Income Tax (Amendment) Act 2015

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Income Tax (Amendment) Act 2015


Act 9 of 2015





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INCOME TAX (AMENDMENT) ACT 2015


Income Tax (Amendment) Act 2015 Arrangement of Sections





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INCOME TAX (AMENDMENT) ACT 2015

Arrangement of Sections

Section

1 Short title and commencement............................................................................... 5
2 Section 2 amended ................................................................................................. 5
3 Section 12 amended ............................................................................................... 6
4 Section 26 amended ............................................................................................... 6
5 Section 60 amended ............................................................................................... 6
6 Section 65A inserted .............................................................................................. 7
7 Parts 7A and 7B inserted ....................................................................................... 8
8 Section 79 amended ............................................................................................. 29
9 Amendment to Second Schedule ......................................................................... 29




Income Tax (Amendment) Act 2015 Section 1





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INCOME TAX (AMENDMENT) ACT 2015

Act 9 of 2015

AN ACT TO AMEND THE INCOME TAX ACT TO PROVIDE FOR THE

TAXATION OF EXTRACTIVE INDUSTRIES AND OTHER MINOR

MATTERS

I assent,

TUPOU VI,

19th November 2015.

BE IT ENACTED by the King and Legislative Assembly of Tonga in the

Legislature of the Kingdom as follows:

1 Short title and commencement


(1) This Act may be cited as the Income Tax (Amendment) Act 2015.

(2) This Act shall come into force on a date to be specified by the Minister for

Revenue by Notice published in the Gazette.

(3) In this Act, “Principal Act” means the Income Tax Act 2007 as amended.

2 Section 2 amended

Section 2 of the Principal Act is amended –

(a) in the definition of “income tax” by inserting at the end of the definition “and

includes a seabed mining royalty or petroleum royalty”;

(b) by inserting the following definitions in correct alphabetical order –

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““arm’s length transaction” means a transaction between independent

persons dealing with each other at arm’s length;

“financial institution” has the meaning in the National Reserve Bank of Tonga

Act;



“immovable property” includes -

(a) a mining right or mining information as defined in section 67A; or

(b) a petroleum right or petroleum information as defined in section 67M;

“international financial reporting standards” means the most recent

International Financial Reporting Standards issued by the International

Accounting Standards Board or any successor entity taking over the role of

issuing International Financial Reporting Standards;

“petroleum royalty” means the petroleum royalty imposed by section

67N; and

“seabed mining royalty” means the seabed mining royalty imposed by section

67B;

3 Section 12 amended

Section 12 of the Principal Act is amended by treating the existing section as

subsection (1) and inserting the following subsection –


“(2) In this section, “business asset” includes shares in a company, or an interest in
a partnership or trust, if the shares or interest derive 50% or more of their value,

directly or indirectly, from immovable property.”.

4 Section 26 amended

Section 26(1)(l) of the Principal Act is amended by deleting the number “5” and

replacing it with “10”.

5 Section 60 amended

Section 60 of the Principal Act is amended by –

(a) inserting the following subsection after subsection (11) –

“(12) An amount shall be Tongan-source income if the amount is derived on

disposal of –

(a) immovable property in Tonga; or

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(b) shares in a company, or an interest in a partnership or trust, if the

shares or interest derive 50% or more of their value, directly or

indirectly, from immovable property in Tonga.”;


(c) renumbering existing subsection (12) as subsection (13);

(d) renumbering existing subsection (13) as subsection (14) and

deleting the reference to “subsection (12)” and substituting a

reference to “subsection (13)”; and

(e) renumbering existing subsection (14) as subsection (15).

6 Section 65A inserted


The Principal Act is amended by inserting new section 65A after section 65 –


“65A Thin Capitalisation


(1) Subject to subsections (2) and (3), if a foreign-controlled resident

company, other than a financial institution, has a debt-to-equity ratio in

excess of 2 to 1 at any time during a fiscal year, a deduction is disallowed

for the interest paid by the company during that year on that part of the

debt that exceeds the 2 to 1 ratio for the period the ratio was exceeded.

(2) If the debt-to-equity ratio of a foreign-controlled resident company

exceeds 2 to 1 for a fiscal year, subsection (1) does not apply if, at all

times, during the year, the amount of the debt of the company does not

exceed the arm’s length debt amount.

(3) This section applies to a non-resident company that has a permanent

establishment in Tonga on the basis of the following -

(a) the permanent establishment is treated as a foreign-controlled

resident company; and

(b) the debt-to-equity ratio of the permanent establishment is computed

by reference to -

(i) the debt obligations of the non-resident company

attributable to the permanent establishment; and

(ii) the equity of the non-resident company attributable to the

operations of the company conducted through the

permanent establishment.


(4) In this section –


“arm’s length debt amount”, in relation to a foreign-controlled resident

company, means the amount of debt that a financial institution that is not

related to the company would be prepared to lend to the company having

regard to all the circumstances of the company;

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“debt”, in relation to a foreign-controlled resident company, means the

greatest amount, at any time during a fiscal year, of the debt obligations

of the company on which interest is payable as determined according to

international financial reporting standards;

“debt obligation” means an obligation to make a repayment of money

to another person, including an obligation arising under a promissory

note, bill of exchange, or bond, but not including accounts payable or an

obligation to make a repayment of money in respect of which no interest

is payable;

“equity”, in relation to a foreign-controlled resident company, means the

greatest amount, at any time during a fiscal year, of the equity of the

company as determined according to international financial reporting

standards and includes an obligation to make a repayment of money in

respect of which no interest is payable; and

“foreign-controlled resident company” means a resident company in

which fifty per cent or more of the beneficial ownership of the company

is controlled by a non-resident person either alone or together with an

associate or associates.”.



7 Parts 7A and 7B inserted


The Principal Act is amended by inserting the following new Parts after Part 7 –

“PART 7A – TAXATION OF MINING OPERATIONS

DIVISION 1 – INTERPRETATION


67A Interpretation


In this Part, unless the context otherwise requires –

“commencement of commercial production” means the first day of the

first period of thirty (30) consecutive days during which the average level

of production on the twenty-five (25) highest production days in the

thirty-day period reaches a level as determined by the Chief Executive

Officer with the advice of the Minister responsible for Lands;

“farm-out agreement” means an agreement to which section 67F

applies;

“licensed area” means the area of land, including seabed, covered by a

mining right;

“licensee” means a person who has been issued with a mining right;

“minerals” has the meaning in the Minerals Act, and includes seabed

minerals, but excludes petroleum as defined in section 67M;

Income Tax (Amendment) Act 2015 Section 7





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“Minerals Act” means the Minerals Act (Cap. 133) or any successor

legislation dealing with mining;

“mining additional profits tax” means the mining additional profits tax

imposed by section 67J;

“mining development activities” means authorised activities

undertaken by a licensee in the extraction of minerals from their natural

state pursuant to a mining development licence;

“mining development expenditure” means capital expenditure incurred

by a licensee in undertaking development activities, other than

expenditure incurred in acquiring a depreciable asset, and includes the

following -

(a) expenditure incurred in acquiring –


(i) an interest in a mining right, other than an interest referred to

paragraph (a)(i) of the definition of “mining exploration

expenditure”; or

(ii) mining information, other than mining information referred to

paragraph (a)(i) of the definition of “mining exploration

expenditure”;

(b) social infrastructure expenditure incurred in accordance with a

mining development licence;

“mining development licence” means –


(a) a mining licence issued under the Seabed Minerals Act; or

(b) a mining lease issued under the Minerals Act;


“mining exploration activities” means authorised activities undertaken

by a licensee in the search for minerals pursuant to a mining exploration

licence;

“mining exploration expenditure” means capital expenditure incurred

by a licensee in undertaking exploration activities, other than expenditure

incurred in acquiring a depreciable asset, and includes the following -

(a) expenditure incurred in acquiring –

(i) an interest in a mining exploration licence, but only when

the licence is acquired from the Government or under a

farm-out agreement; or

(ii) mining information related to mining exploration activities,

but only when the information is acquired from the

Government or under a farm-out agreement;

(b) social infrastructure expenditure incurred in accordance with a

mining exploration licence;

“mining exploration licence” means –

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(a) a prospecting permit or exploration licence granted under the

Seabed Minerals Act; or

(b) an exploration or prospecting licence granted under the Minerals

Act;

“mining information” means information relating to a mining right;

“mining operations” means mining exploration or mining development

activities undertaken under a mining right;

“mining right” means a mining exploration licence or a mining

development licence;

“seabed minerals” has the meaning in the Seabed Minerals Act; and

“Seabed Minerals Act” means the Seabed Minerals Act 2014 or any

successor legislation dealing with seabed minerals activities;

“social infrastructure expenditure” means capital expenditure that a

licensee is required to incur under a mining right on the construction of

a public school, hospital, road, or similar social infrastructure;

“Tonga Seabed Minerals Authority” means the Tonga Seabed

Minerals Authority established under Seabed Minerals Act; and

“uplift factor” means 120%.



DIVISION 2 – SEABED MINING ROYALTIES

67B Imposition of seabed mining royalties

(1) There is hereby imposed a seabed mining royalty on a licensee at the rate

of 3% of the export value of seabed minerals recovered under a mining

right or at such higher rate as may be specified in an agreement between

the licensee and the Tonga Seabed Minerals Authority.

(2) Seabed mining royalties are payable at the time of disposal of the

recovered seabed minerals and shall be accounted for to the Chief

Executive Officer on a monthly basis in accordance with section 67C(3).

(3) The export value of seabed minerals recovered by a licensee shall be the

free-on-board price received or receivable by the licensee for the seabed

minerals.

(4) If a seabed mineral is exported on the basis of a cost-insurance-freight

price, the export value of the seabed mineral shall be the cost insurance

freight price reduced by the cost of ocean freight and insurance.

(5) The export value of seabed minerals recovered by a licensee but lost or

destroyed before sale or other disposal is such amount as determined by

the Chief Executive Officer.

(6) If the Chief Executive Officer is satisfied that the price charged for

seabed minerals is not consistent with the price charged in an arm’s

length transaction, the Chief Executive Officer may substitute the price

charged in an arm’s length transaction.

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(7) Section 66 shall apply, with the necessary changes made, in determining

the price charged in an arm’s length transaction.

(8) This section applies also to a person who recovers seabed minerals even

though the person has no authority to recover such minerals.

67C Procedure relating to seabed mining royalties

(1) A licensee liable for seabed mining royalties under section 67B shall

lodge a seabed mining royalty return for each month stating the export

value of seabed minerals disposed of during the month and the seabed

mining royalties payable thereon.

(2) A seabed mining royalty return for a month shall be lodged within 28

days after the end of the month and shall be in the form and manner

prescribed in the Regulations.

(3) Seabed mining royalties payable by a licensee for a month are due on the

due date for lodging the licensee’s seabed mining royalty return for the

month.

(4) If a licensee lodges a seabed mining royalty return for a month –

(a) the Chief Executive Officer shall be treated as having made an

assessment of the export value of seabed minerals disposed of by

the licensee during the month and the seabed mining royalties

payable thereon equal to those respective amounts as specified in

the return; and

(b) the seabed mining royalty return lodged under this section shall be

treated for all purposes of this Act and the Revenue Services

Administration Act 2002 as a notice of the assessment served on the

licensee by the Chief Executive Officer on the day the return was

lodged with the Chief Executive Officer.

(5) If a licensee fails to lodge a seabed mining royalty return for a month –

(a) the Chief Executive Officer may, based on any available

information and according to the Chief Executive Officer’s best

judgment, make an assessment of the export value of seabed

minerals disposed of by the licensee during the month and the

seabed mining royalties payable thereon; and

(b) as soon as possible after making an assessment under paragraph (a),

the Chief Executive Officer shall serve the licensee with a notice of

the assessment stating the following –

(i) the export value of seabed minerals disposed of by the

licensee for the month;

(ii) the amount of seabed mining royalties due;

(iii) the amount of any penalty and interest payable in respect of

the seabed mining royalties due;

(iv) the time, place and manner of objecting to the assessment.

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(6) Section 71 shall apply to a seabed mining royalties assessment with the

necessary changes made.

(7) Section 92 shall apply to seabed mining royalties on the basis that the

reference to “tax” includes a reference to “seabed mining royalties”.



DIVISION 2 – APPLICATION OF INCOME TAX TO MINING

OPERATIONS


67D Taxation of licensees

(1) A licensee shall be subject to income tax in accordance with this Act but

subject to the modifications in this Part.

(2) If there is an inconsistency in the taxation of a licensee under the income

tax as between this Part and the other Parts of this Act, this Part

shall prevail.

(3) The rate of income tax applicable to a licensee is 25%.


67E Mining exploration and development expenditure

(1) This Act shall apply to mining exploration expenditure incurred by a

licensee in relation to a licensed area on the basis that it is an

intangible with –


(a) a useful life equal to one year; and

(b) a cost equal to the amount of the expenditure.


(2) Subject to subsection (3), this Act shall apply to mining development

expenditure incurred by a licensee in relation to a licensed area on the

basis that it is an intangible with –


(a) a useful life equal to the expected life of the mining development

activities to which the mining development expenditure relates;and

(b) a cost equal to the amount of the expenditure.

(3) If a licensee incurs mining development expenditure or expenditure to

acquire a depreciable asset for use in mining development activities

before the commencement of commercial production, this Act applies on

the basis that the expenditure was incurred at the time of commencement

of commercial production.

(4) Subject to subsection (5), if a licensee disposes of an interest in a mining

right (other than under a farm-out agreement), any gain arising on the

disposal is reduced by any mining development expenditure relating to

the right incurred by the licensee that has not been deducted or recouped

by the licensee.

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(5) The reference in subsection (4) to “mining development expenditure”

includes only such expenditure that is not included in the cost of an asset.

(6) Subject to subsection 67H(7), if a licensee commenced mining

operations before the commencement of the Income Tax (Amendment)

Act 2015, this section applies from the commencement of those

operations.


67F Mining farm-out agreements

(1) This section applies if the following conditions are satisfied –


(a) a licensee (referred to as the “transferor”) has entered into an

agreement with a person (referred to as the “transferee”) for the

transfer of an interest in a mining right; and

(b) the consideration given by the transferee for the interest wholly or

partly includes the transferee undertaking some or all of the

transferor’s work commitments in respect of the interest in the right

retained by the transferor.

(2) If this section applies:

(a) the value of any work undertaken by the transferee in relation to the

part of the interest retained by the transferor is not included in:

(i) the consideration received by the transferor for the

transferred interest; or

(ii) the gross income of the transferor; and

(b) the following applies to any amount in money received or

receivable by the transferor for the transferred interest:

(i) section 52 applies to the amount in money on the basis that

it is a reimbursement or recovery by the transferor of any

deductions allowed for expenditure incurred by the

transferor in respect of the transferred interest; and

(ii) if the amount in money exceeds the amount of deducted

expenditure to which section 52 applies, the excess is

treated as consideration received for the transferred

interest.


67G Contributions to a mining rehabilitation fund


(1) A contribution made by a licensee to a rehabilitation fund as required

under the terms of a mining right granted to the licensee shall be allowed

as a deduction in the fiscal year in which the contribution was made.

(2) Subject to subsection (3), expenditure incurred by a licensee in carrying

out remedial work to a licensed area as required under a mining right

granted to the licensee shall be allowed as a deduction in the fiscal year

in which the expenditure is incurred.

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(3) A deduction shall not be allowed under subsection (2) to the extent that

the remedial work is paid for, directly or indirectly, from money made

available out of the licensee’s rehabilitation fund.

(4) Amounts accumulated in a rehabilitation fund or withdrawn from a

rehabilitation fund to pay for remedial work as required under a mining

right shall be exempt income.

(5) Any surplus in a rehabilitation fund of a licensee at the time of

completion of all mining operations to which the fund relates shall be

included in the taxable business income of the licensee for the fiscal year

in which the operations are completed.

(6) In this section, “rehabilitation fund” means a fund or account required

to be established under a mining right to provide for the future payment

of remedial work to the licensed area covered by the mining right and is

managed jointly by the Minister responsible for Lands and the licensee.

67H Ring-fencing of mining operations

(1) A deduction for expenditures incurred, wholly or partly, by a licensee in

undertaking mining operations in a licensed area during a fiscal year shall

be allowed only against the gross income derived by the licensee from

such operations in the licensed area during the year.

(2) If the total amount of deductions allowed under the Act to a licensee in

respect of mining operations undertaken by the licensee in a licensed area

during a fiscal year exceed the gross income derived from such

operations in the licensed area for the year, the excess shall be carried

forward and allowed as a deduction against amounts included in the gross

income of the licensee from mining operations in the licensed area in the

next following fiscal year of the licensee.

(3) An amount that is not deducted under subsection (2) shall be carried

forward to the next following fiscal year of the licensee and allowed as a

deduction in accordance with subsection (2) in that year and so on until

the amount has been fully deducted or all mining operations of the

licensee in the licensed area cease.

(4) If a licensee has an excess carried forward under subsection (2) for a

licensed area for more than one fiscal year, the excess of the earliest

period shall be allowed as a deduction first.

(5) If a licensee has ceased mining exploration activities in relation to a

licensed area and the licensee has a loss under subsection (2) in relation

to the licensed area, the loss may be transferred to a licensed area in

which the licensee undertakes mining development activities if the

licensed area covered by the mining development activities falls wholly

within the licensed area covered by the mining exploration activities.

(6) When –


(a) a licensee has ceased mining operations in a licensed area;

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(b) the licensee has a loss under subsection (2) in relation to the licensed

area; and

(c) subsection (5) does not apply to the licensed area,


the licensee may elect, by notice in writing to the Chief Executive

Officer, to treat the loss as a loss to which subsection (2) applies in

relation to mining operations undertaken by the licensee in another

licensed area.


(7) If a licensee commenced mining operations before the commencement

of the Income Tax (Amendment) Act 2015, this section applies from the

commencement of those operations.


67I Disposal of an interest in an entity holding a mining right

(1) This section applies if, during a fiscal year –

(a) company, or an interest in a partnership or trust;

(b) the shares or interest derive more than 50% of their value, directly

or indirectly, from a mining right or rights held by a licensee; and

(c) the gain is Tongan-source business income under sections 12(1)(c)

and 60(12).


(2) If, as a result of a disposal referred to in subsection (1), there is a 10% or

more change in the beneficial ownership of a licensee, the licensee shall

immediately notify the Chief Executive Officer, in writing, of the

change.

(3) If a licensee has lodged a notice under subsection (2), the licensee shall

be liable, as agent, for the income tax payable by the non-resident person

in respect of the gain referred to in subsection (1).



DIVISION 4 – MINING ADDITIONAL PROFITS TAX


67J Imposition of mining additional profits tax

(1) There is hereby imposed a mining additional profits tax on a licensee

who has a positive cash balance in relation to mining operations in a

licensed area for a fiscal year.

(2) The mining additional profits tax payable by a under subsection (1) for a

fiscal year shall be 25% or such higher rate as may be specified in an

agreement between the licensee and the Tonga Seabed Minerals

Authority of the positive cash balance of the licensee for the licensed

area for the year.

(3) The mining additional profits tax payable by a licensee for a fiscal year

is in addition to the income tax imposed on the chargeable income of the

licensee for the year.

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67K Mining cash balance


(1) If a licensee has chargeable income in relation to mining operations in a

licensed area for a fiscal year, the cash balance of the licensee for the

licensed area for the year shall be the chargeable income of the licensee

for the licensed area subject to the following adjustments –


(a) the following amounts are deducted from the chargeable income

of the licensee –

(i) expenditure incurred by the licensee during the year in

acquiring a depreciable asset to the extent that the asset is

used in deriving taxable business income in relation to the

licensed area;

(ii) expenditure incurred by the licensee during the year in

acquiring an intangible (other than mining exploration
expenditure) to the extent that the intangible is used in

deriving taxable business income in relation to the licensed

area;

(iii) income tax paid or payable by the licensee on the chargeable

income in relation to the licensed area for the year; and

(iv) the adjusted negative cash balance for the licensed area

brought forward from the previous fiscal year as determined

under subsection (3); and


(b) the following amounts are added to the chargeable income of the

licensee –


(i) the total depreciation deduction allowed in computing the

chargeable income of the licensee for the year in relation to

the licensed area;

(ii) the total amortisation deduction (other than for mining

exploration expenditure) allowed in computing the

chargeable income of the licensee for the year in relation to

the licensed area;

(iii the total deduction allowed for interest and other financial

charges in computing the chargeable income of the licensee

for the year in relation to the licensed area;

(iv) the total deduction allowed in relation to a derivative

financial instrument or a foreign currency hedge in

computing the chargeable income of the licensee for the

year in relation to the licensed area; and

(v) any excess carried forward under section 37 in relation to

the licensed area for the year.


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(2) If a licensee has a business loss for mining operations in a licensed area

for a fiscal year, the cash balance of the licensee for the licensed area for

the year shall be the business loss subject to the following adjustments –


(a) the business loss shall be increased by the amounts specified in

subsection (1)(a); and

(b) the business loss shall be reduced by the amounts specified in

subsection (1)(b).


(3) If the cash balance of a licensee for a licensed area for a fiscal year is

negative, the adjusted negative cash balance of the licensee for the

licensed area for the year shall be the negative cash balance increased by

the uplift factor.

(4) If the cash balance of a licensee for mining operations in a licensed area

for a fiscal year is a positive amount, the cash balance for that year is

treated as zero for the purposes of computing the cash balance of the

licensee for the licensed area for the next following year.

(5) If a licensee commenced mining operations in a licensed area before the

commencement date of the Income Tax (Amendment) Act 2015, the cash

balance of the licensee for the licensed area for the first fiscal year of the

licensee commencing on or after that date shall be calculated on the basis

that this Division applied from the commencement of the mining

operations.

67L Procedure relating to mining additional profits tax

(1) A licensee shall lodge a mining additional profits tax return for a fiscal

year by the same date as the income tax return is due for that year.

(2) A licensee shall lodge a mining additional profits tax return in the form

and manner prescribed in the Regulations.

(3) The mining additional profits tax payable by a licensee for a fiscal year

shall be due on the same date as the income tax is due by the licensee for

that year.

(4) If a licensee lodges a mining additional profits tax return for a fiscal year




(a) the Chief Executive Officer shall be treated as having made an

assessment of the licensee’s positive cash balance and mining

additional profits tax payable thereon, or negative cash balance, for

the year equal to those respective amounts as specified in the return;

and

(b) a mining additional profits tax return lodged under subsection (1)

shall be treated for all purposes of the Act and the Revenue Services

Administration Act 2002 as a notice of the assessment served on the

licensee by the Chief Executive Officer on the day the return was

lodged with the Chief Executive Officer.


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(5) If a licensee fails to lodge a mining additional profits tax return for a

fiscal year –


(a) the Chief Executive Officer may, based on any available

information and according to the Chief Executive Officer’s best

judgment, make an assessment of the licensee’s positive cash

balance and mining additional profits tax payable thereon, or

negative cash balance, for the year; and



(b) as soon as possible after making an assessment under paragraph (a),

the Chief Executive Officer shall serve the licensee with a notice of

the assessment stating the following –

(i) the licensee’s positive or negative cash balance for the year,

as the case may be;

(ii) the amount of mining additional profits tax (if any) due;

(iii) the amount of any penalty and interest payable in respect of

the mining additional profits tax due;

(iv) the time, place and manner of objecting to the assessment.


(6) Section 71 shall apply to a mining additional profits tax assessment with

the necessary changes made.

(7) Section 92 shall apply to mining additional profits tax on the basis that

the reference to “tax” includes a reference to “mining additional profits

tax”.

PART 7B – TAXATION OF PETROLEUM OPERATIONS

DIVISION 1 – PART 7B INTERPRETATION


67M Part 7B interpretation

(1) In this Part, unless the context otherwise requires –

“commencement of commercial production” means the first day of the

first period of thirty (30) consecutive days during which the average level

of production on the twenty five (25) highest production days in the

thirty-day period reaches a level as determined by the Chief Executive

Officer with the advice of the Minister responsible for Lands;

“contract area” means the area of land covered by a petroleum right;

“contractor” means a person who has entered into a petroleum

agreement with the Government;

“cost petroleum” means the share of petroleum that a contractor is

permitted to take under a petroleum agreement to cover costs incurred in

respect of petroleum operations;

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“development activities” means authorised activities undertaken in the

extraction of petroleum from its natural state under a petroleum

agreement;

“development expenditure” means capital expenditure incurred by a

contractor in undertaking development activities, other than expenditure

incurred in acquiring a depreciable asset, and includes the following –

(a) expenditure incurred in acquiring –

(i) an interest in a petroleum right, other than an interest

referred to in paragraph (a)(i) of the definition of

“exploration expenditure”; or

(ii) petroleum information, other than petroleum information

referred to in paragraph (a)(ii) of the definition of

“exploration expenditure”;

(b) social infrastructure expenditure relating to development activities

incurred in accordance with a petroleum right;


“exploration activities” means authorised activities undertaken in the

search for petroleum under an exploration licence or a petroleum

agreement;

“exploration expenditure” means expenditure incurred by a contractor

in undertaking exploration activities, other than expenditure incurred in

acquiring a depreciable asset, and includes –

(a) expenditure incurred in acquiring –

(i) an interest in an exploration licence, or an interest in a

petroleum agreement under which the exploration activities

were undertaken, but only when the interest is acquired

from the Government or under a farm-out agreement; or

(ii) petroleum information related to exploration activities, but

only when the information is acquired from the

Government or under a farm-out agreement;

(b) social infrastructure expenditure relating to exploration activities

incurred in accordance with a petroleum right;

“exploration licence” means an exploration licence issued under the

Petroleum Mining Act;

“farm-out agreement” means an agreement mentioned in section 67R;

“petroleum” has the meaning in the Petroleum Mining Act;

“petroleum additional profits tax” means the petroleum additional

profits tax imposed by section 67V;

“petroleum agreement” means a petroleum agreement entered into

under the Petroleum Mining Act;

“petroleum information” means information relating to a

petroleum right;

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“petroleum operations” means exploration or development activities

undertaken under a petroleum right;

“petroleum right” means an exploration licence or a petroleum

agreement; and

“uplift factor” means 120%.


(2) Subject to subsection (3), to the extent that there is any inconsistency

between the operation of this Act and the terms of a petroleum agreement

entered into before the commencement date of the Income Tax

(Amendment) Act 2015, the petroleum agreement prevails.

(3) For the avoidance of doubt, the requirement under a petroleum

agreement entered into with a contractor prior to the commencement of

the Income Tax (Amendment) Act 2015 that the Government’s share of

petroleum under the agreement for a fiscal year is in full payment of the

income tax payable by the contractor for the year does not apply to the

following –

(a) the tax payable on any gain made by the contractor or any other

person on a disposal, directly or indirectly, of an interest in an

exploration licence or petroleum agreement;

(b) any tax that the contractor is liable to withhold from a payment

made by the contractor.



DIVISION 2 – PETROLEUM ROYALTIES


67N Imposition of petroleum royalties

(1) Subject to this section, there is hereby imposed a petroleum royalty on a

contractor at the rate of 10% or such higher rate as may be specified in a

petroleum agreement of the export value of petroleum recovered under a

petroleum agreement.

(2) Petroleum royalties are payable at the time of disposal of the recovered

petroleum and shall be accounted for to the Chief Executive Officer on a

monthly basis in accordance with section 67O(3).

(3) The export value of petroleum recovered by a contractor shall be the free-

on-board price received or receivable by the person for the petroleum.

(4) If petroleum is exported on the basis of a cost-insurance-freight price, the

export value of the petroleum shall be the cost-insurance-freight price

reduced by the cost of ocean freight and insurance.

(5) The export value of petroleum recovered by a contractor but lost or

destroyed before sale or other disposal is such amount as determined by

the Chief Executive Officer.

(6) If the Chief Executive Officer is satisfied that the price charged for

petroleum is not consistent with the price charged in an arm’s length

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transaction, the Chief Executive Officer can substitute the price charged

in an arm’s length transaction.



(7) Section 66 shall apply, with the necessary changes made, in determining

the price charged in an arm’s length transaction.

(8) This section applies also to a person who recovers petroleum even though

the person has no authority to do so.

(9) This section shall not apply if the petroleum agreement under which the

petroleum is recovered provides for a limit on the annual amount of cost

petroleum equal to 60% or less of the value of petroleum recovered for

a year.


67O Procedure relating to petroleum royalties


(1) A contractor liable for petroleum royalties under section 67N shall lodge

a petroleum royalty return for each month stating the export value of

petroleum disposed of during the month and the petroleum royalties

payable thereon.

(2) A petroleum royalty return for a month shall be lodged in the form and

manner prescribed in the Regulations and shall be lodged within 28 days

after the end of the month.

(3) Petroleum royalties payable by a contractor for a month are due on the

due date for lodging the contractor’s petroleum royalty return for the

month.

(4) If a contractor lodges a petroleum royalty return for a month –


(a) the Chief Executive Officer shall be treated as having made an

assessment of the export value of petroleum disposed of by the

contractor during the month and the petroleum royalties payable

thereon equal to those respective amounts as specified in the return;

and

(b) the petroleum royalty return lodged under this section shall be

treated for all purposes of this Act and the Revenue Services

Administration Act 2002 as a notice of the assessment served on the

contractor by the Chief Executive Officer on the day the return was

lodged with the Chief Executive Officer.


(5) If a contractor fails to lodge a petroleum royalty return for a month –


(a) the Chief Executive Officer may, based on any available

information and according to the Chief Executive Officer’s best

judgment, make an assessment of the export value of petroleum

disposed of by the contractor during the month and the petroleum

royalties payable thereon; and

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(b) as soon as possible after making an assessment under paragraph (a),

the Chief Executive Officer shall serve the contractor with a notice

of the assessment stating the following –


(i) the export value of petroleum disposed of by the contractor

for the month;

(ii) the amount of petroleum royalties due;

(iii) the amount of any penalty and interest payable in respect of

the petroleum royalties due;

(iv) the time, place and manner of objecting to the assessment.

(6) Section 71 shall apply to a petroleum royalties assessment with the

necessary changes made.

(7) Section 92 shall apply to petroleum royalties on the basis that the

reference in the section to “tax” includes a reference to “petroleum

royalty”.



DIVISION 3 – APPLICATION OF INCOME TAX ACT TO

PETROLEUM OPERATIONS


67P Taxation of petroleum contractors

(1) A contractor shall be subject to income tax in accordance with this Act

but subject to the modifications in this Part.

(2) If there is an inconsistency in the taxation of a contractor under the

income tax as between this Part and the other Parts of this Act, this Part

shall prevail.

(3) The rate of income tax applicable to a contractor is 25%.


67Q Petroleum exploration and development expenditure


(1) This Act shall apply to exploration expenditure incurred by a contractor

in relation to a contract area on the basis that it is an intangible with –


(a) a useful life equal to one year; and

(b) a cost equal to the amount of the expenditure.


(2) Subject to subsection (3), this Act shall apply to development

expenditure incurred by a contractor in relation to a contract area on the

basis that it is an intangible with –

(a) a useful life equal to the expected life of the development activities

to which the development expenditure relates; and

(b) a cost equal to the amount of the expenditure.


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(3) If a contractor incurs development expenditure or expenditure to acquire

a depreciable asset for use in development activities before

commencement of commercial production, this Act applies on the basis

that the expenditure was incurred at the time of commencement of

commercial production.



(4) If a contractor disposes of an interest in a petroleum agreement (other

than under a farm-out agreement), any gain arising on the disposal is

reduced by any development expenditure incurred by the contractor that

has not been deducted or recouped by the contractor.

(5) The reference in subsection (4) to “development expenditure” includes

only such expenditure that is not included in the cost of an asset.


(6) Subject to section 67T(7), if a contractor commenced petroleum

operations before the commencement of the Income Tax (Amendment)

Act 2015, this section applies from the commencement of those

operations.


67R Petroleum farm-out agreements

(1) This section applies if the following conditions are satisfied –

(a) a contractor (referred to as the “transferor”) has entered into an

agreement with a person (referred to as the “transferee”) for the

transfer of an interest in a petroleum right; and

(b) the consideration given by the transferee wholly or partly includes

the transferee undertaking some or all of the transferor’s work

commitments in respect of the interest in the right retained by the

transferor.

(2) If this section applies –

(a) the value of any work undertaken by the transferee in relation to the

part of the interest retained by the transferor is not included in:

(i) the consideration received by the transferor for the

transferred interest; or

(ii) the gross income of the transferor; and

(b) the following applies to any amount in money received or

receivable by the transferor for the transferred interest:

(i) section 52 applies to the amount in money on the basis that

it is a reimbursement or recovery by the transferor of any

deductions allowed for expenditure incurred by the

transferor in respect of the transferred interest; and

(ii) if the amount in money exceeds the amount of deducted

expenditure to which section 52 applies, the excess is

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treated as consideration received for the transferred

interest.

67S Contributions to a petroleum decommissioning fund


(1) A contribution made by a contractor to a decommissioning fund as

required under the terms of a petroleum right granted to the contractor

shall be allowed as a deduction in the fiscal year in which the

contribution was made.

(2) Subject to subsection (3), expenditure incurred by a contractor in

carrying out decommissioning work to a contract area as required under

a petroleum right granted to the contractor shall be allowed as a

deduction in the fiscal year in which the expenditure is incurred.

(3) A deduction shall not be allowed under subsection (2) to the extent that

the decommissioning work is paid for, directly or indirectly, from money

made available out of the contractor’s decommissioning fund.

(4) Amounts accumulated in a decommissioning fund or withdrawn from a

decommissioning fund to pay for decommissioning work as required

under a petroleum right shall be exempt income.

(5) Any surplus in a decommissioning fund of a contractor at the time of

completion of all petroleum operations to which the fund relates shall be

included in the taxable business income of the contractor for the fiscal

year in which the operations are completed.



(6) In this section, “decommissioning fund” means a fund or account

required to be established under a petroleum right to provide for the

future payment of decommissioning work to the contract area covered

by the petroleum right and is managed jointly by the Minister responsible

for Lands and the contractor.


67T Ring-fencing of petroleum operations


(1) A deduction for expenditures incurred, wholly or partly, by a contractor

in undertaking petroleum operations in a contract area during a fiscal

year shall be allowed only against the gross income derived by the

contractor from such operations in the contract area during the year.

(2) If the total amount of deductions allowed under this Act to a contractor

in respect of petroleum operations undertaken by the contractor in a

contract area during a fiscal year exceed the gross income derived from

such operations in the contract area for the year, the excess shall be

carried forward and allowed as a deduction against amounts included in

the gross income of the contractor from petroleum operations in the

contract area in the next following fiscal year of the contractor.

(3) An amount that is not deducted under subsection (2) shall be carried

forward to the next following fiscal year of the contractor and allowed as

Income Tax (Amendment) Act 2015 Section 7





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a deduction in accordance with subsection (2) in that year and so on until

the amount has been fully deducted or all petroleum operations of the

contractor in the contract area cease.

(4) If a contractor has an excess carried forward under subsection (2) for a

contract area for more than one fiscal year, the excess of the earliest

period shall be allowed as a deduction first.

(5) If a contractor has ceased exploration activities in relation to a contract

area and the contractor has a loss under subsection (2) in relation to the

contract area, the loss may be transferred to a contract area in which the

contractor undertakes development activities if the contract area covered

by the development activities falls wholly within the contract area

covered by the exploration activities.

(6) When –


(a) a contractor has ceased petroleum operations in a contract area;

(b) the contractor has a loss under subsection (2) in relation to the

contract area; and

(c) subsection (5) does not apply to the contract area,


the contractor may elect, by notice in writing to the Chief Executive

Officer, to treat the loss as a loss to which subsection (2) applies in

relation to petroleum operations undertaken by the contractor in another

contract area.


(7) If a contractor commenced petroleum operations before the

commencement of the Income Tax (Amendment) Act 2015, this section

applies from the commencement of those operations.


67U Disposal of an interest in an entity holding a petroleum right

(1) This section applies if, during a fiscal year –

(a) a non-resident person has made a gain on the disposal of shares in

a company, or an interest in a partnership or trust;

(b) the shares or interest derive more than 50% of their value, directly

or indirectly, from a petroleum right or rights held by a contractor;

and

(c) the gain is Tongan-source business income under sections 12(1)(c)

and 60(12).

(2) If, as a result of a disposal referred to in subsection (1), there is a 10% or

more change in the beneficial ownership of a contractor, the contractor

shall immediately notify the Chief Executive Officer, in writing, of

the change.

(3) If a contractor has lodged a notice under subsection (2), the contractor

shall be liable, as agent, for the income tax payable by the non-resident

person in respect of the gain referred to in subsection (1).

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DIVISION 4 – PETROLEUM ADDITIONAL PROFITS TAX


67V Imposition of petroleum additional profits tax


(1) There is hereby imposed a petroleum additional profits tax on a

contractor who has a positive cash balance in relation to petroleum

operations in a contract area for a fiscal year.

(2) The petroleum additional profits tax payable by a contractor under

subsection (1) for a fiscal year shall be 25% or such higher rate as may

be specified in a petroleum agreement of the positive cash balance of the

contractor for the contract area for the year.

(3) The petroleum additional profits tax payable by a contractor for a fiscal

year is in addition to the income tax imposed on the chargeable income

of the contractor for the year.


67W Petroleum cash balance

(1) If a contractor has chargeable income in relation to petroleum operations

in a contract area for a fiscal year, the cash balance of a contractor for the

contract area for the year shall be the chargeable income of the contractor

for the contract area subject to the following adjustments –

(a) the following amounts are deducted from the chargeable income of

the contractor –

(i) expenditure incurred by the contractor during the year in

acquiring a depreciable asset to the extent that the asset is

used in deriving taxable business income in relation to the

contract area;

(ii) expenditure incurred by the contractor during the year in

acquiring an intangible (other than exploration
expenditure) to the extent that the intangible is used in

deriving taxable business income in relation to the contract

area;

(iii) income tax paid or payable by the contractor on the

chargeable income in relation to the contract area for the

year; and

(iv) the adjusted negative cash balance for the contract area

brought forward from the previous fiscal year as

determined under subsection (3); and


(b) the following amounts are added to the chargeable income of the

contractor –


Income Tax (Amendment) Act 2015 Section 7





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Act 9 of 2015 Page 27




(i) the total depreciation deduction allowed in computing the

chargeable income of the contractor for the year in relation

to the contract area;

(ii) the total amortisation deduction (other than for exploration

expenditure) allowed in computing the chargeable income

of the contractor for the year in relation to the contract area;

(iii) the total deduction allowed for interest and other financial

charges in computing the chargeable income of the

contractor for the year in relation to the contract area;

(iv) the total deduction allowed in relation to a derivative

financial instrument or a foreign currency hedge in

computing the chargeable income of the contractor for the

year in relation to the contract area; and

(v) any excess carried forward under section 37 in relation to

the contract area for the year.


(2) If a contractor has a business loss for petroleum operations in a contract

area for a fiscal year, the cash balance of the contractor for the contract

area for the year shall be the business loss subject to the following

adjustments –


(a) the business loss shall be increased by the amounts specified in

subsection (1)(a); and



(b) the business loss shall be reduced by the amounts specified in

subsection (1)(b).


(3) If the cash balance of a contractor for a contract area for a fiscal year is

negative, the adjusted negative cash balance of the contractor for the

contract area for the year shall be the negative cash balance increased by

the uplift factor.

(4) If the cash balance of a contractor for petroleum operations in a contract

area for a fiscal year is a positive amount, the cash balance for that year

is treated as zero for the purposes of computing the cash balance of the

contractor for the next following year.

(5) If a contractor commenced petroleum operations in a contract area before

the date of commencement of the Income Tax (Amendment) Act 2015,

the cash balance of the contractor for the contract area for the first fiscal

year of the contractor commencing on or after that date shall be

calculated on the basis that this Division applied from the

commencement of the petroleum operations.

67X Procedure relating to petroleum additional profits tax


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(1) A contractor liable for petroleum additional profits tax shall lodge a

petroleum additional profits tax return for a fiscal year by the same date

as the income tax return is due for that year.

(2) A contractor shall lodge a petroleum additional profits tax return in the

form and manner prescribed in the Regulations.

(3) The petroleum additional profits tax payable by a contractor for a fiscal

year shall be due on the same date as the income tax is due by the

contractor for that year.

(4) If a contractor lodges a petroleum additional profits tax return for a fiscal

year –

(a) the Chief Executive Officer shall be treated as having made an

assessment of the contractor’s positive cash balance and petroleum

additional profits tax payable thereon, or negative cash balance, for

the year equal to those respective amounts as specified in the return;

and

(b) a petroleum additional profits tax return lodged under subsection

shall be treated for all purposes of the Act and the Revenue Services

Administration Act 2002 as a notice of the assessment served on the

contractor by the Chief Executive Officer on the day the return was

lodged with the Chief Executive Officer.


(5) If a contractor fails to lodge a petroleum additional profits tax return for

a fiscal year –

(a) the Chief Executive Officer may, based on any available

information and according to the Chief Executive Officer’s best

judgment, make an assessment of the contractor’s positive cash

balance and petroleum additional profits tax payable thereon, or

negative cash balance, for the year; and

(b) as soon as possible after making an assessment under paragraph (a),

the Chief Executive Officer shall serve the contractor with a notice

of the assessment stating the following –


(i) the contractor’s positive or negative cash balance for the

year, as the case may be;

(ii) the amount of petroleum additional profits tax (if any) due;

(iii) the amount of any penalty and interest payable in respect of

the petroleum additional profits tax due;

(iv) the time, place and manner of objecting to the assessment.

(Section 71 shall apply to a petroleum additional profits tax

assessment with the necessary changes made.)

(6) Section 71 shall apply to petroleum additional profits tax on the basis

that the reference to “tax” includes a reference to “petroleum additional

profits tax”.


Income Tax (Amendment) Act 2015 Section 8





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Act 9 of 2015 Page 29




(7) Section 92 shall apply to petroleum additional profits tax on the basis

that the reference to “tax” includes a reference to “petroleum additional

profits tax.”.

8 Section 79 amended


Section 79 of the Principal Act is amended in subsection (3) –

(a) in the English version only, by inserting “, other than services to which

subsection (2) applies,” after “services”; and

(b) in the Tonga version only, by inserting “kehe ange mei he ngaahi ngaue, ‘oku

ngaue’aki ki ai ‘a e kupu si’i (2),” after “tau’ataina,”.

9 Amendment to Second Schedule


The Second Schedule to the Principal Act is amended -

(a) by making the existing Schedule paragraph 1;

(b) in the English version only, in the second row of paragraph 1, by inserting after

“mining” the words “development activities, petroleum development

activities”;

(c) in the Tongan version only, in the second row of paragraph 1, by deleting the

word “keli maka koloa” and replacing it with the following “ngaahi ngaue

fakalakalaka ki he ngaue keli, ngaahi ngaue fakalakalaka petoliume”;

(d) by inserting the following row at the end of the table –


Plant and machinery that has
its first use in undertaking
mining exploration activities
or petroleum exploration
activities

100%




(e) by inserting the following paragraph after paragraph 1 –


“2. In this Schedule –

“mining development activities” has the meaning in section 67A;

“mining exploration activities” has the meaning in section 67A;

“petroleum development activities” means development activities as

defined in section 67M; and

“petroleum exploration activities” means exploration activities as

defined in section 67M.”.

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Passed by the Legislative Assembly this 5th day of October 2015.

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