Perspectives

Scrutiny of Withholding Tax Application by IRC

Immediate policy change on reduced rates

The IRC has begun scrutinizing a range of withholding taxes and will launch a review of taxpayer application of the regimes. The IRC announced a policy change regarding the application of non-discrimination articles in treaties, disallowing the automatic application of such to reduce liabilities.

The Foreign Contractor Withholding Tax (FCWT) regime is familiar to most in PNG; foreign contractors are subjected to 12% FCWT (48% non-resident tax rate applied to deemed contract profits of 25%).

Where a foreign contractor decides to lodge an income tax return, FCWT is typically waived and the contractor is treated as a normal corporate taxpayer.

In some instances, taxpayers have upheld that their FCWT liability is reduced to 7.5% by application of non-discrimination articles (NDAs) in tax treaties (on the basis that the resident corporate tax rate of 30% is applied to deemed profits of 25% instead of the non-resident rate of 48%). Many taxpayers received positive confirmation in this regard from the IRC.

The IRC has announced that it will be undertaking a review of adherence to the WHT regimes, with particular focus on FCWT. The initiative has resulted in a number of policy changes. The most controversial being that NDAs will no longer automatically reduce FCWT. 

Scrutiny of Withholding Tax Application by IRC - Tax Alert
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