PNG’s tax on monopolists is counterproductive

Author: Maholopa Laveil, Lowy Institute

The Papua New Guinea (PNG) government continues to punish the non-competitive sectors within its economy. In 2022, the government introduced a ‘dominant player’ levy and, in 2023, replaced the levy by raising the corporate income tax rate (CIT) on banks from 30 to 45 per cent.

An overhang of struggling revenues from the pandemic and the perceived political popularity of targeting large companies are likely to have influenced the decision to tax large companies. A former Australian Department of Foreign Affairs and Trade senior official and current advisor to the PNG Treasurer is said to have advocated for the levy.

Initially, two non-competitive sectors were targeted. In the telecommunications sector, Digicel holds 91 per cent of the market share for unique mobile subscribers. In the banking sector, the Bank of South Pacific (BSP) holds a 65 per cent market share in outstanding loans. Kina Bank has a 22 per cent market share and the Australia and New Zealand Banking Group (ANZ) and Westpac shares comprise the remainder. BSP is listed on the Australian Stock Exchange as is Kina Bank’s parent company Kina Securities. Westpac and ANZ are Australian banks.

The dominant player levy was a flat-rate levy applied to any firm that had more than 40 per cent market share and was deemed to be using this advantage to generate excessive profits. Under the levy, BSP was required to pay 190 million kina (US$53.9 million) and 350 million kina (US$99.4 million). Combined, the levy amounted to a paltry 4.3 per cent of tax revenue.

In place of the dominant player levy, all other banks, along with BSP, are now required to pay a higher CIT.

The PNG government sparing Digicel in 2023 is consistent with its maintenance of Australia–PNG bilateral relations. In 2022, Australian telecommunications company Telstra acquired Digicel’s arm in the Pacific, in a deal heavily subsidised by the Australian government. Digicel’s Pacific arm covers operations in six Pacific countries — PNG, Fiji, Nauru, Samoa, Tonga and Vanuatu. Telstra will eventually own Digicel’s Pacific operations on a purchase worth US$1.4 billion, of which the Australian government paid US$1.1 billion.

For PNG, even without the levy, the prices of calls, internet data and other phone services are some of the highest in the world. Internet prices have not fallen despite the launch of the Australian-funded Coral Sea Cable in 2019. Stubborn high prices reflect Digicel’s monopoly at the retail end. This monopoly has also enabled Digicel to introduce predatory loan schemes for phone credits which have not been subject to regulation.

While Digicel escapes taxes, the banks will pay the price. PNG’s 2023 budget has blamed limited competition in the banking sector for the high lending rates and low interest rates on deposits facing bank customers, known as the credit spread. PNG has one of the highest credit spreads in the region, with the weighted average interest rate on deposits in 2022 at just 0.2 per cent compared to the weighted average interest rate on loans at 8 per cent.

But a higher tax on the banks will not reduce credit spread, only raise fees for customers. The tax hike only raises government revenue by raising an additional US$68.1 million. Of this, BSP is expected to pay US$53.9 million, Kina Bank will pay US$11.3 million, and ANZ and Westpac will pay the remaining US$2.8 million. Compared to the dominant player levy, this tax hike contributes a low 1.6 per cent of tax revenue.

BSP is unique. The PNG government is a 25 per cent shareholder and BSP is the government’s largest domestic creditor. These connections to the government have done little to shield BSP, which has already announced lower profits for its shareholders — though the government is compensated through the levy and higher tax rate.

Kina Bank is also feeling the heat and has announced it will abandon plans to open new branches nationwide. It will also suspend its small and medium-sized business and home loan concession interest-rate programmes. The tax further hampers financial inclusion efforts in PNG, where up to 80 per cent of the population is unbanked.

A higher tax adds to other banking constraints in PNG. An International Monetary Fund report found that these constraints include the ‘country’s level of income and economic development, relatively skewed income distribution, a lack of competition in the banking sector and weak contract enforcement’. Constraints also incorporate ‘customary land ownership that impedes the use of land as collateral, a large rural population with limited access to urban centres and banking services, and the large informal sector’.

There is good news. The higher CIT has not deterred new investors from entering the banking sector, with subsidiaries of two domestic financial institutions, TISA (Teachers Savings and Loans) , and Credit Corporation awarded provisional commercial bank licenses in December last year, and in February 2023 respectively.

What is worrying is the ad hoc nature of PNG’s fiscal regime. These new and potentially temporary taxes introduce uncertainty for businesses and potential investors when they make decisions on investment and capital expenditure. Instead of more taxes on non-competitive sectors, the government would do better to encourage competition by removing barriers to entry and streamlining license approval processes.

Maholopa Laveil is the FDC Pacific Fellow at the Lowy Institute, currently seconded from the University of Papua New Guinea.

The post PNG’s tax on monopolists is counterproductive first appeared on East Asia Forum.

from East Asia Forum