Tax regime needs reviewing

Business

National Affairs director and economist PAUL BARKER discusses the taxation in the mining, oil and gas sector, personal tax and how to attract investors

IN light of recent political events in the country, Northern Governor Gary Juffa in his congratulatory message to Prime Minister James Marape last week, said the country’s tax regime had to be reviewed.
Economist and Institute of National Affairs director Paul Barker, pictured, discusses taxation in the mining, oil and gas sectors.
Barker said in recent years, revenue to the State has been badly squeezed, with resource revenue having dropped away severely over the past decade.
“For example, mining, oil and gas taxes comprised 40 per cent of total tax revenue (or K2.3 billion) in 2007, by 2011 that was down to 24 per cent although the economy had grown a fair bit in the meantime,” he said.
“But by 2016, it had collapsed to a miserable 1.1 per cent (K92 million) despite major new resource projects having commenced, notably the PNG LNG in 2014 and Ramu Nickel, and with major world-ranked mines operating, like Lihir and Porgera, and gold prices remaining sound.
“By 2018 mining, petroleum and gas taxes had picked up modestly to an estimated 3.6 per cent of total tax revenue.
“So, where has the State secured its revenue in the face of such a collapse in core revenue?
“The answer is personal taxes, goods and services (GST), company taxes from other businesses.
“More recently, mining and petroleum dividends have picked up somewhat, plus by borrowing substantially, largely domestically, but in recent years more internationally ever since 2012.”
Barker said personal income tax rose, as a portion of total tax, from 17 per cent in 2007, to 34 per cent in 2016, slipping back to 31 per cent in 2018.
“GST, which is of course also partly an indirect tax on household income, leapt from 9.5 per cent of total revenue in 2007 to 17 per cent in 2017 and 21 per cent last year.”
Barker said a few resource rich countries such as Saudi Arabia, and a few other countries deemed tax havens, that secure their revenue from other means, for example from gambling, like Monaco, impose low top marginal tax rates: oil-rich Saudi Arabia has a zero income tax rate.
“For example, Singapore has it at 22 per cent, but most countries have a top marginal tax rate ranging from 35 per cent to 62 per cent in the case of Sweden, with countries like the United States at the lower end, at 37 per cent, and others, like Japan at the higher end at 56 per cent, and many, like the United Kingdom, Australia and France on 45 per cent and Germany on 47 per cent.,” he said.
“So, Papua New Guinea is within the international norm, with its top marginal tax rate of 42 per cent,” he said.
Barker said the top marginal rate is paid by very few people in most countries, just a tiny portion of high income earners in PNG’s case for those earning more than K250,000 and in Australia, the US and the UK, for example, the top rate applies on income over US$200,000 (K665,905) or £150,000 (K 561,557), which are all figures well above K600,000.
“So although PNG raised the tax free threshold from K10-12,500 in the last budget, and also the next bracket was also moved slightly up, the higher tax rates of 30-40 per cent all apply at relatively low income levels compared with many other countries, including Australia, notably K20,000 for the 30 per cent rate and below even the threshold for collecting any income tax in many countries.”
Barker said people often confuse the top rates, and assumed these were the rates they were paying on their income, when in fact the lowest part of their income will be zero taxed, and the next portion on 22 per cent and only the higher portions being taxed at the rates over 30 per cent.
“The State does need to earn its revenue from somewhere, and unusually for a so-called resource rich nation, the revenue has not been coming from the extractive sector, thanks to a combination of factors, including concessional fiscal arrangements and deferrals of revenue application on resource projects, particularly in recent decades,” he said.
“PNG also does not have a Sovereign Wealth (or Savings) Fund in place, as have many other resource rich countries, upon which to draw during times of low prices or production.
“PNG also has a very small income tax base, with few formal sector companies paying tax, and few formal sector employees.
“Hence, the drive by Government to roll out GST, partly to draw in revenue from those outside the formal sector, as workers of businesses.
“The recent tax review recommended raising the GST rate to 15 per cent to increase revenue, but also to enable the Government to reduce lower income tax rates, or raise the thresholds further.”
Barker said the relatively high tax rates which apply at relatively low incomes (notably 30 per cent at K20,000) were certainly burdensome on lower income households, especially with the high cost of living, notably for food and rentals, and need to pay for education and health services, even when these were defined as free.
He said reducing those rates or raising the threshold at which they are applied would be desirable, although a higher GST rate would impose a further burden on the same people, raising the price of most goods and services, albeit sharing the burden more widely.
“It is difficult for the Government to make major alterations, without stimulating the overall economy and securing additional revenue from new businesses and employees, catching the tax dodging businesses, many foreign-owned/run (of which there are many, in the major centres and right out into small provincial towns) and unless they ensure that the resource sector, both the extractive and so-called renewable resource industries, including logging and distant water operating fisheries, contribute their fair share,” he said.
“Borrowing more to plug the gap is not the option, as the debt service costs are already burdensome.
“Although, reducing the cost of borrowing, by renegotiating or replacing costly debt with lower cost borrowings is a needed approach, but can only be achieved if the Government can demonstrate sound economic and fiscal management, and the economy is looking sound, with growing economic and employment growth and manageable debt levels.
“All these cannot be achieved overnight, but the Government, working with the private sector, can progress things in the right direction.
“It requires investor confidence and not scaring away investors, but at the same time ensuring reasonable and consistent conditions, which doesn’t include multiple tax concessions which are excessive or out of synch with international norms.
“It also requires cooperation from ordinary citizens, recognising the need to contribute to the state in the form of tax, but in turn expecting or demanding accountability and quality services from their payment.”
Moreover, Barker said it was a nice notion, having very low rates of personal income tax, but unfortunately unrealistic dropping to low levels like 15 per cent or below.