Residential Status
As a general practice, the Internal Revenue Commission (IRC) considers any person who resides in PNG and satisfies any one or more of the following three statutory tests, to be resident for tax purposes.
Domicile test
An individual is considered "Resident", if he is domiciled in PNG except where his usual place of abode is, outside of PNG. In order to determine habitual abode, IRC generally looks at social and economic ties of the individual and his intention to reside in PNG.
183 days test
An individual is considered "Resident", if his total number of days of stay exceeds one half (183 days), in any calendar year. However, where he can prove that his usual place of above is outside PNG or that, he does not intend to reside in PNG, he will be considered a "Non-resident".
Super contributor test
An individual is considered "Resident", if he is a contributor to prescribed superannuation fund or is a spouse or child, of such a contributor.
Source of Income
Residents generally pay tax on worldwide income, whereas non-residents only pay tax on PNG-sourced income. Refer tabular presentation below for more details:
| Residential Status | Sourced Income | Taxability |
|---|---|---|
| Resident | Taxed in PNG | Taxed in PNG |
| Non- resident | Taxed in PNG | Not Taxed in PNG |
| Dual Resident – Treaty Country | Taxed in PNG | Taxed in PNG only if he is considered PNG resident as per the treaty provisions. |
| Dual Resident -Non- treaty Country | Taxed in PNG | Taxed in PNG |
It is possible that an individual may end up in "dual residencies" situation in relation to PNG and another country. If the other country has a double tax avoidance treaty with PNG, then he can avoid getting taxed twice. If not then it is likely that he may end up in double tax.
Mode of Earnings
An individual may receive his income either in cash or non-cash. Cash income include payments received for services by cash, cheques or direct credit. Non- cash income refers to payment received for services, other than cash.
Cash income are fully taxable unless specifically exempted. Non-cash income is taxed as per IRC prescribed methods. Refer to the table below, for taxability of common salary components:
| Component | Classification | Taxability |
|---|---|---|
| Salary or Wages | Cash | Fully taxed |
| Commission | Cash | Fully taxed |
| Bonus | Cash | Fully taxed |
| Allowances | Cash | Fully taxed except for housing allowance where variation is allowed |
| Lumpsum Gratuity/Super | Cash | Taxed at concession rates |
| Lumpsum Leave | Cash | Concessionally taxed |
| Employer provided accommodation | Non-cash | Taxed at IRC prescribed rates but exempt for some categories |
| Employer provided motor vehicle | Non-cash | Taxed at IRC prescribed rates |
| Mess type meals | Non-cash | Taxed at IRC prescribed rates |
| Employer provided public utilities | Non-cash | Not taxable to employee but not deductible to employer |
| Employer provided domestic servant | Non-cash | Not taxable to employee but not deductible to employer |
| School fees | Non-cash | Exempt |
| Annual leave fare | Non-cash | One return fare exempt |
Kind of Engagement
An individual can either enter into a Contract of Service or, a Contract for Service.
A Contract of Service generally refers to a contract entered as an employee, where the employee- employer relationship can be clearly established. In contrast, a Contract for Service refers to a contract entered as an independent contractor, to achieve a specific result.
The following indicia are recommended by IRC, to distinguish employee and independent contractors:
- The provision of benefits like housing, motor vehicles.
- The degree of control exercised by the employer i.e., presence of Master- Servant relationship
- The location of work
- If the remuneration is dependent of achievement of results
- If the work can be delegated or subcontracted
- Degree of risk assumed by the consultant
- Provision of tools and equipment's
- If the consultant is GST registered
- If the consultant is registered with the Investment Promotion Authority
The tax implications of working as an employee, is different to that of a contractor. If an individual is categorised as an employee, then his employer will be required to deduct Salary or Wages Withholding Tax (SWT), from his payments. If he is categorised as an independent contractor, then the payer may need to withholding other taxes like, Business Income Payment tax, Foreign Contractor Withholding Tax, Management Fee Withholding Tax, etc, as the case may be.
Tax Rates
PNG follows a progressive system of taxation in relation to individuals and this means that, the more you earn, the more you pay. The maximum marginal tax rate applicable is 42%. Refer to the table below:
A resident is entitled to claim a deduction of following dependent rebate from tax calculated above:
1 Dependent = K450.06
2 Dependent = K750.10
3 or more dependents = K1,049.88
The person making the payment will be required to deduct the SWT tax and remit with IRC, as prescribed. At end of year the payer will provide the payee with a Tax Deduction Certificate. There is no obligation on part of the individual subject to SWT, to lodge tax return.
Contributed by: SHISHYA PNG LIMITED, E: [email protected] W: www.shishya.net
