PAUL FLANAGAN | PNG Economics | Edited
CANBERRA – Papua New Guinea gave a tax subsidy of at least K504.3 million to PNG LNG in 2017. I nearly choked on my breakfast when I came across this number in the 2019 budget.
I remember the difficulties I had explaining the low tax revenues received from the PNG LNG project in a major report I prepared earlier this year. PNG’s Institute of National Affairs had similar difficulties.
Now the quantification of these tax subsidies by the PNG Treasury and the Internal Revenue Commission helps explain some of the gap between the promise of PNG LNG and its realities.
It was a timely reminder of the enormous importance of getting a good return for PNG from its resources.
At about the same time I was choking on the K504.3 million, PNG was signing another deal for another major LNG project.
On the morning before the start of the APEC CEO summit, the government signed a memorandum of understanding with Total, Oil Search and Exxon Mobil for a new Papua LNG project.
Without having access to the details of the MOU, my great hope is that it will define much better returns than the PNG LNG deal.
There is no doubt that the PNG prime minister and treasurer want a better deal. And it is positive that the agreement so far is only an MOU and not the final investment decision. There were fears that an ‘APEC announceable’ could have rushed PNG into another poor deal.
An analysis of the tax expenditure of the PNG LNG project is useful in highlighting how even the smallest detail in negotiations can have enormous impacts.
For example, the thin capitalisation rules allow resource companies to have a maximum debt to equity ratio of 3 to 1 for interest deductions, when normal companies have a 2 to 1 limit.
It seems boring and technical, but the cost to the PNG government from this single tax incentive was K170.1 million in 2017.
The PNG LNG resource companies are also exempt from “interest withholding tax”. Once again, it sounds technical and not significant. But that amount in 2017 was K304.6 million – half the entire cost of tuition-fee free education for a single tax concession on a single project.
PNG Treasury analysis included in the 2019 budget also highlights that the K504.3 million tax subsidy in 2017 is the absolute minimum estimate.
The report goes through 10 possible tax incentives and admits it only had enough information to cover four items with a fifth (infrastructure tax credits) covered elsewhere.
The most significant of the incentives not costed would be the “dividend withholding tax exemption” under which PNG project partners do not have to pay the normal dividend with-holding tax of 15%.
A back of the envelope calculation gives a likely cost of around K600 million for this. Adding this to the earlier K500 million figure implies tax revenue losses to the government of over K1 billion per year from the PNG LNG project.
The costs of providing tax incentives needs to be understood: forgoing revenue means forgoing funding to meet PNG’s development challenges.
I wish PNG negotiators all the best in securing a better financial deal on future LNG and other resource projects.
If it does, I won’t have trouble eating my K500 million breakfast next time.