Practice Statement PS01/2005


1) Deductibility of “management fees” where the provisions of Papua New Guinea’s double taxation agreements apply.

Date of Issue:

2) 2nd December 2005

Date of Effect:

3) Subject to any subsequent alteration or withdrawal, PS 01/2005 applies prospectively from the current year of income (that ended 31 December 2005) and for all future years.


4) It applies to taxpayers who pay management fees, as defined in subsection 4(1) of the Income Tax Act 1959 as amended (the Act), to associated entities offshore. It applies in cases where both the following sets of circumstances exist:

Firstly, that the provisions of either section 68AD or section 155M of the Act may be relevant, and
Secondly, where the offshore associate in receipt of the management fees is a resident for tax purposes of a country with which PNG has a double taxation agreement.


5) This Practice Statement sets out the manner in which the Commissioner General of IRC proposes to administer the particular legislative provisions involved.

6) It is issued due to recent discussions and concerns within the tax accounting profession regarding the issues at stake. A number of firms have indicated they have clients who have a specific interest in IRC’s administrative interpretation of the relevant provisions, for the current and subsequent years of income.

7) The tax laws of Papua New Guinea (PNG) do not presently include provision for any formal public ruling or advanced pricing arrangement products. However, as the administrator of the Act IRC is conscious of the need to give business certainty when they undertake cross border transactions. We are equally aware though of the need to appropriately enforce anti-avoidance provisions in the Act, so that for example the incidence of tax is not artificially shifted to jurisdictions outside of PNG.

8) It has accordingly been decided that a communication product in the form of these Practice Statements should be made available to assist taxpayers and their advisors in such situations. This first Practice Statement [PS] recognizes the need to balance all the considerations noted in the previous paragraph.

Interpretation to be applied

9) Where a current double taxation agreement (DTA) with PNG contains specific provisions which directly cover the issues of transfer pricing, including management fees, IRC will not in all cases automatically apply the limits on deductibility imposed by sections 68AD and 155M of the Act. The procedure set out in the following paragraphs will govern deductibility in such situations.

10) In most DTAs, under either the Business Profits or Associated Enterprises Article, the partner countries have provided for acceptance of the arms length principle. Where that is the case, management fees as defined will not necessarily be limited to the relevant 2% threshold amounts as far as deductibility in PNG is concerned. However, such treatment will be conditional on the relevant taxpayer, who claims the protection of such a DTA, proving in advance to IRC that the expenditure claimed does legitimately reflect an arms length amount.

11) In order for taxpayers to avail themselves of this treatment, IRC will require them to apply, before the end of the year of income during which such expenditure is claimed, for formal approval of the particular management fee structure. That request for approval must be in writing. It must contain full details of the basis for the management fees to be claimed, as well as for the identity and location of the entity to whom they are to be paid.

12) In view of the date of issue of this Practice Statement, a transitional cut-off date for applications will apply in respect of the income year ended 31st December 2005. Where an application to IRC is required, as noted above, affected taxpayers will be given until 31st May 2006 to lodge such requests for advance approval.

13) The application for approval should be directed to the Transfer Pricing Panel, IRC, PO Box 777, Port Moresby, NCD. Failure to apply for approval in advance will result in all claims being reduced, in the first instance, to the relevant 2% threshold figure for deduction purposes.

14) IRC will consider all such applications for approval on their individual merit. We will then advise our decision as to the amount or level of management fees we will accept as being legitimately arms length in nature under the circumstances. Any taxpayer dissatisfied with that decision will still have avenues to dispute it. These would include the normal objection and appeal rights under Part V of the ITA. They may ultimately also request that action be initiated under the provisions of the Mutual Agreement Procedure Article in the relevant DTA.

Authorized by:
Mr. David Sode
Commissioner General of IRC


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