July 2020

Regional focus by IRC

Recently the Commissioner General Mr Sam Koim has been actively engaging with provincial governors and leaders in relation to extending the reach of the IRC. The campaign to re-open or establish regional offices across the highlands is in support of plans to broaden the tax base and increase the number of taxpayers. The Commissioner General has also taken the opportunity to raise awareness of the basis for the sharing of tax revenues throughout PNG, with a particular focus on GST and its link to the location of business activity. 

Through undertaking regional visits, the Commissioner General has revitalised a conversation in relation to how revenue is collected in PNG and how it is shared.  Efforts to broaden the tax base should be applauded, and a better understanding of how tax revenue is shared among regions is also important. However, the quality of the administration of the GST system, the validity of exchange of data between IRC offices and better communication on the mechanism for taxpayers with regional operations will be required in order to ensure that the system operates smoothly and as intended. 

2020 Budget legislation gazetted

The bills passed in December 2019 in order to implement the tax changes announced in the 2020 budget have finally been certified and gazetted recently. This final step essentially includes the documents in the official legislative record. Unfortunately, as we indicated in our December 2019 Pulse and our Budget commentary a number of technical errors or inconsistencies were contained in the texts of the original bills. These included:

• the rules surrounding the use of carried forward losses and whether the original intent of the provisions were reflected in the language of the bills which have subsequently become law

• uncertainty with respect to the application of changes to the thin capitalisation provisions for resource projects, potentially introducing retrospectivity of application

• the aim of aligning the dates for provisional tax and advance payments tax having the effect of bringing these forward

• an error creating a duplication in the numbering of a section of the Act (with the same section number referencing both fiscal stability for resource projects and the introduction of the SME tax regime). 

In February 2020 Pulse we highlighted efforts at pressing ahead with technical fixes and the intent of the IRC to issue further interpretative guidance for taxpayers that were potentially impacted. However, additional guidance has not been announced and with the Acts now certified, it would be an unusual step for the IRC to provide guidance that may essentially contradict the legislation in place. 

In the shadows of the potential implementation of a new Income Tax Act, which currently is unclear on the status of any transitional provisions, the result is that, for a number of taxpayers, significant uncertainty in their position with respect to the law of the land will continue. While this may not have a widespread immediate tax impact, it does highlight the need for more robust processes associated with the introduction of legislation in order to provide appropriate legal structures for taxpayers to operate. For taxpayers that believe they may be impacted we recommend that they reconsider their current compliance process in order to mitigate potential tax risks. 

Taxpayer Services Strategic Project

As an acknowledgement of the importance for the IRC of collaborative efforts at tax compliance, the commission has instigated a Taxpayer Service Strategy project team with the goal of improving the level of service the IRC provides to taxpayers - and consequently improving on the levels of voluntary compliance. The project team began through a series of meetings with taxpayers and tax agents over a number of days in June 2020 and has proceeded to the submission of an internal report to IRC department heads. The IRC announced that actions to implement the findings from the project team will continue over the coming years. The findings of the project team and the details of initiatives have not been released to taxpayers, however, continued efforts to enhance the level of service to taxpayers will no doubt be welcomed by taxpayers. 

Income Tax Rewrite in Focus: Fixed assets

In a further commentary update to our February 2020 Special Edition Pulse, this month we further explore an area in which the proposed rewritten Income Tax Act (the Proposed Act) appears to anticipate policy shifts, rather than a mere simplification of the Act and which will impact a significant number of taxpayers. The new act proposes a number of changes to the treatment of fixed assets and depreciation. Generally, the impact will be to simplify the tax treatment of depreciable assets, which may be welcomed by many taxpayers. However, it will require a review by most taxpayers upon implementation (as there is a lack of transitional rules), and may require accounting system changes. The changes include:

• Straight line depreciation has replaced diminishing value method as the default methodology for tax purposes - although both methods continue to be available through an election.

• Depreciation rates have been updated to five categories, one of which is “business intangibles”, with straight line rates applicable from 5-25% for the other four categories. Arguably the range of assets described as indicative for each category remains limited in detail. 

• No accelerated depreciation is anticipated under the new act under any circumstances.

• There is no equivalent of the balancing charge adjustment currently allowed under S73 (3) to reduce the depreciable cost of replacement assets in the case of a gain on disposal.

• More prescriptive rules on the deductibility or capitalisation for depreciation of repairs are included.

If you would like to know more about any of these developments or have any other questions, please get in touch with your usual PwC contact.