1. Papua New Guinea’s income tax legislation provides the Commissioner General with wide powers, to adjust the taxable income of PNG taxpayers, where he believes that a taxpayer has conducted non-arm’s length dealings, with international related parties.
B. Division 15 of the Income Tax Act
2. Division 15 applies to non-arm’s length dealings under international tax agreements, entered between a PNG entity and foreign entity.
3. Section 197D deems the consideration, in respect of the supply or acquisition of property, to be equal to the arm’s length consideration for “all purposes of the application of the Act” in relation to a taxpayer, if all the following conditions are met:
- a taxpayer has supplied or acquired property under an international agreement; and
- the Commissioner General, having regard to any connection between any two or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement or any two or more of those parties, were not dealing at arm’s length with each other in relation to the supply; and
- consideration for the supply was received or receivable by the taxpayer in respect of the supply but the amount of that consideration was less than arm’s length consideration in respect of the supply; and
- the Commissioner General determines that these provisions should apply in relation to the taxpayer in relation to the supply,
4. Where it is not possible or practicable for the Commissioner General to ascertain the arm’s length consideration, subsection 197D (4) allows him to determine an amount which is deemed to be the arm’s length consideration in respect of the supply of acquisition of the property.
C. Double taxation agreements (“DTAs”)
5. The DTAs entered by Papua New Guinea enshrine the arm’s length principle under the “business profits” and “associated enterprises” articles however these articles do not indicate priorities as to the methods to be used to determine the attribution of profits or an arm’s length price. Therefore, the Commissioner General takes the view that the treaty does not work to restrict the Commissioner General’s power under Division 15. The Commissioner General also takes the view that there is no inconsistency between the domestic tax provisions and DTA’s.
D. Documentation requirement
6. There is no statutory requirement prescribed under the act to prepare and maintain transfer pricing documentation. Rather, the general requirement of the Act that the taxpayer maintains proper records applies.
7. Sections 364, 365 and 366 of the Income Tax Act deal comprehensively with the information and documents that taxpayer is required to maintain and the IRC’s power to access such information and documents.
8. The Commissioner may require the taxpayer or any other person to produce any documents for examination which he considers necessary for the purpose of obtaining full information in respect of his income.
9. It is in the taxpayer’s best interest to document how transfer prices have been determined, since adequate documentation is the best way to demonstrate that transfer prices are consistent with the arm’s length principle, as required by Division 15.
E. Practice Statement PS01/2005
10. This practice statement applies with effect from 1 December 2006 in relation to the payment of management fees by a PNG entity to another associated entity located in a treaty country. The statement provides that where under the Business Profits or Associated Enterprises Article, the partner countries have provided for acceptance of the arm’s length principle, management fees will not necessarily be limited to the statutory limit (currently 2%). However, such treatment will be conditional on the relevant taxpayer, who claims the protection of such a DTA, proving in advance to the IRC that the expenditure claimed does legitimately reflect an arm’s length amount. However, the practice statement does not suggest any methodology to be applied for determining the arm’s length consideration.
F. Transfer Pricing Taxation Circular No.2011/2
11. The IRC transfer pricing circular goes one step further than the practice statement to apply to all types of non-arm’s length dealing. It reiterates the Commissioner’s power of determination and prescribes the acceptable method of determining an arm’s length consideration. These methods are fully consistent with the OECD guideline. The circular also highlights the importance of transfer pricing documentation.
G. Minimum annual compliance requirement
12. Every company which carry our more than PGK100, 000 in related party dealings (excluding capital value of loans) or more than PGK2 million, in related party loans or advances, is required to provide the details of international dealings by completing a separate schedule. The transactions should be carried out using one of the OECD’s approved pricing methodology or any other acceptable basis. Where a taxpayer indicates that no method is used then the Commissioner is likely to exercise his powers and determine an arm’s length price.
13. Base Erosion Profit Shifting (BEPS) reporting is introduced for transactions from 1 January 2017 in relation to Multi National Enterprises (MNE) Group, whose total consolidated group revenue is equal to or more than K2.3 billion. The PNG entity is generally required to lodge a Country by Country Reporting (CbCR) where it is the ultimate parent entity and in some other cases.