planning and registering your business in png keynote address at australia png business forum may...

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Planning and Registering your Business in PNG

Australia Papua New Guinea Business Forum, May 2016

Transcript

Good Morning Ladies and Gentlemen

I am sure many of you are aware, the opportunities for doing profitable business in PNG are

plentiful. There are limited expat suppliers, the labour is low cost, technology is improving and

most importantly the Oil & Gas sector is red hot. PNG often presents some unique experiences

to new entrants so if you are here today to explore the opportunity of doing business in PNG,

your time will be well spent in this session.

Prior to commencing business is PNG you need to decide how to operate your business to be

both compliant and tax effective with the laws of your country of origin and within PNG. This is

a formidable task overshadowed only by process of implementing these decisions.

There are principally three forms by which a business may be conducted in PNG and this

morning I will deal with each of these in turn.

Foreign Contractors

Branch

Local PNG Company

Foreign Contractors

The first aspect that I would like to discuss is that of a foreign contractor. Many business

providing services in PNG are subject to tax in PNG under the foreign contractor provisions of

the Income Tax Act.

The foreign contractor provisions apply where a non-resident derives income from a prescribed

contract. The foreign contractor is deemed to have derived that income from a source in Papua

New Guinea and is liable to pay tax on that income in PNG.

Peter Maletz

Partner, Hanrick Curran

Tel: 07 4052 7524; 07 3218 3900

[email protected]

Peter is a Partner at Hanrick Curran, an independent mid-tier Accounting firm with offices in

Brisbane, Cairns, PNG and is part of the world wide Alliott Group network. His 30 years of

business management and accounting expertise is valued by clients across a range of

industries, with extensive experience in hospitality, integrated tourism and mining. He has

acted for numerous resource and tourism companies in Australia, PNG and Asia Pacific region.

Peter is an avid contributor to his client’s strategic plans and has extensive corporate experience

in a Board of Advice role having held executive positions on an International School Board, the

Papua Club, the Port Moresby Chamber of Commerce and as President of the Aust. PNG

Business and Cultural Society. In 2010 Peter was elected to the Executive Committee of Aust.

PNG Business Council, is the current Treasurer and is often invited to speak at Council events on topics of cross border business opportunity.

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“Prescribed contracts” cover fairly broad business activities including the installation, use or

maintenance of substantial equipment in PNG, construction projects, the use for right to use in

PNG of any industrial, commercial or scientific equipment and the provision of professional

services as an Advisor, Consultant or Manager.

Where a foreign contractor has derived income from a prescribed contact the foreign contractor

is deemed to have derived taxable income in an amount equal to 25% of the gross income. As

the rate of income tax imposed on a foreign contractor is 48% of taxable income, the tax

payable by the foreign contractor is 12% of the gross payment.

A foreign contractor can apply to the Commissioner General to lodge an income tax return on

an annual basis, and pay tax on taxable income from the project. Where this approval has been

obtained the foreign contractor will be exempt from having the 12% Foreign Contractors

Withholding Tax deducted from contract payments. Foreign Contractors Withholding Tax is

allowable as a tax credit against foreign income in Australia.

Additionally, a foreign contractor is required to apply for a Tax File Number and lodge this with

the contract.

There is often confusion between the taxation of management fees paid to a non-resident and

the taxation of foreign contractors. Broadly, in practice the management fee (withholding) tax

applies to management fees paid for services rendered outside PNG and the foreign contractor’s

withholding tax is payable in respect of services rendered within PNG.

When management fees are paid by a PNG resident to residents of Australia the management

fee will not be subject to withholding tax where the services are provided from offshore.

This is considered the simpler option, but it won’t suit everyone.

Branch of an Overseas Company

The next method of doing business in PNG which I would like to discuss is the operation

through a branch of an overseas company.

Businesses owned by non-residents operating in PNG largely fall within the foreign contractor

withholding tax positions. However, where a non-resident does not fall within the foreign

contractor provisions, for example because it does not have a prescribed contract, then it will

essentially be taxed like a resident company but will pay tax at 48%. It will have the same

requirements as a resident company in respect of lodging tax returns and liability to GST.

Branch accounts are required to be audited by a registered company Auditor, however there

are certain exemptions available with regard to audit requirements based on the domicile of the

overseas company and/or a size criteria.

Whilst on the surface this doesn’t appear overly attractive, used in the right way, this can be a

very effective cross border business structure.

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Local PNG Company

The third means by which a business can operate in PNG is through a locally incorporated

subsidiary. Companies that are tax residents of Papua New Guinea are taxed at the rate of 30%

and are required to lodge annual returns and register for GST. In addition to the 30% income

tax a locally incorporated company is liable to Dividend Withholding Tax at the rate of 17% on

dividends paid to Shareholders from after tax profits. Accordingly the effective rate of tax

payable by locally incorporated companies after distribution of all after tax profits to

Shareholders is 41.9%.

Local foreign owned companies are required to be audited by virtue of the Companies Act

requirements and must have a local ordinarily resident PNG director.

This structure provides a local presence and allows you to capitalise on all associated benefits.

The Registration Process

I would now like to examine the registration process for each of these options of carrying on

business in Papua New Guinea.

All foreign enterprises i.e. business with more than 50% foreign ownership are required to be

certified with the Investment Promotion Authority. It is illegal to conduct or to carry on business

without certification and heavy penalties can be imposed. It should also be noted that in order

to apply for a Tax Identification Number, register for GST or open a bank account proof of

certification needs to be provided. The IPA has a K2000 filing fee upon application for

certification of an enterprise in PNG. Foreign companies operating as a branch in PNG need to

be registered with the Registrar of Companies as a foreign company.

Likewise companies incorporated in PNG are also required to be registered with the Registrar of

Companies. Annual returns are required to be submitted to the Registrar of Companies in

respect of both locally incorporated and branches of foreign companies on an annual basis.

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Exchange Controls

It is important to mention the exchange control restrictions which operate in PNG through the

administration of the Bank of Papua New Guinea. The authority to approve the exchange

transactions in most cases lies with the authorised dealers i.e. the Banks who in turn report to

the Bank of Papua New Guinea.

Tax clearance certificates are required where certain cumulative remittances of foreign currency

exceed K200,000 in a calendar year. Generally resident companies are not permitted to receive

payments for goods or services in a foreign currency. For exchange control purposes a resident

includes a foreign company operating actively in PNG on a branch basis. In this regard, an

entity is deemed to be operating actively in PNG if there exists some location within the Country

from which the entity engages and intends to continue to engage in economic activities and

transitions on a significant scale. Typically there is no difference between a branch and a PNG

incorporated subsidiary from a foreign exchange control perspective as both are considered to

be residents for exchange control purposes.

Personal Property Securities Register

It is worth mentioning that PNG established a Personal Property Securities Register, operative

from 9 May 2016. This is to operate much the same as the somewhat similar register does in

Australia. Accordingly, where a contract contains retention of title clause, that security interest

needs to be registered under the Personal Property Securities Act. If you fail to register

business assets there is a potential that you risk loss of those assets. This obviously has a

significant impact on doing business in PNG and accordingly advice should be sought,

particularly given the recent introduction of the Register.

Bust a Myth

I have been in the business of helping clients do business in PNG for over 30 years so have

heard all the myths, in closing, let me bust a few of those for you.

“It’s too dangerous to do business in PNG”

FACT: Follow the well beaten expat path.

“The red tape is impossible”

FACT: Use advisers who know the system

“You must have local ownership”

FACT: The reality is, foreign is fine.

I thank you for your attention today and hope that this brief overview of doing business in PNG

provides some assistance in your deliberations.

Author Peter Maletz © Hanrick Curran, May 2016