2005 Papua New Guinea National Budget

Transcription

1 2005 Papua New Guinea National Budget

2 16 November 2004 PWC BUDGET COMMENTARY The Minister for Finance and Treasury, the Honourable Bart Philemon, MP, today handed down the 2005 National Budget. Executive summary The theme of the 2005 National Budget Building the Economy Through Sustained Reform continues the Restructuring for Recovery and Development policies underpinning the 2004 National Budget. Key components include: A budget deficit path that continues to track downwards resulting in deficits of no more than 1.0% of GDP in 2005 with a view to a balanced budget in the medium term. No new taxes or increases in existing taxes and no additional government debt in the medium term. Focus government expenditure on high priority programs (transport infrastructure rehabilitation and maintenance, basic education, primary health care, law and justice, and programs promoting export growth and income earning opportunities in rural areas). Continuation of the public sector rightsizing program with the objective of controlling public sector salary costs. Increase the state s contribution to Public Officers Superannuation Fund consistent with the transition to a fully funded superannuation scheme. Government to limit participation in the economy to areas where there is a clear rationale for public intervention. Move towards improvements in public sector financial transparency by improved budget strategy and processes and public finance management Budget Commentary (1)

3 Key budget assumptions The major assumptions on which the budget has been based are summarised in the table below STATE OF THE ECONOMY 2000 act act act est Proj 2005 Proj Avge ( ) Real GDP Growth (%) Agriculture (%) Mining (%) Petroleum (%) Non-mining GDP Growth (%) Inflation (year average) (%) * Oil Price (US$ per barrel) * Gold Price (US$ per ounce) * Interest rates (182 day T-Bill) (average for year) (%) Courtesy: National Statistical Office, IMF and Treasury Department * Actual * Continuing challenges The 2005 budget has been delivered in the context of an improving economy and seeks to build on these improvements. The improvements in the economy need to be translated into real and sustainable improvements in living standards for all Papua New Guineans. The government sees this budget as being consistent with the Medium Term Fiscal Framework, which requires responsible and sustainable fiscal management. Further, the budget is heavily guided by the Medium Term Development Strategy which has three main roles: 1. To provide overarching development strategy for Papua New Guinea; 2. To provide the policy and expenditure framework for the implementation of the Agenda for Recovery and Development; and 3. To help strengthen the public expenditure management framework in Papua New Guinea. The 2005 budget continues the expenditure control measures introduced in previous budgets, particularly in the areas of public sector salary and wage costs. High priority programs have been identified and funds have been allocated to these programs in preference to those identified as being of lower priority Budget Commentary (2)

4 Continuing and sustained structural reform The 2004 budget focused on the 4 core reform principles of promotion of good governance, improving economic management, improving public sector performance and removing barriers to investment and economic growth. These are continued in the 2005 budget under the approach of creating an environment that will support private sector growth. This approach has three main elements: 1. Creation of a stable investment climate by: Fiscal management Working towards a balanced budget position in 2008 and improvements to the budgetary process. Public debt management policies Planned reduction in external debt levels over the medium term from 32% of GDP in 2004 to 26% of GDP in 2008 accompanied by the switching of Treasury Bills to Inscribed Stock in the amount of K457 million in Affordable wages policy Continued work by the government to ensure that salary increases are based on increases in productivity as opposed to being based on inflationary factors, reinforced by agreements with groups such as the Public Employees Association, Teaching Service Commission, Papua New Guinea Teachers Association. 2. Provision of an efficient, effective and affordable public sector by: Improved public sector resource allocation This is the focus of the Medium Term Development Strategy. Provincial resource allocation The National Economic and Fiscal Commission is continuing its work to improve the system of intergovernmental fiscal relations. Improved governance and accountability The reforms in this area continue to be guided by the Strategies for Supporting Public Sector Reform Civil service size and payroll reform Implementation of single payroll system in National and Provincial Departments continuing, which has seen the correction of a significant number of payroll anomalies. Improving financial management This covers enhancing the utilisation of existing financial systems, expenditure control, rationalisation of trust accounts, continuing the appointment of financial controllers to manage finances in key areas in the pubic sector and the establishment of district treasuries to maintain Local Level Government Accounts Budget Commentary (3)

5 Enhanced cooperation program This initiative is aimed at improving the capacity of both the public service and the police force. 3. Creation of a competitive and dynamic sector by: Removing impediments to economic growth Reviews of how PNG s economy and legislative environment interacts with the global business environment are being conducted, including the APEC peer review of PNG s individual action plan. The Tariff Reduction Program is continuing and the 2% import levy will be removed as planned. Reviews are also being conducted in the areas of immigration and work permits (including removal of the need for training and localisation plans), removing the Reserved Activity List, streamlining the foreign exchange control system and increasing the efficiency of customs clearances. Privatisation program Through the Independent Public Business Corporation the government is continuing to rehabilitate public enterprises and where appropriate, investigate options for privatising these enterprises. The sale of 51 % of Telikom PNG continues to be reviewed. Financial sector reform A potential financial recovery plan for the Rural Development Bank is being formulated to facilitate lending to small and medium enterprises in both rural and urban areas. The rates of mandatory employer and employee superannuation contributions will increase in 2005 to 7.7% and 5.5% respectively. It is expected that the Insurance Complaints and Disputes Tribunal will be established in Supporting rural growth Existing tax incentives to promote agricultural businesses are being continued in 2005 and the infrastructure tax credit for the agricultural sector will increase from 0.75% to 1.0% in Forestry management will continue to be an area of focus under the World Bank Forestry and Conservation Project Budget Commentary (4)

6 Financing the budget 2005 FINANCING Kina Millions 2003 (act) 2004 (rev) 2005 (proj) Tax revenue and grants 3,650 4,284 4,639 Total expenditure and net lending 3,774 4,129 4,777 Deficit(-) / Surplus(+) % of GDP -1.0% 1.1% -1.0% Net External Financing Concessional Commercial Extraordinary Net Domestic Financing Domestic borrowing Asset sales Other TOTAL Courtesy: Department of Finance and Treasury The Government s total financing requirement for 2005 will be K327.9 million. This consists of the deficit of K137.7 million and net external repayments of K190.2 million. New external commercial borrowing of K14.6 million will be undertaken, offset by amortisation of K20.4 million on old commercial borrowing, leaving a net commercial borrowing surplus of K5.8 million; External commercial borrowings represent the completion of an outstanding loan in relation to Phase One of the Yumi Yet Bridge Project. K936.3 million of new debt is to be raised domestically, of which K608.4 million is required to amortise existing domestic loans leaving net domestic borrowings at K327.9 million. The new domestic borrowing will be done through issuance of at least K757.0 million in Inscribed Stock (including the switching of K457.0 million in Treasury Bills to Inscribed Stock) with the balance in Treasury Bills. No receipts from asset sales are included (and proceeds that become available will be used to retire public debt) Budget Commentary (5)

7 Recurrent and development expenditure The total appropriation for 2005 of K5,793.4 million comprises: Recurrent budget of K2,889.2 million (2004 estimate = K2,763.3 million) Development budget of K1,888.3 million (2004 revised = K1,365.8 million) Amortisation of domestic and external debt amounting to K1,015.9 million (2004 revised = K1,593.5 million) From the recurrent budget, National Departments will receive K1,586.6 million of which 48.4% represents salary and wages and 42.6% represents the purchase of goods and services. Provincial Departments will receive K628.1 million of which 83.6% represents salary and wages and only 10.7% represents the purchase of goods and services. Interest payments and fees will account for K480.5 million or 16.6 % of the recurrent budget. The portion of the National Department and Provincial Department allocations represented by salary and wages has increased slightly over the revised 2004 figures, as has the anticipated interest payments and fees. K1,283.1 million or 68.0% of the development budget is in the form of project grants or donor assisted development programs. Of this Australia is the largest contributor providing over 82.1%, with Japan, EU and New Zealand providing the balance. The Medium Term Development Strategy provides the framework for the development budget. This strategy identifies and addresses 7 expenditure priorities which are reflected in the development budget: 1. Rehabilitation and maintenance of transport infrastructure 2. Basic education 3. Primary and preventative health care 4. HIV/AIDS prevention 5. Development oriented adult education 6. Law and justice 7. Generation of income-earning opportunities. Key Impact Programs within the 2005 development budget are: 1. Transport Infrastructure Rehabilitation and Maintenance Highlands Highway (including infrastructure tax credit) K158 million Other roads and bridges maintenance and rehabilitation K199 million District Road Improvement Program K20 million Budget Commentary (6)

8 2. Export Promotion and Income Earning Opportunities Provincial Economic Impact Program K10 million PNG Gas to Queensland Support K2 million. 3. Public Sector Reform & Governance Enhanced Cooperation Program K503 million. 4. Access to Basic Education and Health Health sector improvement program K20 million Funding for National AIDS Council K10.5 million. INCOME TAX Corporate tax rates There has been no change to the general corporate income tax rate of 30%. Personal tax rates There has been no change to the general personal income tax rates. Management fees 2% limit The Government considers that overseas management fees are often used as a means of tax avoidance. The income tax law currently limits the amount of the deduction to the greater of 10% of assessable income and 15% of allowable deductions other than management fees. Where the taxpayer is a resource company the limit is 2% of operating expenses. It is proposed the limit for all other companies will be reduced to the greater of 2% of assessable income and 2% of allowable deductions other than management fees. The Budget papers discuss this amendment in the context of overseas management fees. However, it is worth noting this amendment will also apply to management fees payable within PNG. The definition of management fee has been extended to include technical fees. This means technical fees will now be subject to management fee withholding tax. Where the company charging the management fee is located in a country with which PNG has a double tax agreement, it is possible the double tax agreement may operate to effectively prevent the Commissioner General from denying a deduction where the arms length management fee exceeds these limits Budget Commentary (7)

9 An amendment has also been included to deem management fees paid overseas by PNG companies to be sourced in PNG. According to the Budget Papers this amendment deals with technical problems with the legislation relating to the treatment of such fees in double tax treaties. However, to the extent the amendment purports to override a double tax agreement the amendment does seem to be effective. Interest income The current exemption for interest paid on an approved long term bond is to be removed. This will apply with effect for securities issued on or after 16 November Agriculture incentives In the 2004 Budget, the Treasurer introduced a number of incentives intended to stimulate investment in the agriculture sector. These initiatives did not include an increase in the tax credit for infrastructure tax credits. In the 2005 Budget, the infrastructure tax credit for the agricultural sector is increased from 0.75% to 1.0%. THE MINING, PETROLEUM AND GAS INDUSTRY In prior years there have been a number of amendments relating to the Mining, Petroleum and Gas Industries. The 2005 Budget contains several amendments which impact these industries. The changes are: The definition of exploration activities has been amended to include the words or minerals. As the law is currently drafted it is arguable a deduction is only allowed for petroleum exploration. This is due to the fact that the legislation introduced in the 2001 Budget was missing these words. PricewaterhouseCoopers was concerned the Internal Revenue Commission would apply a literal interpretation of the law and deny resource companies a deduction for exploration expenditure incurred after 1 January The submission from PricewaterhouseCoopers suggested the amendment should apply from 1 January However, this aspect of the submission has not been adopted in the proposed amendment. Prior to 2001, the Income Tax Act limited the deduction for allowable exploration expenditure (AEE) and allowable capital expenditure (ACE) such that these deductions could not be used to create tax losses. In 2001, the taxation of resource projects was revised to remove this cap. The intent of the amendment was to allow deductions for AEE and ACE deductions to create tax losses in the early years of a project which would then be claimed when income was derived in future years. One of the effects of the amendment is that all deductions for ACE and AEE are claimed by the end of the project. Rather than remain unclaimed, these deductions may now be represented by tax losses. These losses cannot be utilised due to the ring-fencing of the taxation of resource projects Budget Commentary (8)

10 The 2005 Budget introduces amendments to restore the effect of the previous provisions by limiting the maximum deduction for ACE and AEE in any year of income to the amount of income remaining after all other deductions have been made. PricewaterhouseCoopers assisted the resource industry in achieving this amendment through detailed submissions requesting amendment of the Income Tax Act. In the 2002 Budget the infrastructure tax credit scheme was extended to include a tax credit of 1.25% of income in respect of expenditure on the Highlands Highway. This allowed resource companies to incur up to 1.25% of their 2002 assessable income on maintenance of the Highlands Highway over the three years from 2002 to The 2005 Budget renews the 1.25% credit in respect of 2005 assessable income. This will allow resource companies to incur up to 1.25% of their 2005 assessable income on maintenance of the Highlands Highway over the three years from 2005 to Under the current law there is a special tax credit of up to 1.25% of assessable income for expenditure by a gas project company on construction, upgrading or repair of a road listed in the Gas Agreement. The Government considers this credit should not be available until there is a clear commitment to the project. The law will be amended to ensure that from 2005 onwards, gas project companies will be unable to claim or accumulate new credits until commitment to the project occurs. Gas Project tax credits already accumulated will be prioritised to approved expenditure on construction of the Gobe-Samberigi Road. The amalgamation provisions of the income tax law do not specifically set out the consequences of an amalgamation for a company engaged in resource operations. Consequently, there is some doubt whether or not exploration and development costs incurred by mining and petroleum companies are transferred on amalgamation. It is proposed to amend the law to make it clear that these amounts are deductible to the continuing company. It is also proposed to make it clear that entitlements to infrastructure tax credits are also transferred on amalgamation. This issue was raised with the IRC and Treasury by PricewaterhouseCoopers not just in respect of the resource industry but also for other taxpayers potentially affected. The amendments are based on draft legislation prepared by our tax practice. The amendments were intended to ensure the avoidance of doubt which may have existed in the original legislation. However, it was hoped that these amendments would be applicable from the date the amalgamation rules were introduced into the income tax law. It is noted that the Budget papers confirmed the PricewaterhouseCoopers view that there was no tax policy reason for denying the transfer of resource deductions and tax credits to an amalgamated entity Budget Commentary (9)

11 GOODS AND SERVICES TAX When agreement was reached with the provinces on the distribution of GST Revenue, it was determined that: (i) the provinces would receive 60 percent of inland GST collections or an amount equal to their 2003 distribution, whichever was larger; and (ii) the National Government would receive 40 percent of inland GST collections from which any top up payments would be made and would retain 100 percent collections on imports. It was agreed that this formula would apply in 2004 but that the National Economic and Fiscal Council would review the distribution of GST revenues and make recommendations to Government during 2004 on the appropriate distribution for 2005 and future years. It is proposed to amend the Goods and Services Tax Revenue Distribution Act 2003 to extend the existing formula until the end of In the meantime, a working group of Provincial Governors will develop options for a new formula to apply for 2006 and onwards. STAMP DUTIES There are no amendments to the Stamp Duties Act. CUSTOMS, EXCISE AND INDIRECT TAXES Excise duty - alcohol and tobacco The twelve month freeze on excise duty on alcohol and tobacco products will cease on 30 November From 1 December 2004 the scheduled indexation will recommence. Excise rates will be subject to 2.5% increases at six monthly intervals on 1 June and 1 December of each year. Excise duty - bulk petroleum products Due to the start of domestic production of petroleum products, a regulation has been introduced to prescribe when the excise on sales of fuel shipped by coastal freighter to other parts of PNG, is payable. The regulation provides that excise on coastal shipments is payable no later than 20 working days after the shipment of that fuel. Excise duty - other Penalties under the Excise Act have been amended to bring them into line with penalties in other tax laws and to update those penalties to current values Budget Commentary (10)

12 Customs duty The import levy of 2% introduced for all imports in the 2004 Budget will cease on 31 December The duty free allowances for spirits and perfume have been increased from one bottle of spirits to two bottles and from 0.5 litres of perfume to 1.0 litre. A regulation has been introduced to enable the design of the baggage declaration to be more flexible, by giving the power to design the form to the Commissioner General. This may see travellers only completing one form on arrival in PNG in the future. Export tax There have been no changes to export tax. Gaming machine tax There have been no changes to the Gaming Machine Tax. Further information in relation to the 2005 National Budget can be obtained from John Leahy or David Caradus at PricewaterhouseCoopers in Port Moresby. The PNG Budget commentary has been prepared to provide a prompt overview of the general issues raised in the 2005 PNG Budget. It does not cover exhaustively the subjects discussed. When specific issues occur in practice it may be necessary to refer to the laws and regulations and to obtain appropriate professional advice. Whiles every care has been taken in the preparation of this publication, no warranty is given as to the correctness of the information it contains and no liability is accepted for any statement or opinion, nor for any error or omission Budget Commentary (11)

13 For more information on the PNG National Budget contact: In Port Moresby Partner John Leahy Director Nick Rowley Manager Thomas Taberia Partner David Caradus Manager Carl Valentine Manager Priscilla Kwan 6th floor, Credit House Cuthbertson Street Port Moresby Telephone: (675) Facsimile: (675) In Lae Partner Stephen Beach Manager Deven Lodhia 2nd floor, ANZ Haus Central Avenue Lae Telephone: (675) Facsimile: (675) Visit us on the web at *connectedthinking pwc