Tax holidays worrisome

By MALUM NALU
GENEROUS tax concessions given to mining and gas companies are contributing to low government revenue per capita, according to Asian Development Bank country economist Aaron Batten.
He said the average effective tax on PNG’s mining, oil and gas companies was now on the low side of fiscal regimes across the world
“Three main factors contribute to PNG’s low government revenue per capita,” Batten said.
“Firstly, only 5% of the population is engaged in formal private sector employment, which gives the government a small income tax base.
“Secondly, as a result of tax concessions and the abandonment of the additional mining profits tax in 2003, the average effective tax on PNG’s mining, oil and gas companies is now on the low side of fiscal regimes across the world.
“The recently-opened Ramu nickel and cobalt mine has a 10-year tax holiday before it will contribute to national revenue.
“Many other similarly beneficial concessions have been made to firms across the sector.
“Thirdly, PNG suffers from poor tax compliance and enforcement.
“The PNG tax office lacks the manpower and resources to effectively pursue individuals, firms and industries it suspects of not paying full tax obligations.”
Batten said contrary to some public expectations – spurred on by LNG and election rhetoric – the new government would have to manage a period of much slower growth in government revenue.
“Later this year, the Government will finalise its third medium term fiscal strategy (MTFS 2013-17), which will play an important role in establishing the fiscal rules required to balance PNG’s large social and physical infrastructure investment needs with maintaining the macroeconomic stability that has underpinned the last decade of economic growth,” he said.
“However, maturing mining and oil operations will contribute to a 5% to 10% decline in real government revenue between now and 2014.
“The addition of LNG revenues in 2015 will help, but as a result of generous taxation concessions, these revenues will not peak until after 2020.
“Current expectations are that there will be zero net savings made within the newly created Sovereign Wealth Fund during the next five-year MTFS period.
“Adding to this fiscal challenge is the already low level of revenue per capita the PNG government is able to generate – which at US$650 per capita is amongst the lowest in the South Pacific.
“To put this in perspective, if revenues expected at the projected peak of LNG production in 2028 were added to the 2011 national budget, PNG government revenue per capita would still be below that of Tonga, Samoa and Fiji.”
 Batten said in addition to addressing long standing issues of expenditure quality, the incoming PNG government would  have to manage a growing need for fiscal austerity.
“Expenditures will be usefully focused on the rehabilitation of existing service delivery infrastructure, rather than the creation of new assets, which may further undermine the ability of the state to fund recurrent maintenance,” he said.
“Strengthening revenue compliance and reviewing resource sector taxation arrangements would help to alleviate some fiscal pressures over the medium term.”
“Improving the inclusiveness of economic growth over the next decade will require re-invigoration of the microeconomic reform agenda to strengthen competition, lower barriers to new business, and stimulate growth in the non-mineral economy.
“To complement these efforts, there must also be a renewed effort to improve the quality of service delivery by SOE’s through the creation of more accountable, performance orientated, management structures, and greater private sector participation.”