PNG tax credit scheme halted for government review

In a bid to increase transparency and ensure that only qualified projects are eligible for government assistance, a complete review of Papua New Guinea’s tax credit scheme (TCS) got under way in the beginning of 2018. The government has utilised the TCS to enhance the commercial viability of infrastructure projects since 2003, albeit with mixed results. This led Prime Minister Peter O’Neill to call a halt to the scheme in early 2018 due to split views on its effectiveness. With the TCS now on hold for evaluation, some say potential investors will be less incentivised to venture into remote areas of the country until a revamped assistance mechanism takes its place.

The Scheme

Although the management of some public programmes has come under fire, the Infrastructure TCS (ITCS) of 2003 and the National Infrastructure TCS (NITCS) of 2013 have both been effective methods of infrastructure delivery for the country. For example, the road connecting Erave to Samberigi was successfully developed under the ITCS, funded by local company Oil Search. The road is a major transport link that has eased traffic on the Highlands Highway and has supported the timely delivery of agricultural products to markets. “The TCS has been pivotal in developing and maintaining roads throughout the country,” Graham King, general manager of Hargy Oil Palms, told OBG. The NITCS has also delivered projects of national importance, such as the APEC Haus conference centre in Port Moresby and the upgrading of government offices.

The TCS has been particularly successful in promoting infrastructure development in rural areas, with many projects either benefitting the agriculture sector or undertaken by industry stakeholders themselves. “The tax system overall is reasonable; however, the TCS has been stopped and that is a missed opportunity,” Greg Worthington-Eyre, CEO of local rice supplier Trukai Industries, told OBG. “Many agricultural companies are located in very remote areas, and they are the ones doing a lot of the necessary investment. Without the TCS, this will be even more challenging.”

Building vital infrastructure in more remote parts of the country has also positively affected private oil and palm oil firms. “The TCS works for many companies. It’s transparent, it’s practical and the results are immediate,” Robert Nilkare, PNG country manager of New Britain Palm Oil and president of the Business Council of PNG, told attendees of an investor event in January 2018. “Certainly for companies like New Britain Palm Oil, ExxonMobil, Oil Search and Barrick, it’s a good model, and a way for us to interact and engage with the government in a positive way.”

While a number of other stakeholders have spoken out against the decision to halt the scheme, representatives of the PNG Extractive Industries Transparency Initiative welcomed the government’s decision, citing a lack of accountability. One of the noted shortfalls of the TCS was a lack of monitoring capacity, which created an inaccurate reporting system. Furthermore, as the TCS mainly benefitted large agro-industrial firms, smallholder growers are still allowed a 150% tax deduction on expenditures for production, processing, packaging and marketing activities.

Impact

Prior to the scheme being halted, tax credit was made available by the Department of National Planning and the Internal Revenue Commission to resource-related firms for expenditure on capital assets, but excluded expenditure required under the Mining Act and the Oil and Gas Act. For companies that built agricultural infrastructure, a credit limit of 1.5% of assessable income or the amount of tax payable for the year – whichever was less – was granted.

With a moratorium placed on the TCS, a number of proposed agri-business projects in remote regions have become less feasible. For these investments to remain viable, the government will either need to reinstate a revised TCS with better monitoring mechanisms or adopt an alternative incentive programme.