Papua New Guinea’s Extractive Resource Sector: Towards a Policy of Leaner Tax Incentives

This paper reports on a review of tax incentives for the extractive resource sector in Papua New Guinea (PNG) to ascertain whether the incentives are economically beneficial for the country’s economy. A qualitative research approach was used that combined a triangulation of methods to compare tax incentive practices in PNG with that of Indonesia, Malaysia and Australia. A high level of discretion in providing tax incentives outside of legislation was evident in Indonesia and Malaysia, whereas legislated tax incentives for extractive industries are the norm in Australia. In contrast, the PNG government has, until now, provided ad hoc project-specific tax incentives to promote investment and distribute economic activity across the country. The country’s fiscal regime for the extractive sector is also not incorporated in general legislation. The paper explored whether tax incentives are linked to an increase in foreign direct investment (FDI), but no nexus was found between a high discretion for tax incentives and increased FDI. Due to the general lack of transparency in the PNG tax incentive system, it is not possible to ascertain the value of tax incentives. Indeed, given the absence of reliable reports of revenue loss on tax incentives, it is difficult to assess the merits of particular extractive sector tax incentives in the PNG context. PNG’s resource sector is the recipient of unnecessary additional tax incentives. Further support for this conclusion is the literature, which points to resource prospectivity, rather than tax incentives, as the primary motivator for FDI into the extractive industry. We recommend a policy program of leaner tax incentives for the extractive resource sector in PNG. An amendment to the Fiscal Responsibility Act 2006 is necessary for tax expenditure statements to be prepared outside of the national budget.