A look at regulations for foreign investment

The investment environment in Papua New Guinea is liberal and open. Official policy has been to welcome and selectively encourage foreign investment and to allow for the use of expatriate workers. The Investment Promotion Authority (IPA), which was established by act of Parliament, functions as a onestop shop and provides a wide range of services – from assisting with incentives to locating land – free to qualified investors. More broadly, the government is strongly committed to the private sector and has said that its participation in the economy is vital to the nation’s future. According to the US State Department, the sanctity of contracts is upheld by the courts and national treatment is accorded.

A few selected areas, however, are restricted and reserved for PNG nationals. These areas include small-scale farming, poultry farms, small sawmills, commercial fishing within the three-mile limit, building maintenance of residential units, small-scale furniture manufacturing, processing of green coffee beans, real estate management, equipment rental, small hotels, land and domestic waterway transportation, and small-scale retail.

Approvals Needed

Foreign companies operating in non-restricted sectors must still gain a number of approvals. A foreign firm, unless its activities in the country are very short term or primarily offshore, must be certified by the IPA. Central bank approval is also required for foreign investments on a wide range of transactions. One of these is the issuing of equity or debt to foreign investors. Another is the sale of goods and services to non-residents on extended terms. According to the US State Department, the central bank checks that transactions are conducted at the prevailing commercial rates and that loan proceeds are promptly brought into the country. It also seeks to ensure that debt to equity ratios are maintained within reasonable levels.

All companies, foreign and domestic, are subject to the Companies Act of 1997 and the Companies Regulation Act of 1998. Other acts, laws and statutes may also apply for certain sectors, such as the Forestry Act 1991, the Mining Act 1992, the Fisheries Act 1994, and the Oil and Gas Act 1998.

All foreign companies must register or incorporate locally, which can take from 1-21 days. IPA certification is supposed to take 35 days, but can take up to six months, according to CCH Law. Agreements signed by foreign companies without IPA certification are considered illegal and can attract penalties.

In the World Bank’s “Doing Business 2014” report, PNG is ranked 101 out of 189 countries for ease of starting of business. The study says that to register a firm takes six procedures, an average of 53 days and costs the equivalent of 13% of income per capita. That compares to an average of seven procedures, 37 days and 29.8% of per capita income in other East Asia and Pacific countries.

Regulatory reforms are set to address many such hurdles. A recent government report recommended streamlining business set-up procedures, and the IPA is setting up an online registry to speed up processing. This should help improve PNG’s ranking.

Applicable Taxes

Resident corporations are taxed on worldwide income at a rate of 30%. Nonresidents are taxed on PNG-sourced income. A goods and services tax is charged on taxable supplies made in the country at the rate of 10% if turnover is greater than PGK250,000 ($101,625).

While PNG has not yet instituted a social security programme, companies are required to contribute to a registered superannuation fund for all their local employees. The rates are 6% for employees after tax and 8.4% for employers pre-tax. PNG also has a stamp duty. In the Doing Business survey, the country ranks 116th globally for its tax system. Companies must make an average 32 tax payments a year, which take 207 hours a year to prepare and absorb 22% of corporate profits. That compares with the East Asia and Pacific average of 25 payments, 208 hours and 16.4%.

In late 2013 the IPA introduced an online registration system, which allows business names to be registered and companies to register and submit filings. Foreign law firms say that the new system is a game changer, as it will save time and money for corporations and reduce costs for the IPA.

The new online system was jointly funded by the International Finance Corporation and the New Zealand government. According to the statements that IPA has given to the local press, the organisation hopes that the new system will result in an improved ranking in the World Bank’s “Doing Business” survey. The country has already made significant gains in terms of the cost of starting a business – dropping from 29% of per capita gross national income in 2003 to 13% currently.

New Legislation

New legislation has been passed that has the potential to change the foreign investment environment, and concerns have been expressed in print. In late 2013 the Takeovers Code was amended, and now the code includes a national interest clause. The clause seems to cover almost all companies in the country, including those with over PGK5m ($2m) in assets, those with more than 100 employees and those that are foreign-owned.

No exact definition has been given for national interest. Early analysis indicates that the law is likely to be triggered in cases where the ownership of local shareholders is significantly diluted, in cases where market liquidity is affected, if the acquisition could lead to job losses, where delisting could result or where underlying assets are moved from local to foreign control. According to press reports, media, fisheries and agriculture are the main target sectors of the recent legislation.

Attorneys in PNG note that many countries have such clauses and that national interest requirements are not at all unusual. There are also indications from the highest levels that the new requirement will be implemented in a pragmatic and constructive manner. For example, Prime Minister Peter O'Neill said in comments to PNGFM in late 2013 that the equity structure of by News Corporation but which has a public float and a local shareholding base, is a structure that is broadly acceptable to the government.

But press reports and legal analysis warn that the national interest clause nevertheless represents a risk. Officials are indicating that national interest is likely to be broadly defined and that the focus will be as much on overall ownership numbers as on specific threats to the country.

During a briefing in September 2013, Richard Maru, minister for trade, commerce and industry, said that 90% of the formal economy was controlled by foreigners and that citizens and the government want to see more local ownership. Lawyers commenting at the time said that because of the lack of guidelines on what constitutes national interest, all takeovers could potentially be scrutinised and that overall transaction activity could fall as a result. Australia, which has its own national interest law, has been most vocal in opposition to PNG’s. “The PNG government has moved to limit the operations of foreign companies and individuals in its economy,” wrote The Australian newspaper in late 2013.

Case Study

A number of commentators noted that use of the amendment so far seems to validate concerns about its application and implementation. According to press reports, the national interest test was cited to stop the acquisition of New Britain Palm Oil by Malaysia’s Kulim in September 2013. The Malaysian company, which already owned 48.97% of the PNG entity, wanted to raise its stake to 68.97%. The PNG Securities Commission, which enforces the code, said that the transaction violated the national interest test. In a letter to Kulim, the PNG Securities Commission wrote that the transaction would reduce liquidity in the shares, reduce local ownership and increase the chance of a full takeover, and that it could lead to job losses at one of the country’s largest employers.

If the takeover had gone through, New Britain Palm Oil would have had fewer than 300 local shareholders, would have had to delist from the local exchange and may have been forced off the London Stock Exchange. Critics question the decision and its timing. They say that the introduction of the amendment and its rapid use in a deal that may have been scuttled anyhow on commercial grounds suggests that PNG’s national interest test may not be exactly like those found in other countries.

“Simply introducing a national interest test on foreign takeovers, that itself I think is not that controversial – a number of other countries have a similar provision. But what is worrying is the context in which it occurred, which is that there was already a takeover offer on the table,” Stephen Howes, the director of the Development Policy Centre at the Australian National University, was quoted saying in an ABC news article published in October 2013.