Papua New Guinea Log Tax Rate Cut Called Excessive

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WORLDWIDE FOREST/BIODIVERSITY CAMPAIGN NEWS

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12/15/98

OVERVIEW & COMMENTARY by EE

A study in the latest edition of the Pacific Economic Bulletin has

determined that the effective rate of taxation on export logs in Papua

New Guinea (PNG), the mechanism whereby equitable rent sharing and

sustainable output was to be achieved, has been reduced from 33% to

2.75%. As the new tax rate was brought in, PNG's timber exports in

November rose 250% from the average monthly rate over the past year

(from about 100,000 m3 to 250,000 m3). At nearly a 0% tax rate at

current log prices, virtually no taxes are being collected on this

resurgent log export. At current prices companies are saving K25

(about US$ 12) in taxes on each cubic meter. From the government's

perspective, the logs are being given away to subsidize the flagging

timber industry-though landowners continue to get K10 (US$ 5) per

cubic meter in royalties and various other lesser premiums.

If the current cutting rate continues, spurred on by essentially no

export tax, over the next one year period PNG will be back to the 3

million m3 mark; the typical yearly rate of harvest prior to the Asian

economic crisis. Problematically, the current PNG budget does not

continue support for independent monitoring of log exports by SGS.

Within the course of a matter of weeks, some would say that the PNG

forest industry has taken several huge steps backwards-giving away

its log export taxation structure and monitoring of log exports, which

have taken over a decade to achieve and were the centerpieces of

industry reform. It appears that the logging holiday is over.

g.b.

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RELAYED TEXT STARTS HERE:

Title: Log Tax Rate Cut Excessive

Source: Post Courier

Date: December 15, 1998

THE recently announced tax rate cuts for certain categories of logs

are far too excessive, according to a recently published report.

The conclusion was made by two academics at the National Centre for

Development at the Australian National University and published in the

latest edition of the Pacific Economic Bulletin.

The report, by Theodore Levantis and John Livernois, is titled Taking

a piece of the pie: Papua New Guinea's log exports and optimal

taxation.

The study looks at what would be the optimal given the various

constraints and complexities in the market, considering logging

contractors are predominantly foreign-owned and the use of domestic

factors is limited.

They said because of this, the rate cuts would allow resource rents to

be transferred overseas while PNG misses out.

The Skate Government announced on July 29, as part of its reform

package, a number of economic reform measures, which included cuts to

tax rates for certain categories of logs.

In their report, the academics said that until the recent changes to

the export tax scales, the National Government was by far the most

important beneficiary of the logging industry, taking about 33 per

cent of the value of exports.

They said the question now is what is the best way to control

production so that it remains at or below sustainable harvest, arguing

that one possible method would be to use a tax mechanism.

Mr Levantis and Mr Livernois presented a summary of their report at a

seminar organised by the Institute of National Affairs in Port Moresby

on Friday.

They said while the Government may need to consider an appropriate

revenue mechanism for the industry, that has been made difficult by

the need to keep harvesting the logs within a sustainable yield.

``An appropriately set tax would reduce the aggregate level of

production to a target volume, but this would be achieved by rendering

unfeasible production in higher cost plots.

``What the tax mechanism will fail to do is systematically reduce

production in each region to the sustainable level.

Lower cost regions may still be over exploited,'' they said.

``The appropriate method for keeping production within the sustainable

yield is via the licence and quota system that is, direct government

regulation of what is the maximum allowable cut in each region each

year,'' they said.

They told the seminar participants that the mechanisms for such a

system to restrict production within sustainable yield are already in

place but its success would depend on discipline from government.

Mr Levantis and Mr Livernois said the objective of their study was to

shed some light on the problem of designing an ``optimal mechanism''

for capturing a larger share of logging rents for PNG.

They concluded that doing this with an export tax is probably the best

approach in PNG because of a number of reasons, which included the

high cost of obtaining accurate and credible estimates of logging

costs on a tract-by-tract basis.

They also concluded that the recently announced reductions in export

tax rates were far too excessive. At current prices of about K135, the

export tax, they said, is 2.75 per cent.

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