PNG's tax system under review

By Sam Vulum

One of Papua New Guinea’s most contentious issues, its tax system, is up for review in a move seen as a first major critical and comprehensive assessment of any kind undertaken since independence in 1975.

It has been claimed that some of the country’s taxes have not been reviewed to see whether they have achieved their objectives. There was very little, or no data available to verify whether incentives for taxes, in particular, indirect taxes, have worked.

An increasing level of personal income tax was another concern closer to the hearts of many Papua New Guineans, especially those in lower wage-earning bracket. It was a burden they had to face after the passage of every national budget over the years, except this year’s budget when they received some reprieve.

Considering the difficulties already faced by Papua New Guineans, being brought about by a struggling economy, the government decided not to introduce new revenue measures in the 2000 Budget.

The measures included no personal income and indirect taxes for goods, services and entertainment.

The proposed tax review by the government was seen as a step in the same direction under its reconstruction program. However, personal income taxes remained high as contained in a supplementary budget introduced by the government upon taking office in June 1999. And it was hoped that the review would also address what has been seen as the “discriminatory” application of the system. The current situation was such that people in the higher-pay bracket, including expatriates, were getting more in fringe benefits while low-income workers were worse off. The expatriate component of gratuity payments were not also taxed as salaries.

Personal income tax, mainly contributed

by low income earners, made up the biggest slice of tax revenue receipts collected by the Internal Revenue Commission in the first half of 1999. IRC collected more than K 248 million against a budgeted target of K 212 million. This, plus other contributions helped the IRC to exceed its revenue collection for the period.

The total revenue collected in the period was K 737.2 million.

This was a tremendous effort by the IRC, however, questions remained whether the effort was transparent, honestly done and not at the expense and burden of some struggling low income earners.

It is hoped that the review would address this taxation disparity between the high and low wage earners and citings by the Asia- Pacific Economic Cooperation (APEC) that tariff levels in PNG remain the highest among APEC member countries.

The figures, released in August 1999 by a New Zealand APEC Trade Force, a body set up to prepare for the hosting of the 1999 APEC meeting in Auckland in September, showed that out of the 21 APEC member countries, PNG has the highest average tariffs of 23 per cent.

Neighbors Australia and New Zealand reduced their average tariff levels to 5.6 per cent and 4.2 per cent respectively. Indonesia lowered its rates from 18 per cent in 1988 to 11.9 per cent in 1995, while Malaysia’s average fell from 13.6 per cent in 1988 to 9.3 per cent in 1998. Only Hong Kong and Singapore have zero level of tariffs.

The larger economies of United States, Japan and China have also been slow in their tariff reforms, while Mexico and Japan have increased their tariff levels slightly.

Over the past decade, most Asia-Pacific economies have initiated substantial tariff reductions. The government highlighted in a newspaper advertisement that it has commissioned the comprehensive and in depth independent review of the country’s tax system to help with the implementation of its reconstruction and development initiatives. The government said the review will be transparent and involve extensive

consultation and dialogue with stakeholders such as provincial government authorities, the private sector and industry representatives and small business representatives.

As part of the consultation process, members of the public are invited to make written submissions or commentaries on how to refine, realign and consolidate our tax system. Former Internal Revenue Commissioner and diplomat Sir Nagora Bogan will chair the review. He will be assisted by a small team of specialists, and will be able to call on the expertise of both the public and sub components of the review will be outscored. It is envisaged that active participation of the public through this medium will generate intelligent, rational, well-informed and more representative discourse on the tax review.

The primary focus of the review is to provide the government specific recommendations on the formulation and administration of tax policy, which will help in the long term economic and social development of PNG. A tax system that will also provide a fair, efficient and secure source of tax revenue for the government.

The review will ensure that the ongoing process of tax and fiscal policy formation and the administration of the tax system are done in a manner that ensures integrity, impartiality, fairness and durability of the tax system.

The review will adopt an impartial and objective posture in discharging its mandate. This posture will enable the review to objectively appraise and critique all tax and fiscal policies and provide independent comments or recommendations to the government for its consideration and decision.

The review will include personal and corporate income tax, mining and hydrocarbon tax regimes, excise tax regime and tariff arrangements, operation of value added tax, process of tax/fiscal policy formulation and efficiency and simplicity of tax administration.