Corporate income tax down: Study
CORPORATE income tax was significantly down on the original 2020 Budget estimate compared to the previous year, according to a report by Deloitte.
It blamed the downturn on the adverse implications of the Covid-19 pandemic on business profitability, which should extend into 2021, given that the 2020 income will be reported in that year.
The report said, however, that the Internal Revenue Commission (IRC) predicted an increase in 2021 by focusing on audits and compliance checks.
The decline in oil and gas prices, the closure of the Porgera mine and the temporary closure of the Ok Tedi mine due to the pandemic significantly impacted collections from the mining and petroleum sectors.
Forecasts are based on Porgera resuming production around July 2021.
Corporate tax losses
The 2020 Budget changes shortened the loss carry forward period from 20 years to seven years (and from unlimited to 20 years for resource operations).
However, the legislative amendments created some confusion as to whether the shortened year count was to be applied prospectively (from Jan 1 2019) or retrospectively (from the year the loss was incurred).
While it is understood that the policy was for the change to be prospective, and this is how the changes have been interpreted by the IRC, the legislation had not been amended to reflect this.
The seven-year tax loss carry-forward period is now clarified to apply from Jan 1, 2019, such that losses available at that date may be carried forward up to 7 years from Jan 1, 2019.
Losses can continue to expire under the old 20 year rule during that period.
This change remains unhelpful for resource operations, given it does not specify that such losses may be carried forward 20-years from Jan 1, 2019.
Provisional tax payments
Provisional tax payment dates were previously set regardless of the accounting year end for taxpayers.
This complicated matters for taxpayers who had a substituted accounting period year-end different to the default Dec 31.
In the 2020 Budget, provisional tax payment dates were amended to change the dates to 90 days, 180 days and 270 days from the year end.
However, these dates were not comparable to existing Dec 31 year-end payment dates (being a month earlier) and have not been enforced in 2020.
The payment dates have now been amended to:
- First instalment – 120 days after the end of the preceding year;
- Second instalment – 210 days after the end of the preceding year; and,
- Third instalment – 300 days after the end of the preceding year.
The changes do not take account of long or short months so the payment date may not correspond with the month end.
Changes are effective from Jan 1, 2020, meaning the IRC will be required to clarify that penalties will not be imposed for dates already passed, should it be earlier for a taxpayer with a SAP.
Anti-avoidance measures
The 2021 Budget introduces anti-avoidances measures to discourage employees and employers from converting employment relationships into independent contractor arrangements and thereby falling within the small business tax regime (rather than salary and wages tax).
The new rules outline conditions that must be met before an independent contractor will be treated as such.
Where one of these tests is not met the contractor must be treated like an employee, subject to salary and wages tax.
In a positive step, the tests pull back from the initial anti-avoidance proposals circulated earlier in the year which were almost impossible to satisfy.
The measures codify what had essentially been the common law tests with respect to distinguishing between an employee and independent contractor.
This is effective from the date to be specified in the National Gazette.
Small business taxes
The 2020 Budget announced the introduction of a simpler tax regime for individuals conducting business as sole traders.
The intention is to encourage them to enter the formal tax regime.
While the small business tax still only applies to individuals, there have been some changes to the thresholds and tax amounts:
lSole traders with turnover less than K60,000 will now pay a fixed annual amount of K250; and,
lA sole trader with annual turnover of K60,000 or more will now pay a small business tax of K62.50 plus 2 per cent of turnover above K15,000 per quarter (March, June, September and December).
Exclusions for who can be a sole trader subject to small business tax remain.
For instance, they cannot provide professional services or be registered or required to be registered for GST (with the GST registration threshold being an annual turnover or K250,000).
These changes will come into effect from a date to be specified in the National Gazette.
Prescribed royalty withholding tax (PRWT)
Prescribed royalty payments are specified payments to or on behalf of customary landowners.
At present payments are directly paid by the developer to the relevant regulator, who then makes the payments to landowners and the PRWT to the IRC. Given this chain can prolong the payment to IRC, the 2021 Budget now amends the legislation to mandate developers to directly pay the five per cent PRWT to IRC.
Problematically this is stated to be effective from Jan 1, 2020.
Customs
Current penalty fees and imprisonment terms of importers, exporters, brokers, and travelling passengers for offences under the Customs Act are increased to enhance compliance. There are new specific penalty provisions for the smuggling of tobacco products introduced.
The increases in penalties are stated to be designed to increase compliance with Customs Act requirements.
Changes are effective from Jan 1, 2021.
The Customs Counter Clearance threshold is also to be increased from K1,000 to K5,000 to encourage SMEs and individuals to declare goods.
Excise
Twenty per cent excise duty has been introduced on hybrid vehicles, including electric vehicles.
Previously, these vehicles had no tariff item.
The rate of 20 per cent is the same as that applied to combustion engine vehicles.
Changes are effective from Jan 1, 2021. It was also confirmed that UHT Milk should be duty free.