Transfer Pricing in Papua New Guinea

The legal framework

Papua New Guinea has rewritten its income tax law from the ground up. The Income Tax Act 2025 commenced on 1 January 2026 under section 165(1) and repealed the Income Tax Act 1959 by section 163. Transfer pricing, which had occupied seven prescriptive sections of Division 15 (sections 197A to 197G), now occupies two: section 73 on cross-border transfer pricing and section 74 on documentation.

Section 164(2) preserves the repealed law for earlier tax years. Because the PNG tax year is the calendar year, two regimes run in parallel through 2026: current-year compliance under section 73, and audits and amended assessments for FY2025 and earlier under Division 15 and Taxation Circular 2011/2.

The new standard is conditions-based rather than price-based. Section 73(1) defines arm's length conditions as those reasonably expected between independent persons dealing wholly independently in comparable circumstances, determined by reference to the actual commercial or financial relations and to their form and substance — a marked upgrade on the deemed-consideration mechanics of old section 197D. A transfer pricing arrangement is a cross-border supply or acquisition of goods, services, money, intangibles or an asset between associates, and there is no de minimis. Cross-border is broader than a resident and non-resident pairing: the definition also reaches two residents where the transaction relates to a business carried on through a permanent establishment outside PNG, and two non-residents unless both act through PNG permanent establishments. Associate status comes from section 4, which sets 50 per cent tests for partnerships, for a company and its member, and for two commonly controlled companies — but section 4(4)(c) makes a trust and any person who benefits or may benefit under it associates with no percentage threshold at all, and a de facto test catches anyone expected to act on another's directions, requests, suggestions or wishes.

Three structural features repay attention. Section 73(4) gives the Commissioner General a full non-recognition power on substance-over-form and commercial-rationality grounds, tracking Chapter I of the OECD Guidelines. Section 73(5) deems a permanent establishment and its head office associates and their internal dealings non-arm's-length, with a reciprocity escape in section 73(6); PNG applies the Authorised OECD Approach. Section 75(3) makes section 73, with Part VIII anti-avoidance, immune from treaty override. Financial transactions are policed separately by the 2:1 debt-to-equity thin capitalisation rule in section 77.

The catch is fundamental. Sections 73(2) and 73(3) both express the obligation and the adjustment power to operate in accordance with the Regulations, and no transfer pricing Regulation had been gazetted as at August 2026. The OECD Guidelines have never been enacted in PNG statute, and the 2025 Act does not mention them.

Methods, comparables and benchmarking

No PNG statute has prescribed a transfer pricing method, and the 2025 Act continues that tradition by deferring to the Regulations. Method acceptance is administrative: Taxation Circular 2011/2, paragraphs 80 to 89, records the Commissioner General's endorsement of CUP, resale price, cost plus, TNMM and profit split, with no hierarchy. Paragraph 89 applies a most-appropriate-method test turning on the facts and on the reliability of the information available for a comparability analysis. On commodities, which matter enormously in an LNG, gold and copper economy, PNG selected "other" in its OECD profile and supplied no explanation. Do not read an approach into that silence.

Comparability follows Chapter III of the Guidelines, and there is no preference for domestic comparables. That is decisive rather than permissive: PNG has almost no independent listed sector, so benchmarking runs on regional Asia-Pacific or wider sets by necessity. The IRC's own tool is TP Catalyst, and PNG has confirmed that it uses secret comparables when assessing transfer pricing. An arm's length range or statistical measure is permitted, but nothing domestic prescribes the interquartile range or a point-in-range adjustment convention; those are OECD-conforming practice, not PNG rule. Comparability adjustments are required.

On the tested party there is direct domestic guidance, under a Circular heading devoted to the question. Paragraph 151 of Taxation Circular 2011/2 records the Commissioner General's support for paragraph 3.18 of the Guidelines — test the party to which a method can be applied most reliably and for which the most reliable comparables can be found. Paragraph 152 expressly contemplates testing the foreign party where it owns no intangibles and performs no unique functions, paragraph 153 asks for a pragmatic approach, and paragraph 116 states that where only one party makes unique contributions the tested party will be the less complex one. KPMG's report that the IRC expects the methodology to reward the PNG operation commensurately with its economic contribution and risks is a gloss on that, not the primary rule.

Documentation: what the IRC expects

Section 74 is an enabling provision and nothing more. It directs that the Regulations shall provide for a Local File covering material controlled transactions, a Master File containing standardised information relevant for all members of the multinational group, a Country-by-Country Report in the OECD format, and documentation to be kept by any person entering a transfer pricing arrangement. It fixes no threshold, deadline, language or content, and it says nothing about intangibles. Until the Regulations are made the three-tier regime is enacted but not operational, and advisers should resist presenting Master File and Local File as live obligations with settled thresholds.

The CbCR threshold is genuinely unsettled. KPMG PNG cites K2.1 billion for the expected Regulations; sources describing the pre-2026 regime give PGK 2.3 billion. Both are meant as the kina equivalent of EUR 750 million. Filing is within twelve months of the reporting fiscal year end under section 201A of the 1959 Act, on the Annex III template prescribed by section 201, with notification under section 200 on a prescribed paper form lodged at the LTO Service Centre counter or by email — due on the last day of the reporting fiscal year itself, 31 December for calendar-year groups, rather than in advance of it. PNG signed the CbC MCAA in March 2023 and ratified the MAAC and the MLI that August.

The live disclosure obligation is the return itself. Form C, in its body and at Schedule 7, Part A, Question 1, asks whether international related party dealings exceeded K100,000 in total for the year excluding the capital value of loans, and whether related-party loans borrowed or loaned aggregated more than K2,000,000 at any time. A yes triggers the International Dealings Schedule, which requires purchases and sales by category — tangible property, intangibles, financial transactions, services and other — each tagged with a transfer pricing method code, a country code and a documentation code. That self-assessed documentation code is the practical documentation trigger in Papua New Guinea, and the schedule is the IRC's principal risk-selection dataset. Section 134 separately requires records sufficient to compute the tax and disallows deductions the taxpayer cannot evidence without reasonable excuse.

Audits, penalties and the enforcement climate

There is no transfer-pricing-specific penalty in PNG and no documentation-based penalty protection. PNG answered no to the OECD on specific penalties, on compliance incentives and on safe harbours; the one simplification it ever reported, the management fee cap, has since been repealed. Section 162 leaves offence penalties to the Regulations. An adjustment therefore lands in the general regime: late lodgement penalties reaching 100 per cent of the tax, late payment penalties around 20 per cent per annum, and additional tax at 20 per cent where provisional tax was estimated below 75 per cent of the amount ultimately assessed. Those figures come from professional summaries of the Tax Administration Act 2017, which has not yet been amended to align with the new Income Tax Act, so the FY2026 penalty position carries real uncertainty.

Amendment windows run three years from the date the tax became due and payable where a full and true disclosure of material facts was made. Where it was not, the Commissioner General has six years in the ordinary case, and no limit at all where tax evasion or avoidance is involved.

Enforcement has sharpened. The IRC historically assessed first and audited later, but now runs targeted and industry-wide audits, and the return format is built for benchmarking against industry norms, with divergence inviting review. Logging and forestry has been the most visible front: the then Commissioner General cited entrenched evasion with egregious transfer pricing incidents and initiated more than twenty audits. Commodity pricing, intercompany financing, management fees, cost allocation and PE profit attribution are the recurring themes. Sam Loi took over as acting Commissioner General in December 2025.

Dispute resolution and advance certainty

There is no advance certainty in Papua New Guinea. PNG left every box unticked for rulings, enhanced engagement and unilateral, bilateral and multilateral APAs, and the 2025 Act contains no APA or ruling provision at all. Taxpayers cannot buy comfort up front; they can only build a defensible file.

MAP is the sole mechanism, available under the ten bilateral treaties listed in Schedule 5 to the 2025 Act — Australia, Canada, China, Fiji, Indonesia, Korea, Malaysia, New Zealand, Singapore and the United Kingdom — alongside the MLI and the MAAC. The IRC has issued and published a MAP Guideline, and the treaties give a filing window of two years, three under some. PNG is an Inclusive Framework member and has been through a simplified Action 14 peer review, but caseload is negligible — no MAP cases reported for 2022 — and PNG publishes nothing on multilateral MAPs, model timeframes or resolution times.

The domestic route is demanding. An objection must be lodged within 60 days of service of the assessment, stating grounds precisely and specifying the amendments considered necessary. It is invalid unless the return has been furnished, the undisputed tax paid, and the disputed tax, or at least 50 per cent of it, paid or subject to an arrangement satisfactory to the Commissioner General. Review lies only to the Tax Review Tribunal, within 28 days of the objection decision and served within seven, the 50 per cent trust-account deposit being a precondition. Appeal to the National Court is confined to a question of law, and grounds cannot later be amended. A serving Supreme Court judge has publicly questioned whether the deposit requirement, combined with the absence of direct recourse to the judicial branch, renders the tax incontestable.

The onus is on the taxpayer to prove the assessment excessive and by how much; exposing a flaw in the Commissioner General's method is not enough. There is no published PNG transfer pricing case law; Australian and English authority is treated as persuasive.

Pillar Two, Amount B and what changed in 2026

Papua New Guinea has not implemented the GloBE rules: no income inclusion rule, no UTPR, no qualified domestic minimum top-up tax, and no Pillar Two measure in the 2026 National Budget. Top-up tax referable to PNG operations therefore accrues to parent jurisdictions. Watch the interaction with new section 76, which attributes property income where a resident holds 50 per cent or more of a low tax entity, defined partly by an effective corporate rate below 15 per cent. Same marker, different machinery: a domestic attribution rule, not a GloBE charge.

PNG appears on the OECD's June 2024 list of covered jurisdictions for the Amount B political commitment, under which other Inclusive Framework members respect PNG outcomes where it applies the simplified and streamlined approach. Listing does not require adoption, and none has been announced.

Other 2026 changes bite harder day to day: a 15 per cent branch profits tax with PE return filing, capital gains tax on interests in mining and petroleum projects including indirect disposals crossing 10 per cent, and the disappearance of the 2 per cent management fee deduction cap, which had limited related-party management fee deductions to the greater of 2 per cent of assessable income or 2 per cent of allowable deductions. Intra-group service charges are policed by section 73 now, not by a formula.

How practitioners should respond

Work both regimes at once: build FY2026 files to the section 73 standard while keeping Division 15 and Circular 2011/2 arguments live for open years.

Treat the International Dealings Schedule as the document that actually drives risk. Its method, country and documentation codes are self-assessed statements the IRC will hold the taxpayer to, and they should be reconciled to a real benchmarking file before the return is signed.

Rebuild service-fee positions. The 2 per cent cap was crude, but it was certainty; what replaces it is a benefit test, a charge-out analysis and a comparables set.

With secret comparables, a taxpayer-side onus and no APA anywhere in the system, the only leverage is evidentiary. Document the search strategy, choose the tested party on the Circular's own terms — the less complex party, the one for which the most reliable comparables exist — and be explicit about why regional comparables were used. Then watch the gazette: when the Income Tax Regulations land, thresholds, deadlines and a formal Master File and Local File obligation land with them.