The challenges businesses face

Institute of National Affairs director PAUL BARKER comments on the recent revelation by Internal Revenue Commission on the under-reporting of taxes worth K18 billion by 127 companies.

EVERY business has an expectation to break even at the least in order to stay operational and an aspiration, indeed obligation, to seek to make a profit for its owners, be they a private or public company or a State-owned enterprise.
Economist and executive director of the Institute of National Affairs Paul Barker commented on the recent revelation by the Internal Revenue Commission (IRC) on the under-reporting of taxes worth K18 billion by 127 companies.
Barker said profitability was required to provide a return on capital, and to enable future investment to occur, and without that motive, clearly locally-owned or foreign-owned businesses would invest their money in other activities, perhaps in other countries.
“Papua New Guinea is generally an expensive place to do business,” he said.
“With relatively high costs of transport and communications, utilities and services, such as power and telecommunications, and the need often to provide costly additional power, in the form of back-up generators and expensive extra security.
“The corporate tax rates are relatively high by global standards, where rates have tended to be coming down, while the benefits from those taxes are limited, with public goods provided by the State, being generally of a poor standard, including law and order and basic infrastructure.”
Barker said businesses had a wide range of taxes and related payments to make to the State, or collect for the State, including group tax on wages paid, corporate income tax, goods and services tax (GST) on sales of goods which was largely recoverable, import and in some cases, export taxes, as well as license or permit fees, royalties, levies and other user charges, according to the nature of the business.
“Businesses have a duty to minimise the amount of tax they pay, but are obliged to pay at the legally required rate,” he said.
“Tax evasion is illegal, where companies are in breach of the tax rules in avoiding paying their rightful contribution of tax.
“Tax avoidance is not illegal, where companies are minimising their tax payments, within the law.
“It may be considered unethical by many, but companies are not required to pay more than they should, and their managers and directors will not be rewarded if they pay more than they must and fail to make profits, especially if they are also going to pay for various public goods themselves.
“If there are major gaps in the payment of what the State considers proper tax payments, but are not legally required to be paid, because of some weaknesses in the tax law, it is the obligation of the State to plug those loopholes.”

Barker said big areas where many countries felt they had missed out on revenue was with multinational companies registered in a low tax country, but providing services globally, and earning good money from all those countries, including the technology giants, many countries and groups of countries, like the European Union, are now going to court to try and secured legitimate tax income from these companies.
“The recent exposure of the Panama Papers revealed something of the level of offshore registration of businesses and assets, some legal and illegal, seeking to avoid tax obligations in their home countries,” he said.
“The extractive industries transparency initiative (EITI) process in the extractive industries is a mechanism to try increase the level of awareness of revenues, tax obligations and actual transfers to the state by corporations, reduce the level of tax avoidance, enhance sustainable revenue and improve the competitive nature of business administration and awarding of licenses and contracts in member countries.
“A decade ago, corporate tax revenue from the extractive industries in PNG was about K1.5 billion, but with low commodity prices and circumstances, however 2016 corporate tax revenue from the sector had fallen to below K90 million, despite the industry having grown considerably in scale and the gold price remaining firm, and even growing.”
Barker said taxes on wages and salaries far exceeded the tax on company profits which partly reflected the maturity of the operations, commodity prices, and factors such as major reinvestment, but also the tax rules that allow advanced depreciation or, in the case of Ramu nickel, an extended tax holiday.
“Nevertheless it highlights issues and the need for improved oversight and appropriate revenue conditions, including to ensure earlier revenue streams from new projects. It also highlights the need for more transparent revenue flows through the state-owned enterprises, such as Kumul Petroleum and Kumul Minerals.”
Barker said the K18 billion revealed by the IRC seemed extraordinarily large, and clearly covered some extended period.
“It also highlights the weaknesses in data and revenue management by the IRC, but also the reticence of many businesses to register for tax, or to fully pay their tax dues,” he said.
“Many PNG and even overseas-owned and operated businesses, both in the cities, but also in provincial towns and rural areas, are failing to pay payroll tax, GST or corporate tax, and are operating as though they’re informal sector operators, even though they clearly should be registered and are making good money.
“They might say they’re paying taxes of a sort, to officials, criminals and others to turn a blind eye, but they’re not paying to the State, and are unfairly competing with other firms that are paying their fair taxes, they’re also generally not applying minimum wages or superannuation, or complying with other legal obligations.”
Barker said the tax office needed its capacity to be strongly reinforced to be able to collect taxes due, including from businesses operating in rural and urban areas, from renewable resource operators which haven’t declared any profits, yet have clearly been making very good money over many years.
“Generally, agriculture doesn’t make much money, but does generate major employment and needs the support from the state to do so, but the purpose of the extractive sector (and resource utilisation) is substantially to generate the revenue needed by the state to provide core public goods like law and order, infrastructure, education and health,” he said.
“If it’s failing to do that adequately there is clearly something remiss.”
Barker said the solution for most businesses, including for shifting informal sector operators into the formal sector, is not to raise tax levels, but generally to make tax levels lower and more internationally competitive.
“At the same time to ensure that everyone pays, and that the incentive to avoid or particularly to evade tax is minimised but the chances of being caught are raised, along with the penalties,” he said.
“Generally, automating and self-assessing is best and minimising the IRC tasks, and enables the tax office to concentrate efforts more on oversight and tax audits, including field inspections to check company books and operations.
“Cooperation between government agencies is critical and sharing as far as possible, within the bounds of the tax laws.
“Improving the benefits to tax payers, in terms of improved government accountability over the use of tax revenue, in terms of improved and sustained basic infrastructure, also encourages tax payments, not least as companies then need to pay less on back-up systems of generators, early replacing parts of vehicles and increased security costs.”