The government aims to use tourism projects to develop rural areas

Tourism – along with mining, fisheries and agriculture – has been identified as a priority investment sector by the government of Papua New Guinea. It is both clean and sustainable, and takes advantage of the natural strengths of the country. It also has the potential to bring income and employment to remote areas of PNG that are in need of development and can help preserve the country’s many cultures and traditions. Because the tourism industry is so attractive and beneficial to the economy, the government has offered a number of incentives in order to encourage investment from overseas.

The PNG Tourism Master Plan, which runs from 2007 to 2017, aims to increase tourism revenues to PGK1.78bn ($723.57m) by 2015, with tourism spending reaching PGK727m ($295.53m) and sector employment increasing by 13,000 jobs. It includes a particular focus on fostering projects in rural areas.

While significant domestic investment has been made in the tourism sector – such as by Steamships Trading Company and by the Constantinou Group – and a number of foreign-owned ventures have been established outside the cities (for example, the Loloata Island Resort), consistent and large-scale development has been largely lacking. With the exception of Intercontinental Hotel Group, no major international chain is currently involved in the country, and, perhaps more troubling, there are no large-scale, integrated, international resort developments.

Tax Environment

Recognising this gap, the country has been working for some time to encourage foreign investment in the tourism sector. Annual budgets going bank to 2005 have included various incentives for tourism operators. This is important, as the country can be an expensive place to do business, especially in terms of tax.

Resident companies are taxed 30% on their worldwide income, while non-resident companies are taxed 48% on their PNG-sourced income. A 17% withholding tax is charged on dividend income, and the country also requires a 12% payment to National Provident Fund and has a 10% goods and services tax. At the personal level, income tax tops out at 42%. Furthermore, paying taxes is not particularly easy in PNG. The country is ranked 106th in the paying taxes category of the World Bank’s 2013 “Doing Business” report. The international body found that 33 payments are required per year, and making these payments takes a combined average of 207 hours.

Incentives

The tourism sector gets all of the usual help from the Investment Promotion Authority (IPA). The IPA provides introductions for foreign business and acts as a one-stop shop for licensing. The Tourism Promotion Authority (TPA), meanwhile, provides its own assistance. The tourism body identifies potential projects, assists with feasibility and pre-feasibility studies, helps in identifying potential business partners and liaises with local authorities to get the right permissions and permits.

In addition to the services provided by the TPA, there are a number of general incentive programmes that may be of interest to investors in tourism. For example, the government’s rural economic development scheme allows for a 10-year income tax exemption for projects that help boost the economies of underdeveloped areas. Approved rural investments can use losses from these projects to offset income in other businesses. Additionally, any business that invests in PNG may double deduct any staff training costs, and this may help tourism-related companies in building up their human resources capacity. The double deduction is applicable to training for both Papua New Guinean and foreign staff and can be completed at facilities both in-country or overseas.

Accelerated Depreciation

Beyond the general incentives provided, tourism investors are also eligible for additional, targeted help. A wide range of tourism-related expenditures receive exceptionally favourable tax treatment. According to the TPA, eligible companies can double deduct expenses related to international promotion campaigns, market research costs, expenses incurred in business related travel outside PNG, public relations expenses, the costs of overseas offices and the cost of bringing travel agents to PNG for promotional purposes.

Tourism investments may also benefit from accelerated depreciation. Initial year depreciation on tourism-related plant or capital equipment, with an effective life of greater than five years, may be increased by 55%, taking the total in year one to 70% of the investment. After that, the item is subject to straight line depreciation of 10% a year. Large-scale tourism projects may receive a 20% income tax rate for a period of 15 years. Small-scale tourism sites being upgraded to large scale may also qualify. Apartment developments are excluded from this programme – all lodging must be temporary in nature. To qualify for the incentives for large-scale projects, construction must have begun after January 2007 but before December 2021, the project must involve at least $7m worth of expenditure and the completed facilities must include at least 100 rooms for the temporary accommodation of people.

Another benefit given to those who qualify for the 20% rate is a tax credit for investments made in infrastructure. The credit, however, is limited to 1.5% of income and only applies to infrastructure that has been approved beforehand for the credit. Some relief is also available for the GST and tariffs, especially for products sold duty free to tourists.

Large Scale

The main areas of interest for the government with respect to tourism are large-scale projects and training facilities, and therefore smaller investments may not receive as much focus from the authorities. It is also important to note that all the incentives have well-defined eligibility guidelines and are subject to change from one budget to the next. While PNG has been consistent in its support of the sector, its policies tend to be specific and its programmes strict. Potential investors cannot simply count on concessional rates, rapid depreciation or tax credits, as investors already in the county point out that taxes, while high, are not the main bottleneck to development. They say that the incentives are good, but infrastructure still needs to be improved and security problems should be addressed.

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The Report: Papua New Guinea 2014

Tourism chapter from The Report: Papua New Guinea 2014

Cover of The Report: Papua New Guinea 2014

The Report

This article is from the Tourism chapter of The Report: Papua New Guinea 2014. Explore other chapters from this report.