PM: Tax regime bad for oil, gas
Post-Courier (PNG), Copyright 2000
November 10, 2000
THE taxation regime in Papua New Guinea has made it one of the least attractive places to explore for and develop minerals, oil and gas, Prime Minister Sir Mekere Morauta said yesterday.
Sir Mekere said PNG’s fiscal regime for mining was now “severely out of line with countries competing with us for investment dollars’’.
He said the petroleum regime was less out of line but needed rebalancing to help marginal projects, while the regime needed to change to ensure that PNG’s large gas reserves could be developed.
The mining and petroleum industry review was conducted by representatives from the Asian Development Bank for the Bogan committee.
Sir Mekere said the committee’s recommendations for the industry, if implemented would boost incentives for marginal projects, increase the State’s share from very profitable projects, and improve transparency and effectiveness of the regimes, reducing scope for negotiation and discretion.
In the mining industry, the committee recommended that:
* THE mining levy be phased out over four years, beginning at the start of 2002.
* COMPANY income tax be cut from 35 per cent to 30 per cent.
* DIVIDEND withholding tax be cut from 17 per cent to 10 per cent.
* NO change to royalty.
* DEPRECIATION allowances for tax purposes be simplified and made more generous.
* ADDITIONAL profits tax would in future have two tiers: one at 15 per cent rate of return and one at 20 per cent, but the tax rates would be reduced too — 20 per cent for the first tier and 25 per cent for the second.
* EXPLORATION incentives, including a deduction of 25 per cent of expenditure anywhere in PNG against mining income — and the right to carry forward unused deductions.
* AN increase in the loss carry-forward limit from seven years to 20 years.
In the oil sector, the recommended that:
* A cut in petroleum income tax for new projects from 50 to 45 per cent:
* DEPRECIATION and loss carry-forward changes the same as for mining.
* ADDITIONAL profits tax rates the same as for mining (so that APT for petroleum would be at lower rates but more likely to be paid if a project was profitable).
* EXPLORATION incentives — the same as for mining.
Sir Mekere said the most important recommendation in the petroleum sector was to allow oil fields to be included in a gas project as their oil production declines and gas production increased.
“This would be a major incentive to development of gas, which is essential, if the petroleum industry as a whole were to survive,’’ he said.
“For gas, a 30% tax rate is recommended and the application of the same depreciation, additional profits tax and loss carry-forward arrangements as for oil and mining.
“The recommendations mean that the gas sector would receive new exploration incentives, and would benefit enormously from the ability to group together petroleum fields, processing facilities and pipelines within one tax ‘ring fence’.’’
He said that as part of a balanced package with these incentives, the Taxation Review had recommended the additional profit tax should be made the same as for oil and mining.
“The nation would thus share in more of the benefits if the gas project turns out to be bigger and more profitable than first expected,’’ Sir Mekere said.
He said the Bogan committee carefully examined the fiscal terms needed to ensure the PNG Gas project could go ahead.
“I personally am confident that the recommendations create an attractive tax package that will help this project and others in future.’’
Sir Mekere said that consistent with his statement to Parliament on fiscal stability earlier this year, the normal term of the fiscal stability assurance would be 10 years, but account would be taken of a project’s financing period.
However, he said there was also a change to do some general house cleaning.
He said the review had exposed many areas where the existing tax system was not transparent, contained too much scope for discretion by ministers or officials, and invited wasteful negotiation by investors.
“There are too many incentives for tax planning and not enough for profitable exploration, development and production. All this should (and will) change.’’
Sir Mekere said cabinet would be discussing the recommendations next week, and those that were endorsed would be incorporated in the 2001 budget.
This is the first ever comprehensive tax review since independence.