How to pay a US company legally from Papua New Guinea
Quick answer
Paying a US company from Papua New Guinea (PNG) involves navigating foreign exchange controls managed by the Bank of Papua New Guinea. While there is no US-PNG tax treaty, arm's-length service payments are typically not subject to US withholding tax. International wire transfers through commercial banks are the primary payment rail, though delays due to FX rationing are common.
The regulatory environment
The Bank of Papua New Guinea (BPNG) serves as the central bank, responsible for maintaining price stability and overseeing the financial system. The BPNG exercises significant control over foreign exchange movements to protect its reserves, leading to a persistent foreign exchange shortage since 2015. All outward payments or remittances in foreign currency must be processed through an Authorized Dealer (commercial banks) and reported to them using specific forms (Form-R1 or Form-R1(A)).
These foreign exchange controls mean that obtaining USD for international payments can be challenging and subject to delays. The BPNG rations foreign currency, which can result in a backlog of orders for businesses attempting to make international payments. This situation can lead to delayed invoice payments and deferred payments for goods and services.
US tax treaty status
There is no income tax treaty between the United States and Papua New Guinea. Consequently, the default US tax rules apply. For passive income such as dividends and royalties paid to a PNG entity, a 30% US withholding tax typically applies. However, for arm's-length payments for services performed by a US company for a PNG entity, US withholding tax is generally 0%, provided the services are not performed within the US by the PNG entity's employees or agents.
How to actually send the payment
The most common method for sending payments to US companies from Papua New Guinea is via international wire transfer through commercial banks such as ANZ, Kina Bank, or Bank South Pacific (BSP). The process typically involves:
- Foreign Exchange Application: Submitting an application to your commercial bank for foreign currency (USD). This application will require supporting documentation, including invoices, contracts, and proof of service delivery, to justify the payment.
- BPNG Approval: The commercial bank will then submit the request to the Bank of Papua New Guinea for approval and allocation of foreign currency. Due to FX rationing, this step can introduce significant delays, often ranging from several weeks to months.
- Wire Transfer Execution: Once foreign currency is allocated and approved, the bank will execute the wire transfer. Timelines for the actual transfer can vary, but typically take 1-5 business days after the FX approval.
Fintech platforms like Wise and Payoneer have limited or no direct functionality for initiating outward payments from PNG in PGK to USD. While OFX offers services for sending money to Papua New Guinea, initiating payments from PNG to the US is primarily bank-driven due to the stringent FX controls. DigiPay.Guru is a local fintech solution focused on digital payments within PNG, but not typically for international outward remittances.
Common mistakes and how to avoid them
- Underestimating FX Delays: Many businesses fail to account for the significant delays in obtaining foreign currency. Fix: Plan international payments well in advance, initiating the FX application process several weeks or even months before the payment due date.
- Incomplete Documentation: Submitting incomplete or incorrect documentation for FX applications can lead to further delays or rejection. Fix: Ensure all supporting documents (invoices, contracts, service agreements, proof of delivery) are meticulously prepared and submitted with the application.
- Ignoring Central Bank Regulations: Not understanding the specific requirements of the Bank of Papua New Guinea's foreign exchange manual. Fix: Consult with your commercial bank's international payments desk or a local financial advisor to ensure full compliance with BPNG regulations.
- Assuming Fintech Availability: Believing that popular international fintech platforms offer straightforward outward payments from PNG. Fix: Verify the capabilities of any fintech platform for outward payments from PNG before relying on them; generally, traditional bank transfers are the only reliable option.
Edge cases
- Paying a US LLC vs. C-Corp: The legal structure of the US entity generally does not impact the PNG payment process or FX controls. The key consideration remains the nature of the payment (service vs. passive income) for US tax purposes.
- Dividend vs. Service Payment: Payments classified as dividends or royalties to a US company will likely be subject to 30% US withholding tax due to the absence of a tax treaty. Payments for legitimate, arm's-length services are typically not subject to US withholding tax.
- Large vs. Small Amounts: While all foreign currency payments are subject to BPNG's FX controls, larger amounts may attract closer scrutiny and potentially longer processing times. There are no explicit approval thresholds publicly stated, but banks will assess each transaction's legitimacy.
When you don't need us
If your payment is a straightforward, arm's-length service invoice to a US company, and you have sufficient lead time to navigate the Bank of Papua New Guinea's foreign exchange process through your commercial bank, you may not require specialist assistance. Your local bank should be able to guide you through the necessary forms and documentation.
When Keystone Bridge helps
Keystone Bridge can provide invaluable assistance when navigating the complexities of international payments from Papua New Guinea, especially given the stringent FX controls and the absence of a US tax treaty. This includes situations involving significant payment delays due to FX rationing, structuring complex transactions (e.g., intercompany loans, intellectual property royalties), or when dealing with large transaction volumes. Our expertise ensures compliance and helps mitigate risks associated with cross-border payments in challenging regulatory environments.
For the broader picture on this topic, see our guide on how to pay a US company from your country.