schedule 3: exemption from taxation of officers (other than high officers) including the right to import and re-export furniture and other personal effects free of import duties when taking up a post in PNG.

Exemption for designated aid organisations s. 2, 4, 5 & 6 Aid Status (Privileges and Immunities) Act 1977

Exemption from various taxes

Administered by the Minister for Foreign Affairs and Immigration. Section 2 gives the Head of State the power to grant an organization ‘designated aid status’. This provides a range of exemptions for a person granted designated aid status including: • exemption from taxation on salaries

and the right to bring in goods import duty free when first arriving (section 4)

• exemption from import duty, excise & GST on the importation of a motor vehicle (section 5)

For an organization granted ‘designated aid status’, an exemption is available from import duty, excise and GST on the

Allows organisations to be given designated aid status

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importation or purchase of vehicles, plant and equipment to be used for performing functions under an aid agreement entered into with the State.

Exemption of international organisations – section 39 of the Income Tax Act

Exemption from various taxes

Exempts the income of prescribed organisations of which PMG is a member along with the salary and allowances of officers of those organisations working in PNG.

Exemption for certain visiting Defence Forces Defence (Visiting Forces) Act 1975

Exemption from various taxes

Administered by the Minister for Defence Provides for the exemption from import duties or taxes associated with the importation of any goods required by a friendly visiting force (See section 32). This may be limited under an agreement with the Minister. Section 44 also gives the Minister the power to enter into an agreement with the visiting force to exempt the members of that force from income tax and import duties/excise/GST associated with the importation of personal goods and motor vehicles.

Other exemption for visiting defence force personnel – Sections 37 & 38 Income Tax Act (introduced 1976)

Exemption from various taxes

Exempts from income tax, including salary and wages tax the pay and allowances paid to certain defence force personnel.

Exemption for Peace-Corps Volunteers – Section 19B

Exemption from various

Exempts the salary and wages paid to Peace Corp volunteers in PNG.

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Income Tax Act taxes

Exemption of certain providers of technical assistance – Section 22 Income Tax Act

Exemption from various taxes

Exempts from income tax or salary and wages tax, income derived under prescribed technical assistance agreements.

Exemption of Kula Fund and Pacific Capital Partners (PNG) Pty Ltd – Section 22A Income Tax Act

Exemption from various taxes

Exempts both organisations from any tax in PNG. Exemption is no longer operative – the Kula Fund ceased operating in June 2010

To facilitate an Asian Development Bank initiative to provide equity for emerging enterprises in the South Pacific

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ATTACHMENT B: SUMMARY OF KEY FINDINGS AND RECOMMENDATIONS FROM THE NATIONAL INVESTMENT POLICY, VOLUME II (1999)

Incentive Description Discussion/Finding Status of recommendation for implementation

Export sales incentive

Income from export sales of qualifying goods are exempted for the first three years. For the following four years, an exemption is provided for that portion of export sales that exceeds the average over the preceding three years.

Few companies have attempted to benefit partly because few companies export manufactured products and lack of awareness is part of the problem.

Consider it to be very generous concession and recommend maintaining the incentive and more awareness done.

The incentive ceases to apply effective 1 January 2015 to comply with WTO requirements but will continue to apply to income from export sales where the declared year of income is prior to 1 January 2015.

Infrastructure Tax Credit scheme

Tax credit scheme allows for fixed amount of assessable income from mining, petroleum and gas operations to invest in prescribed infrastructure which is offset against income tax assessed in the year of expenditure.

The scheme has contributed to improved infrastructure in some parts of the country and is no cost to the companies but then several infrastructure built have not met the requirements of the national government. The funds tend to benefit few provinces whereas had the money been distributed according to national priorities it would have much broader coverage. There is also lack of administrative capacity to monitor the quality of the

The recommendation to not to extend to other sectors was not implemented instead tax credit scheme now includes the following sectors:

- Primary production, 1.5% of the assessable income derived in 2006 year of income and subsequent years.

- Tourism, 1.5% of the assessable income derived in 2007 year of income and subsequent years.

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infrastructure.

Recommend due to lack of administrative capacity to monitor the investments and the loss of revenue to both National and Provincial Governments, the tax credit scheme should not extend to other sectors.

Rural development incentive

This is a 10 year tax holiday provided to new companies after commencement of businesses on the net income in prescribed industries and districts specifically set up in under developed areas not dependent on exploitation of natural resources.

The incentive has not been fully utilized due to lack of infrastructure and other problems related to remoteness of the prescribed areas.

Recommend the incentive to be repealed and alternative incentives considered for the rural area.

Recommendation to repeal the incentive not implemented.

Double deduction for market development costs

Double deduction is available for expenditure on developing an export market for PNG manufactured goods through publicity, sample provision, market research, trade fairs, preparation of tenders, certain travel expenses, technical information provision expenses, sales office expenses and expenses incurred in bringing business to PNG.

The incentive should be broadened to some service export e.g. tourism (hotels, tour operators and perhaps airlines) for overseas adverting and marketing.

Recommend the incentive for tourism should be limited to small businesses and not large hotel chains.

Recommendation implemented but not limited to small tourism businesses within PNG after 31 December 2005.

Pioneer This was a 5 year tax holiday provided to The incentive failed to meets its intended The pioneer industry incentive was

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Industry incentive

new manufacturing activities not previously undertaken in PNG.

purpose as businesses granted the incentive ceased operating on expiry of the incentive period.

repealed in 1999.

Bougainville incentive

This incentive is a tax holiday on the taxable income of sole traders or companies based in or conducts most of its business in Bougainville Province. The incentive was initially for the period 21 April 1993 to 31 December 1996 which was later extended to 31 December 2003. This incentive does not extend to salary or wages tax, DWT, FCWT, non-resident insurers tax, overseas shipping tax and prescribed royalty tax.

The incentive had some success in Buka in stimulating investment.

Recommend to maintain incentive.

Recommendation not implemented. The incentive expired at 31 December 2003.

Volcano affected (Rabaul) incentive

This incentive is a tax holiday on the net assessable income of the volcano affected area enterprise or the period 16 September 1994 to 31 December 2000. This incentive does not extend to salary or wages tax, DWT, FCWT, non-resident insurers tax, overseas shipping tax and prescribed royalty tax.

The incentive had some success in Kokopo in stimulating investment.

Recommend to maintain incentive.

Recommendation not implemented. The incentive expired at 31 December 2000.

Double deduction for

Businesses can claim double deduction for salary or wages paid to registered

More businesses have claimed this incentive relative to other incentives and

Recommendation implemented. The double deduction also includes salary

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staff training costs

apprentices and citizen employees attending fulltime professional training at a Government training institute or prescribed tertiary institute.

whether it has had a major impact is for the National Training Council to address.

Recommend to retain the incentive.

or wages paid to full time training officers. From 1 January 2007 it extends to tourism sector for staff training costs.

Primary production investment scheme

Accelerated depreciation

Tax deductions available to companies for expenditure on agriculture development under Section 97 and for depreciation of agricultural plant of equipment can be passed through directly to the shareholders for deduction at shareholders marginal tax rates. The deductions are passed to shareholders proportion to monies paid on the shares and the deductions cannot exceed the monies paid on the shares.

Initial year depreciation is increased by 20% of the cost price for new or capital plant or articles with effective life over 5 years acquired for primary production in PNG.

Both the primary production investment scheme and initial year depreciation on new capital or articles used for primary production have been used by limited companies. However the revenue forgone is quite big (K2million kina per year). This suggests this incentive is being utilized by few large companies.

The scheme has potential to benefit primary production in PNG. The lack of utilization maybe due to public awareness.

Recommend Government to retain incentives as part of its strategy to develop the rural areas.

Incentive retained.

Industrial plant depreciation

Taxpayers acquiring industrial plants may elect in any year to increase the amount of depreciation deductions by

This incentive has been successfully utilized in the fishing industry.

Recommendation implemented. Incentive retained.

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the lesser of the amount of income remaining after all deductions including depreciation or the remaining depreciable value of the plant. The plant life must exceed 5 years. Taxpayer must elect to claim the amount in any year provided no loss is created.

Expenditure on acquiring the following types of new plant or article is provided a 100 % deduction for: - property directly used for agriculture production. - property used by residents engaged in commercial fishing. - boats or ships and ancillary equipment used as dive boats used by an accredited scuba diving or snorkeling operator.

Recommend retain existing provisions as these are consistent with international standards.

Initial year accelerated depreciation

New Plant (other than resident property with a cost exceeding K100,000) with a life exceeding five years used in Papua New Guinea in manufacturing, construction, transport, storage, communication or agriculture production can be depreciated at 20% in addition to the normal depreciation.

This incentive has been well utilized.

Recommend to maintain the incentive.

Recommendation implemented. Incentive retained and from 1 January 2006, the initial depreciation for tourism purpose is 55% in addition to the normal depreciation.

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Modification of plant for the purposes of conserving fuel input can be depreciated at 20% in addition to the normal depreciation. Expenditure on converting oil-fired plant to non oil-fired plant can be depreciated 30% in addition to the normal depreciation. Expenditure on acquiring new non-oil fired plant can be depreciated at 30% in addition to the normal depreciation.

Duty drawback It’s a rebate paid to exporting manufacturers, when they export goods to the amount of duty already paid on the new materials.

There have been a number of administrative problems with the existing system. The two major ones are (i) the duty drawback could only be given after notice in the National Gazette and (ii) the lengthy delays in the refunds being paid out.

The scheme is an important incentive to exporters and there is a need to redesign the system to clearly define the method of calculating the amount of drawback as well as the removal of the need for a Gazettal notice.

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Wages subsidy Companies manufacturing new products may receive a wage subsidy for each citizen employee for 5 years from commencement of operations in proportion to the minimum wage in that area. The subsidy is phased out over the 5 years. 1st year – 40% 2nd year – 30% 3rd Year – 20% 4th year – 15% 5th year – 10%

The scheme has not greatly contributed to substantial increase in additional jobs.

Many companies manufacturing new products are not aware of this subsidy.

Firms utilizing this scheme are capital intensive in methods of production and the scheme is just additional cost to the operations.

Recommend introducing eligibility restrictions on capital intensity.

Recommendation not implemented.

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ATTACHMENT C: VALUE OF INCOME TAX INCENTIVES (2015 BUDGET)

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ATTACHMENT D:STRENGTHS AND WEAKNESSES OF DIFFERENT TYPES OF TAX INCENTIVES

Strengths Weaknesses Lower Corporate Income Tax (CIT) rate

• Simple to administer • Revenue costs are more transparent • Attractive for mobile investors (reducing

rate of tax on profits) • Dynamic effect on stimulating economy

• Largest benefits go to high-return firms that are likely to have invested even without incentive

• Invites tax avoidance through high-tax enterprises shifting profits to low-tax ones via transfer pricing (intracountry and international)

• Acts as windfall to existing investments • Unlike specific benefits, may not be tax spared by home country tax authorities

Tax Holidays • Simple to administer • Allows taxpayers to avoid contact with

tax administration (which may be important if it is complex or corrupt)

• Relative Compliance Cost • Reduction on tax liabilities • Can provide an immediate and large

benefit to start-ups who are profitable early in their life-cycle.

• Same as lower CIT rates, except might be tax spared. • Attracts Footloose Industries that tend to leave as soon as the incentives expire,

without lasting employment effective. • invites tax avoidance through the indefinite extension of holidays via creative

redesignation of existing investment a new investment • Creates competitive distortions between old and new firms • Revenue costs are not transparent unless tax filling is required in which case

administrative benefits are forgone.

Investment allowance (e.g. 150% and Double Deductions) and Tax Credits • Can be targeted to certain types of • Distorts choice of capital assets in favour of short-lived ones, since a further

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investment with highest positive spill overs

• Revenue cost are more transparent

allowance is available each time an asset is replaced • Qualified enterprise may attempt to abuse the system by selling and purchasing the

same assets to claim multiple allowances • Greater administrative burden • Discriminates against investment with delayed returns if loss carry-forward

provisions are inadequate. Accelerated Depreciation

• All of the benefits of investment allowances and credits

• Does not generally discriminate against long-lived assets

• Moves the CIT closer to a consumption-based tax, reducing the distortion against investment typically produced by the regular CIT

• Some administrative burden • Discriminates against investment with delayed returns if loss carry-forward

provisions are inadequate.

Exemptions from Indirect Taxes • Allows taxpayers to avoid contact with

tax administration (which may be important if it is complex or corrupt)

• Prone to abuse – easy to divert exempt purchase to unintended recipients

Special Economic Zones • Allows taxpayers to avoid contact with

tax administration (which may be important if it is complex or corrupt)

• Distorts locational decisions • Typically results in substantial leakages of untaxed goods into domestic market,

eroding the tax base Source: 1. OECD (2001), United Nations (2000), Fletcher (2000)

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ATTACHMENT E – INTERNATIONAL CASE STUDIES ON EXPERIENCE WITH TAX INCENTIVES

Country Experience

Uganda The government of Uganda is providing a wide range of tax incentives to businesses to attract greater levels of Foreign Direct Investment (FDI) into the country. A recent report prepared by the Tax Justice Network has however raised concerns about these incentives (Tax Justice Network, 2012). In particular it noted estimates from the African Development Bank that losses from tax incentives and exemptions are “at least 2%” of GDP. This amounted to around US$272 million in 2009/10. The report also estimates tax that collections could increase to 16% if tax collection were improved and if some of the revenue-negating measures, such as tax incentives, were removed

The report also suggests that it is unlikely that Uganda’s attraction of more FDI than its neighbors, Kenya and Tanzania, is due to its use of tax incentives.

The report also raises concerns about apparent tax competition being undertaken by countries in the region, competing for FDI. This is leading to a “race to the bottom”.

Tunisia In 2013, an analysis of Tunisia’s tax incentive framework was conducted by the OECD Tax and Development Program at the request of the Ministry of Finance. The review the incentives system was done within the framework of the “Principles of Enhance the Transparency and Governance of Tax Incentives for Investment in Developing Countries”. The report (OECD, 2013) provided a number of recommendations to the Tunisian Government on the management of its tax incentives. This included building capacity in tax policy analysis to improve understanding of the effects of proposed tax incentive measures, address the lack of transparency and complexity in the tax incentive system, consolidate investment agencies and improve the process by which the revenue loss associated with tax incentives is estimated and reported.

Nigeria A public statement of the full extent of tax incentives in Nigeria is hard to achieve due to the complexity of the tax incentives framework. Tax incentives can also be introduced through laws (currently including as many as 15 acts and provisions),

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budget speeches, government notices, executed agreements, as well as Memoranda of Understanding between the government and businesses (OECD 2014, p30)

Mozambique In 2009, the Code of Fiscal Benefits harmonised most investment incentives in Mozambique. In 2013, as many as 17 laws and legislative acts were consolidated into the General Tax Code in Senegal, significantly improving transparency of the tax system (OECD 2014, p30)

Ghana In Ghana, as many as 10 organizations/agencies have the authority to recommend or grant tax incentives and exemptions (OECD 2014, p30).

The analysis of Ghana’s tax expenditure landscape reveals that 15 largest “beneficiaries” take the vast majority, 93.2 %, of all VAT tax expenditures (OECD 2014, p30).

Zambia Proposed tax incentives measures in Zambia are announced through a budget speech delivered in Parliament by the Minister of Finance; and are debated, voted, and passed by Parliament (OECD 2014, p30)

Swaziland The administration process for the Swaziland’s Development Approval Order is opaque and includes discretionary eligibility criteria such as “beneficial to the development of the economy.” The application process is long and time-consuming; it doesn’t follow a set timeline (OECD 2014, p31)

Tanzania In Tanzania, in the 2013-2014 Budget Speech, the Government voiced a commitment to rationalise the existing investment incentives, in particular, to reduce tax exemptions from 4.3% of GDP in 2011-12 to a maximum of 1% by 2014, based on systematic analysis of revenues foregone.

Mauritius Impact evaluation of investment incentives in Mauritius prompted a move away from an investment regime of numerous and overlapping tax incentives towards the current simplified tax system.

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REFERENCES

Burton, M & Stewart, M, 2011, ‘Promoting Budget Transparency through Tax Expenditure Management - A Report on Country Experience for Civil Society Advocates’, available at http://internationalbudget.org/wp-content/uploads/Promoting-Budget-Transparency-Through-Tax-Expenditure-Management.pdf Caiumi, A, 2011, ‘The Evaluation of the Effectiveness of Tax Expenditures – A Novel Approach: An Application to the Regional Tax Incentives for Business Investments in Italy’, OECD Taxation Working Papers, No. 5, OECD Publishing. http://dx.doi.org/10.1787/5kg3h0trjmr8-en Daly, M, 2005, ‘The WTO and Direct Taxation’, Discussion Paper No 9 – WTO and Direct Taxation Conference, Vienna 8-11 July 2004 available at http://www.wto.org/english/res_e/booksp_e/discussion_papers9_e.pdf Department of Commerce and Industry, 1999, ‘National Investment Policy Vol 2 – Investment Incentives for Papua New Guinea’ IMF, 2012, ‘Philippines – Road Map for a Pro-Growth and Equitable Tax System’, IMF Country Report No. 12/60 available at http://www.imf.org/external/pubs/ft/scr/2012/cr1260.pdf IMF, 2014, ‘The Bahamas – Tax Reforms for Increased Buoyancy’, IMF Country Report No. 14/17 INA 2014, ‘Challenges of doing business in Papua New Guinea’, PNG Institute of National Affairs and Asian Development Bank http://www.adb.org/publications/challenges-doing-business-papua-new-guinea-2014 Klemm, A and Van Parys, S., 2009, ‘Empirical Evidence on the Effects of Tax Incentives’, IMF Working Paper WP/09/136. Klemm, A, Bedi, S & Park, J, 2012, ‘A Partial Race to the Bottom: Corporate Tax Developments in Emerging and Developing Economies’, IMF Working Paper WP/12/28. Mercer-Blackman, V, 2008, ‘The Impact of Research and Development Tax Incentives on Colombia’s Manufacturing Sector: What Difference Do They Make?’ IMF Working Paper WP/08/178. Nam, C. W & Radulescu, D. M ,2004, ‘Do Corporate Tax Concessions Really Matter for the Success of Free Economic Zones?’, Economics of Planning, 37:99–123

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OECD, 2010 , ‘R&D Tax Incentive – rationale, design and evaluation’, available at http://www.oecd.org/sti/ind/46352862.pdf OECD, 2012, ‘Principles to Enhance the Transparency and Governance of Tax Incentives for Investment in Developing Countries’ available at http://www.oecd.org/ctp/tax-global/transparency-and-governance-principles.pdf OECD, 2013, ‘Analysis of the Tunisian Tax Incentives Regime’, available at http://www.uscib.org/docs/Tunisia_Tax_Incentives_Analysis.pdf OECD, 2014, ‘Report to the G20 Development Working Group on the Impact of BEPS on Low Income Countries (Parts 1 & 2)’ available at www.g20.org Tax Justice Network, 2012, ‘Tax Competition in East Africa: A Race to the Bottom? Tax Incentives and Revenue Losses in Uganda’, available at www.taxjusticeafrica.net. PNG Chamber of Mines and Petroleum, 2014, ‘Submission to the Tax Review Committee on Mining and Petroleum Taxation’, available at www.taxreview.gov.pg/submissions United Nations (Committee of Experts on International Cooperation in Tax Matters(, 2005, ‘Tax aspects of donor-financed projects’, available at www.un.org/esa/ffd/tax/firstsession/ffdtaxation-tax%20aspects.doc. World Bank, 2003, ‘Tax Incentives – Using Tax Incentives to Attract Foreign Direct Investment’, Public Sector note available at http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/282884-1303327122200/253Moris-020603.pdf World Bank, 2003, ‘Why worry about tax expenditures?’, Prem Notes, No 77 available at http://www1.worldbank.org/prem/PREMNotes/premnote77.pdf

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ABBREVIATIONS

FTZ: Free Trade Zone G20: Group of 20 Countries GST: Goods and Services Tax IMF: International Monetary Fund IRC: Internal Revenue Commission ITA: Income Tax Act ITC: Infrastructure Tax Credit OECD: Organisation for Economic Cooperation and Development PNG: Papua New Guinea PNGCS: PNG Customs Service R&D: Research and Development SEZ: Special Economic Zone UN: United Nations