30-09-2002, 08:09 PM
The Value Added Tax or VAT is illegal and invalid - a three man Supreme Court rules:

The Port Moresby Chamber of Commerce issed the following article:

Dear Members,

Please find attached another opinion from Price Waterhouse Coopers on the VAT issue . POMCCI agrees that the most sensible course of action would appear to be to continue as normal . It would be hard to see the IRC/Government failing to address this critical revenue issue expeditiously and returning to the status quo prior to Friday's ruling.

Our thanks to David Caradus and his staff at PWC for providing us with this information to disseminate to POMCCI Members / President.

"As reported in today's Post Courier, the Supreme Court ruled on Friday 27 September that the Value Added Tax (VAT) is invalid. We have discussed the issues with a senior officer of the Internal Revenue Commission. Our discussions confirmed that the IRC is requesting businesses to continue to charge VAT. However, if there is currently no legal basis for charging VAT then it is not possible to enforce payment when a customer refuses to pay the VAT. On the other hand if the VAT is validated retrospectively, the cost of not charging VAT would be a cost to the supplier. This creates a dilemma for both the supplier and the purchaser.

We also understand that the IRC have applied for a court order to overcome the Supreme Court decision of Friday, 27 September 2002. Pending formal resolution of the issue, it would seem to us that all businesses and their customers will be better served by assuming the VAT will be validated and thus continue as normal. Clearly, the Government must act quickly to deal with this potentially critical situation. We will continue to follow-up and monitor the progress of any proposed solution to the problems created by the Supreme Court decision.

POMCCI Secretariat

30-09-2002, 08:10 PM

To all Members,

This is an update from KPMG - Ms. Lynette Morris on the above scenario. Please note the following:

"IRC have advised that they are appealing the decision and if necessary will request the Government to pass amending legislation to validate the VAT Act. If amending the legislation is passed, it will be backdated to the date of the commencement of the Act.

All those registered for VAT should therefore be aware that when the amending legislation is passed, they will be liable for the VAT on all sales and transactions irrespective of whether it was charged to the customer".

We shall keep you posted on the above matter as details come to hand.


04-10-2002, 08:30 PM
Dear Clients

I refer to our e-mail on Monday and advise I have had further discussions with David Sode of the IRC on the VAT issue. The IRC will be seeking to obtain a stay order in respect of the Supreme Court judgement on Monday, 7 October 2002. The stay order, if obtained, will operate to validate the VAT for a specified period. David Sode believes that there are legal grounds to support a reversal of the Supreme Court judgment and the Government will be seeking to lodge an appeal against the judgement. It is likely that the appeal will be heard by the full bench of the Supreme Court, consisting of seven judges.

Provincial sales taxes

We understand that the National Capital District Commission is seeking to impose a Sales Tax. As reported in the newspapers, the Morobe Provincial Government has decided to impose its own goods and services tax. It is possible the other provincial governments will move to impose similar taxes in the near future. However, we understand that there is a view that this is no longer within any Provincial Government's power and that steps are being taken by the Ombudsman Commission and the National Government to challenge the validity of any provincial government sales and service tax.

VAT on imported goods

The IRC have proposed that importers to lodge security or a deposit in a
trust account, to enable the release of imported goods, pending the final
outcome of the VAT issue. If the VAT is validated, it will be imposed on
the imported goods and collected against the security lodged or the

If the VAT issue cannot be resolved quickly, it is possible that the VAT
which would have applied to imports will be collected as Customs Duty.
However, this requires changes to customs duty rates to be enacted. Should this be the case we would make representations to the IRC that the customs duty be treated as an input tax credit if the VAT is ultimately reinstated.

Recommended action

Based on our discussions with the IRC we believe the following course of
action should be considered:

(a) recover in the pricing of your goods and services the VAT potentially

(b) if practical, invoices should be altered to remove any reference to
VAT. The invoice could include an alternative description such as "Price
Adjustment" to enable business to track the potential VAT from both the
output tax and input tax points of view. However, in the context of retail
sales it would in practice be preferable to make the adjustment to the
actual price charged for goods;

(c) account for the potential VAT on sales and purchases as if VAT were

As a result of this a business will have either a potential VAT refund or
an amount payable. To the extent that the customers pay the potential VAT on invoices, businesses, which have a net payable, will have received the funds that they would normally remit. At this stage, the IRC have not made any specific recommendation as to what to do with these funds. The options being discussed are:

(a) the business retains the funds;

(b) the amount is paid to a trust account to be administered by the IRC or another Government body;

(c) the amount is paid to a trust account to be administered by a third

The trust account arrangements may enable refunds to be made to those
businesses due a refund. As such the idea would enable businesses which voluntarily complied to continue as usual and not be significantly exposed to cashflow disadvantages. It may also have the benefit of encouraging customers to pay invoices in full (inclusive of the potential VAT).

It will be apparent that that there is the potential for businesses to seek
to gain market share through exploiting what could ultimately prove to be a temporary cessation of VAT enforcement, with the prospect that the defect in the law (if there is one) will be remedied retrospectively. Against that background, the discussions with the IRC today, attended by a number of representatives of the business community, reached the broad consensus that arrangements of a kind described above should be supported by the business community generally. Such arrangements if widely adopted should minimise the potential for the situation to be exploited through price cutting practices.

Estimated Time to Resolve

It would appear that if legislation change is required that the earliest
this could be achieved is February 2003 due to the need for Parliament to be recalled and for the necessary amendments to be voted on twice as required by the Constitution.

We will continue to monitor closely the progress of the issues and will
update you on the Supreme Court hearing on Monday. In the meantime, should you require any further information, please contact David Caradus or me.

Yours faithfully

John Leahy
Managing Partner

04-10-2002, 08:34 PM
VAT UPDATE - 4 October 2002

Since our last email on Monday 30 September 2002, various discussions and meetings have resulted in some changes as to how businesses should be dealing with the current VAT situation. We remind you this issue is under continual change and subject to change at any time. We will continue to keep you informed as developments occur.

The uncertainty that results from last Friday’s Supreme Court judgement that VAT was illegal and invalid, contains enormous financial and social implications for everyone in Papua New Guinea.

Faced with the prospect of its revenue source drying up, the public sector will quickly be unable meet its commitments both in the payment of wages and in the provision of basic services. The likely impact of such an occurrence on business, social conditions and law and order are easy to imagine. A solution to the legal impasse needs to be established very quickly or the problems will rapidly accelerate.

We understand that the Government has initiated proceedings aimed at allowing the VAT legislation to continue operating whilst remedial measures are taken to rectify the legislation. On Monday the Supreme Court will be asked to review its decision and either order that the effect of its decision be deferred until further consideration or be suspended until 1 April 2003. It is expected that this process will be contested by the Morobe Governor. This does not seem to offer a quick solution, but may at best provide some temporary relief during which the legislation may be amended. A further motion is before the National Court this morning to prevent provincial governments from collecting any taxes.

It seems most likely that Parliament must meet to pass legislation resolving the issues raised by the Supreme Court judgement and that at some stage in the future we will once again operate in a fiscal environment where a 10% sales based tax is effective. Minimising the time frame to getting us there is critical for the continued stability of many functions within the country.

Business is faced with many problems relating to how it operates during the period before the status quo can be legally restored. The IRC have indicated that they cannot force business to collect VAT but warned that if the Government successfully legislates to restore the tax retrospectively, they will seek to assess liability to the tax based on revenue figures. Consequently any business that fails to charge a notional VAT would be caught out and be assessed for tax irrespective of the fact they have not received it from their customers.

The PNG Chamber of Commerce have suggested that businesses adopt a new pricing policy which should take into account the possibility of retrospective tax legislation. Without charging the tax separately this would leave them in a revenue neutral position were the tax to be reimposed retrospectively. Clearly some businesses such as those governed by the price controller are unable to take advantage of this.

It should be noted that 'carrying on as normal' can be viewed as being contrary to the Supreme Court order previously issued and therefore in contempt of Court. To avoid being held in contempt of Court, businesses should remove all references to 'plus VAT' or 'including VAT' from their invoices, statements, or receipts. Businesses can charge a surcharge instead, and hold the collection of those 'surcharges’ as a 'notional VAT' to be held until such time as VAT is reinstated (if it all). Therefore, the cash price to the purchaser remains the same.

Customs Office:

The Customs office is not charging VAT on any imports since the September 27 decision. At this stage, no increases to duties have been actioned. Therefore, importers of goods into PNG will gain a small window of opportunity until such time as any changes are made to the either the Supreme Court ruling or to the Customs Tariff Act. It is possible excise and customs duty may be increased in the near future to compensate for lost revenue.

Provincial Governments:

Provincial Governments are unable to implement a Sales Tax regime as the legislation that allowed such action has since lapsed. Therefore the Provincial Governments are facing a serious funding problem, as they will not be receiving any distributions of VAT.

Internal Revenue Commission:

IRC are continuing to process their backlog of VAT returns and refunds. However, no refund cheques will be issued by IRC, no enforcement action will be pursued by IRC, and IRC will no longer action any offsets of VAT credits to pay other taxes (e.g. group tax or income tax). A request for VAT offset can still be made, but IRC will not action it until such time as VAT is reinstated as legal and valid. IRC have indicated they will not penalise clients for the taxes outstanding, where a VAT credit will cover that arrear and a request for offset is made. Assuming VAT is reinstated, the offsets will be actioned at that time.

IRC have advised us they wish businesses to continue 'as per normal'. IRC have also indicated they do not want businesses to pay over the VAT to them. As the first payment deadline for VAT post the Court decision is 21 October (for the month of September), businesses should consider not paying any VAT to IRC until closer to 21 October. This provides 17 days in which to assess the situation. It is hoped that greater certainty will be available by this date as to the appropriate course of action to take. If no certainty is obtained by 21 October, IRC have discussed the possibility of businesses paying the VAT into a separate trust account for holding until such time as VAT is reinstated as valid and legal, after which it can be passed back to the IRC.

Businesses should record the notional VAT in their accounting systems. Assuming VAT is reinstated as legal and valid, IRC will be seeking retrospective application of the amendments required and businesses will then be required to pay over to the IRC any VAT collected, or deemed to be collected. Where businesses did not collect a notional VAT on sales (on VAT saleable goods), there is likely to be a deemed VAT calculated on those sales. Therefore businesses that reduce their sale price by the VAT portion and sell those goods at the VAT reduced price may be forced to pay 1/11 of the sale price to IRC.

Currently, the IRC are waiting on an answer to their application for a stay on the operation of the Supreme Court ruling issued on 27 September making VAT illegal and invalid. A decision on the stay should be issued at 10:00am Monday 7 October, with the IRC holding a general meeting with businesses at 2:00pm the same day to discuss their position based on that decision. We will be issuing a statement immediately after that meeting for your information.

In the event IRC are unsuccessful in reinstating VAT, alternative options are to introduce a replacement surcharge and/or levy, reimposing tariffs, declaring a state of emergency, or any combination of the above.

Such action is obviously dependant on proceedings over the near future.

We are discussing various other issues with IRC relating to VAT and will keep you informed of those, as we are able to obtain more certainty. In the mean time, if you have any queries regarding the impact of the Supreme Court decision on your business operations then please do not hesitate to contact any of the following:

Paul Barber PaBarber@deloitte.com.pg
Larissa Hines LHines@deloitte.com.pg
Arunava Basu Abasu@delolitte.com.pg
Brydon Davidson brydavidson@deloitte.com.pg