Tax Guide for US Expats Living and Working in Papua New Guinea
Who Is Liable For Income Taxes in Papua New Guinea
Residents of Papua New Guinea (PNG) are subject to PNG tax on worldwide income. Nonresidents are subject to tax on PNG-source income only.
PNG’s domestic law contains the following definition of a “resident” or “resident of Papua New Guinea:”
“(a) in relation to a person, other than a company, means a person who resides in Papua New Guinea, and includes a person
(i) whose domicile is in Papua New Guinea, unless the Chief Collector is satisfied that his permanent place of abode is outside Papua New Guinea;
(ii) who has actually been in Papua New Guinea, continuously or intermittently more than one half of the year of income, unless the Chief Collector is satisfied that his usual place of abode is outside Papua New Guinea, and that he does not intend to take up residence in Papua New Guinea; or
(iii) who is a contributor to a prescribed superannuation fund or is the spouse, or a child under 16 years of age, or such a contributor…”
If an individual does not satisfy the above definition, he or she is considered a nonresident of PNG. The residency of an individual may be affected if PNG has entered into a double tax treaty with another relevant country.
The residence tests, and in particular, the overriding “resides” test (see paragraph [a] of the definition above) can be met relatively easily. The PNG Internal Revenue Commission (IRC) typically considers a person who is in PNG for employment purposes for as little as six months to be a resident of PNG for domestic tax purposes. Because PNG has a relatively limited treaty network, the residency test under PNG domestic law can be very important.
Income subject to tax. Taxable income is calculated by subtracting deductible expenses and losses from the assessable income of the taxpayer. The taxability of various types of income is discussed below. For a table outlining the taxability of income items.
Employment income. Salary, wages, allowances and most cash compensation is included in the employee’s assessable income in the year of receipt. Noncash benefits are either taxed in the employee’s hands (often at concessional rates) or are exempt from tax. No specific PNG tax is imposed on employers with respect to the provision of noncash benefits. However, Salary or Wages Tax (SWT) withholding obligations may exist for employers to the extent that employees are taxed on such benefits.
Self-employment and business income. Taxable income from self-employment or from a business is subject to PNG tax. Each partner in a partnership is taxed on his or her share of the partnership’s taxable income.
Directors’ fees. Directors’ fees are included in assessable income as personal earnings and are taxed in the year of receipt.
Dividends. Dividends paid to both residents and nonresidents by a PNG company are subject to a 17% dividend withholding tax. For nonresidents, the rate may be reduced by a treaty.
PNG resident individual taxpayers are not entitled to any credit for underlying corporate taxes paid by resident PNG companies to offset taxes payable on dividends.
Dividends paid, whether directly or indirectly, out of the assessable income of petroleum or gas operations are exempt from dividend withholding tax.
For dividends derived from nonresident sources, a foreign tax credit (FTC) may be allowed for foreign taxes paid. The FTC allowed is equal to the lesser of the foreign tax paid or the amount of PNG tax payable on that income.
Interest, royalties and rental income. Interest, royalties and rental income derived by residents are included in assessable income with a deduction allowed for applicable expenses.
If tax is paid in the foreign country on foreign income, the resident may be able to claim an FTC. If the foreign investment results in a tax loss (that is, deductible expenses exceed assessable income), the tax loss is quarantined and can only be offset against other foreign-source investment income.
Interest paid by residents to nonresident lenders is subject to a final withholding tax of 15% (subject to any reductions available under an applicable double tax treaty).
Accrued foreign company income. The PNG tax law does not currently contain controlled foreign company rules or any similar measures. Accordingly, income or gains accumulating in foreign companies or foreign trusts are typically only taxed on a receipts basis.
Converting transactions denominated in foreign currency into Papua New Guinea kina amounts. Taxpayers are generally required to convert income amounts denominated in foreign currency into Papua New Guinea kina (K) amounts at the time of derivation of the income. Likewise, taxpayers must convert expense amounts into kina amounts at the time of payment.
Realized foreign-exchange gains are assessable and realized foreign-exchange losses are allowable deductions, to the extent they relate to the derivation of income assessable in PNG.
Concessions for individuals on short-term assignments. PNG tax legislation does not contain concessions with respect to living away from home allowances. Any such allowances paid in cash are fully taxable to employees.
Taxation of employer-provided stock and stock options. The PNG tax law does not contain any specific rules that deal with the taxation of employer-provided stock options. However, discounts provided to employees on stock or options acquired under an employee stock scheme are generally taxed as ordinary income in the employees’ hands.
Capital gains and losses. Capital gains are generally not subject to tax in PNG. However, the disposal of a capital asset may be subject to tax to the extent the disposal takes place as part of a profit-making scheme or is part of the ordinary business of the taxpayer.
Deductions
Deductible expenses. Expenses of a capital, private or domestic nature, and expenses incurred in producing exempt income are not deductible. Some employment-related expenses may be deductible. To claim a deduction, an individual must file an income tax return.
Dependent rebates and personal tax offsets. If a dependent’s declaration has been furnished, an individual taxpayer is allowed a rebate for a maximum of three “dependents.” A dependent is a person who is related to the taxpayer, whose separate net income during the year does not exceed K 1,040, and who is one of the following:
- A spouse
- An unmarried child who is less than 16 years old
- A full-time student child over 16 years old but under 25 years old
- An invalid relative
- A parent of the taxpayer or of his or her spouse, if the parent is a resident of PNG
For an individual earning salary or wage income, the rebates are built into the SWT tax rate schedule published each year by the IRC. The following are the fixed amounts of the fortnightly rebates:
- One dependent: K 17.31
- Two dependents: K 28.85
- Three or more dependents: K 40.38
Business deductions. Losses and expenses are generally fully deductible to the extent they are incurred in producing assessable income or are necessarily incurred in carrying on a business for that purpose.
Deductions are allowed for salaries and wages paid to employees, as well as for interest, rent, repairs, commissions and similar expenses incurred in carrying on a business.
Specific records must be kept for all business expenses incurred.
Expenditure for the acquisition or improvement of assets is not deductible, but depreciation deductions may be claimed.
B. Social security taxes
Superannuation/pension contributions. Under the Superannuation (General Provision) Act 2000 (PNG Superannuation Act), a PNG employer with 20 or more employees that has employed an employee for 3 months or more must make a minimum contribution to an Authorised Superannuation Fund (AFS). An AFS is a PNG resident superannuation fund that has been authorized to operate by the Bank of PNG.
Currently, the requirement to make superannuation contributions into an AFS exists only with respect to PNG-citizen employees. Contributions are currently optional for noncitizen employees. Under certain proposals, contributions would be required with respect to noncitizens.
The compulsory employer contribution is 8.4% of an employee’s annual taxable salary. It is also compulsory for PNG-citizen employees to contribute 6% of their annual taxable salary into an AFS from their post-tax salary. This is in addition to the compulsory employer contribution of 8.4%.
A deduction is not available for employers who make contributions to nonresident superannuation funds with respect to non-citizen employees.
Training levy. All businesses that have an annual payroll exceeding K 200,000 are subject to a 2% training levy. The amount payable is reduced by training expenses incurred by the employer for the benefit of PNG-citizen employees. Expenses incurred to train noncitizens are not qualifying training expenses for the purpose of the training levy.
Double tax relief and tax treaties
Foreign tax credit. A foreign tax credit (FTC) may be allowed for foreign taxes paid. The FTC equals the lesser of the foreign tax paid and the amount of PNG tax payable on the relevant income.
For FTC purposes, income derived from treaty and nontreaty countries are treated the same.
Double tax treaties. PNG has entered into double tax treaties with the following countries.
Australia
Fiji
Malaysia
Canada
Germany*
Singapore
China
Korea (South)
United Kingdom
* This treaty has been signed, but it has not yet been ratified.
To learn more about the history, culture, economy and other information about Papua New Guinea
We have been preparing US income tax returns for US Citizens and permanent residents living in Papua New Guinea for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Papua New Guinea and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Papua New Guinea.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email