On 4 March 2022 the World Bank published an economic update on Papua New Guinea recommending changes in tax policy and administration to improve revenue collection.
The report notes that tax collection has been in decline, and this has been made worse by the COVID-19 downturn. Measures are required to raise revenues efficiently over the long term. Papua New Guinea (PNG) also needs to ensure that an appropriate share of the benefits from business operations in the resource sector goes to the public revenue.
Goods and services tax
The World Bank report recommends measures to improve GST revenue performance. PNG’s GST exemptions are consistent with good international practice, and the tax rate is comparable to other countries in the region. Further measures should however be taken to address GST compliance. A comprehensive GST compliance improvement plan should be put in place to identify the risks to GST revenue and prioritize measures for improvements. In the longer term the rate of GST could be increased, but the first priority is to significantly improve the overall GST compliance level in relation to both filing returns and payment of the tax. To maintain the equity of the tax system a reduction in the personal income tax rate would need to be implemented at the same time as any increase in the GST rate.
Measures to improve GST compliance should include bringing businesses into the formal sector and reducing the GST registration threshold. As many small suppliers would continue operating informally even if the small supplier threshold were lowered, priority should be given to other measures to bring them into the formal economy. Implementing the small business tax regime, which has already been enacted, is a good starting point, and assistance programs in the pandemic could be used as an incentive for businesses to join the formal economy.
Corporate income tax
The report recommends broadening the tax base for corporate income tax by removing tax holidays and other measures. In place of tax holidays, PNG could introduce incentive measures such as accelerated depreciation, investment allowances or tax credits for training, job creation or research and development.
PNG could introduce a capital gains tax and consider boosting investment by offering immediate expensing of capital investment. Improved data sources should be compiled, to facilitate the cost-benefit analysis of important tax incentives. Also, the transfer pricing rules should be tightened to prevent profit shifting and protect the tax base. As a longer-term measure the standard rate of corporate income tax could be reduced.
Personal income tax
The tax burden should be lowered for salary and wage earners, in particular groups in the lower and middle earnings brackets. This rebalancing of the tax mix could be implemented when the revenue from consumption taxes has increased.
Tax administration
Measures should be introduced to improve tax compliance, with annual compliance improvement plans and more detailed plans relating to specific business types. A comprehensive taxpayer awareness program should be developed for various groups of taxpayers. Taxpayer services and tax administrative procedures could be strengthened and simplified to facilitate compliance. Data quality could be improved an effective debt management strategy drawn up. Audit operations should be supported by an audit plan, with auditor training and close monitoring of audit quality.
In the medium to long term, modern e-services can be implemented through integrated ICT solutions. This would allow the IRC to adopt efficient business processes and facilitate business continuity during future crises.
