The Papua New Guinea withholding rule that stops a client paying you

Most tax questions on a cross-border invoice are about how much is deducted. Papua New Guinea adds a second one that is more immediately expensive, because it is about whether the payment can leave at all. Under the foreign contractor regime the Papua New Guinean payer is deemed by statute to be the contractor's agent, and the Internal Revenue Commission states that the agent must not make any payment to the foreign contractor, or transfer out of the country any such payment, until written confirmation is received from the Commissioner General.

Key Takeaways

• Four regimes can reach a payment to an Australian: foreign contractor withholding, management fee withholding, royalty withholding, and salary or wages tax.
• The foreign contractor regime turns on work done in Papua New Guinea; the arm of the management fee regime that reaches an adviser abroad is written for services performed outside it.
• On the foreign contractor regime the payer is deemed the contractor's agent, must lodge the contract within fourteen days, and may not release or remit the money before the Commissioner General confirms.
• The Commission's published table puts Australia at the full 17 per cent for management fees, and records that some agreements had previously been misread as exempting the tax.
• The Commission's web page and its own taxpayer guide state the foreign contractor rate differently, at 15 and 12 per cent.

The regimes, and the boundaries between them

The Commission's summary lists its withholding rates side by side. Management fees are 17 per cent, foreign contractors 15, and royalties 30 to an associate and 10 otherwise, with Australia at 10 on its country table. The first two are what an ordinary invoice meets, and the Commission draws the boundaries between them itself. A foreign contractor is a person who is not a resident of Papua New Guinea, is a party to a prescribed contract, and receives payments for services under a contract where those payments cannot be considered either salary or wages or management fees. The definition is a residual: the other two regimes are tested first.

The Commission adds a note that matters for an individual rather than a firm. Any individual carrying out personal service in Papua New Guinea would normally be deemed an employee and subject to salary or wages tax, and in those cases the salary or wages provisions override the foreign contractor provisions.

What a prescribed contract is

The foreign contractor regime applies only to a prescribed contract, which the Commission defines as a contract for prescribed purposes. Those purposes are set out as four limbs.

Every limb says in Papua New Guinea. That is the test, and it is a test about where the work is done rather than about where the contract was signed or the money was paid from.

The Commission also defines contract with unusual breadth: an agreement, whether express or implied, whether in writing or not, and even whether or not enforceable or intended to be enforceable.

The obligation that holds the payment

The heart of the regime is the treatment of the payer. Any person carrying on business in Papua New Guinea who enters into a contract for prescribed purposes with a foreign contractor is considered to be the agent of that foreign contractor, and is then required to do two things.

The first is to provide the Commissioner General with a copy of the signed contract, or written notification of an agreement, within fourteen days of signing. The second is not to make any payment to the foreign contractor or transfer out of the country any such payment until written confirmation is received. That confirmation states that arrangements have been made to the Commissioner General's satisfaction for the payment of any income tax assessed, or that may be assessed, to that foreign contractor.

The Commission gives examples of who this catches, among them companies, partnerships and joint ventures and government departments. The tax is deducted when payment is made and remitted by the twenty-first of the following month. A payer who fails to deduct may be fined between 400 and 2,000 kina and may also be liable for the tax not deducted.

The regime that reaches work done outside the country

Management fee withholding tax is the one that reaches an adviser who never boards a plane. The Commission states that any management fees paid by a resident to a non-resident for management services performed outside Papua New Guinea are subject to the tax at 17 per cent of the gross taxable management fees, and that the rate is reduced if the non-resident is resident in a country with which Papua New Guinea has a double tax agreement. As imposed, it catches payments by a resident or by a non-resident company with a permanent establishment in the country.

A taxable management fee is defined by deductibility, as the part of a fee that is an allowable deduction after applying section 68AD or section 155M of the Income Tax Act 1959, so the tax follows the deduction rather than the invoice.

Then comes the table, and the correction that produced it. The Commission records that a number of Papua New Guinea's agreements had been misinterpreted by exempting the tax on fees paid to certain jurisdictions, that it has reviewed the position, and that the notice supersedes any previous advice. Australia is listed at 17 per cent, the same as a non-treaty recipient, alongside Canada, Singapore and New Zealand. China, Germany and South Korea show no deduction, the United Kingdom, Malaysia and Indonesia 10 per cent, and Fiji 15. The rates applied from 1 February 2021.

Australia and Papua New Guinea do have an agreement. The Treasury's list of income tax treaties records it as signed on 24 May 1989 and in force from 29 December 1989, with the multilateral instrument applying from 1 December 2023. On the Commission's table it changes nothing for a management fee.

Which leaves the commonest case of all, and the Commission's own definitions answer it. A service performed from Australia that is not a management fee, not a royalty, not work done in Papua New Guinea and not the use there of equipment the contract supplies, falls outside every limb: the prescribed purposes are all anchored in Papua New Guinea, and the foreign contractor definition is a residual that excludes anything the management fee provisions already cover.

Where the rate is stated two ways

The Commission's Foreign Contractor Withholding Tax taxpayer guide, document 2014-TPG-F1-02, effective from 5 September 2014, states that the rate of withholding is 12 per cent of the gross payments made to a foreign contractor. Its Withholding Taxes web page states that the rate is currently 15 per cent of the gross payment, and that the income once taxed is a final tax which should not be included in a return the contractor files for other Papua New Guinean income.

The two documents sit on the same site and they do not agree. The web page is the later of the two, on its own references to 2017 and 2021, and it is also the page that carries the fourteen-day and no-payment obligations in full.

The web page also disagrees with itself on one further point. It states that a non-resident contractor, as at 1 January 2017, no longer has the option to lodge an annual income tax return and be assessed on an actual net profit or loss basis, while a later section still describes an alternative system under which the Commissioner General may approve a return and grant an exemption. That section ends by repeating the point that matters most here anyway: the payer is to await written confirmation of the contractor's liability before making any payment.

How the same fee is treated on the Australian side is a separate body of law, and the guide on how to find an accountant covers how to check that a tax agent is registered.

Where to look next

• Receiving money from Papua New Guinea - the kina to Australian dollar corridor page for this route.
• AUD to PGK - the convert page for the pair, with the kina's crawl-like arrangement and its order backlog behind it.
• How international transfers work - the sequence a payment moves through once the Papua New Guinean end is settled.
• Understanding transfer fees - what a transfer costs, and the margin inside a quoted rate.

Sources

• Withholding Taxes, Internal Revenue Commission of Papua New Guinea - the list of withholding rates by payment type; the management fee section, including the definition of a taxable management fee by reference to sections 68AD and 155M of the Income Tax Act 1959, the 17 per cent rate on management services performed outside Papua New Guinea, the statement that a number of agreements had been misinterpreted by exempting the tax, the country table effective 1 February 2021 with Australia at 17 per cent, and the statement that the notice supersedes previous advice; and the foreign contractor section, including the definition of a foreign contractor and of a contract, the four prescribed purposes, the deeming of the payer as agent with the fourteen-day notification and the bar on payment or transfer out of the country before written confirmation, the classes of payer caught, the 15 per cent final rate, the monthly remittance date, the 20 per cent late payment penalty, the fine range for failing to deduct, the statement that the return option was removed as at 1 January 2017, and the alternative system section that still describes it.
• Foreign Contractor Withholding Tax Forms taxpayer guide, Internal Revenue Commission - document 2014-TPG-F1-02, effective from 5 September 2014: the three-limb definition of a foreign contractor; the four prescribed purposes in full; and the statement that the rate of withholding is 12 per cent of the gross payments, with the annual reconciliation due by 28 February.
• Income tax treaties, Australian Treasury - the entry for Papua New Guinea, signed 24 May 1989 and in force 29 December 1989, with the multilateral instrument applying from 1 December 2023.

General information about how Papua New Guinea withholds tax on payments to a contractor or adviser outside the country. Which regime a particular contract falls into, and how the amount is treated once it reaches Australia, are questions for a registered tax agent in each country. Not financial advice, not tax advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.