Digicel executives flee PNG to avoid jail

Digicel executives have fled Papua New Guinea to avoid potential jail time for failing to pay a one-off $130 million tax imposed on the Pacific telco which Telstra is in the process of buying.

The exodus of key management personnel raises the question of “who will run Digicel for Telstra”, a source said.

Digicel and Telstra have lobbied the Australian government to intervene in the tax dispute.

A request has been made for Prime Minister Scott Morrison to speak to PNG Prime Minister James Marape to help overturn the Digicel tax and to stop potential jail terms of up to six months for failure to pay it, a source said.

PNG late last month imposed a 350 million kina ($130 million) “super tax” on Digicel Pacific, disrupting a
$US1.6 billion ($2.1 billion) buyout of the telco by Telstra and the Australian government, which is trying to negate China’s influence in the region.

Facing a big budget deficit during COVID-19, PNG Treasurer Ian Ling- Stuckey legislated the market concentration levy on the country’s dominant telco and Bank South Pacific, which is listed on the Australian Securities Exchange.

Digicel was given one week to pay the tax by March 30 and is now liable for an additional 50 million kina fine for failing to meet the deadline.

Digicel’s executives face “up to” six months in prison for not paying the fine, under a standard clause often used in PNG tax law.
The company’s Irish billionaire owner, Denis O’Brien, visited PNG last week to speak to Prime Minister Marape to try to overturn the tax.

Mr O’Brien has since left and Digicel has launched a court case in PNG against the tax.

After receiving legal advice from a major international law firm, it is understood other senior executives such as Digicel PNG chief executive Colin Stone and chief sales officer Lorna McPherson also exited the country in recent days.
PNG’s Treasurer made personal assurances to Digicel executives that they would not be jailed and that telecommunications is a key sector of the economy, according to a PNG-based source. The exodus was described as “theatrics”.
PNG’s Internal Revenue Commission has discretion whether to seek jail time.

Credit rating implications

The “exit tax” complicates Telstra’s acquisition of the Pacific’s largest telco business with significant Australian government financing support.
Telstra intends to retain key PNG-based Digicel management to help with the transition to run the Pacific telco.

Digicel has said the “bizarre” tax had “implications for the sale of Digicel’s Pacific operations to Telstra” and “wider reputational and credit rating implications for Papua New Guinea internationally”.
A Telstra spokesman said that “under the contract the seller has an obligation to operate the business consistent with the basis in which we agreed to acquire it until it’s handed over”.
“Therefore any issues that arise in the meantime, such as this tax, are for the seller to resolve.”
A senior Australian government source said Telstra was not liable for the tax and it was a problem for Digicel.

However, sources said that, under PNG tax law, Telstra would inherit the tax liability if it was not resolved by Mr O’Brien.
Telstra may have to factor the financial burden into its final payment, or set money aside in a trust pending a legal resolution.

Digicel is the South Pacific’s biggest telco business. Headquartered in PNG, it also operates across Vanuatu, Nauru, Samoa, Tonga and Fiji.

The takeover arose after the Australian government’s national security officials became concerned about the potential for a Chinese state-owned enterprise to buy Digicel and use it for strategic influence and espionage on Pacific politicians and elites.

Stephen Howes, Australian National University economist and a former adviser to the Australian government on PNG, said the additional tax on Digicel Pacific was justified because it had slashed its tax bill for years through “profit shifting”.

Low-tax jurisdictions

Digicel Pacific paid lucrative brand licensing fees to its parent company, Digicel, which has entities in low-tax jurisdictions such as Ireland, the Caribbean and Singapore.
“That would be a good reason for this exit tax if they wanted to justify it,” Professor Howes said.
“PNG is in a very difficult budgetary position and Digicel is a massive monopoly and has been incredibly profitable.”

Mr Ling-Stuckey said last week that the one-off tax on Digicel was based on the “high historic levels of overall profitability from Digicel Pacific” after allowing for recurrent and capital profits.
“We know that some will not like the outcomes, but this is a sovereign acting in the interests of all the people of PNG in this critical work of budget repair in these most extraordinary and difficult times.”
The federal government’s Export Finance Australia (EFA) is significantly de-risking Telstra’s investment in Digicel through about $US720 million of 10-year debt and $US610 million of subordinated equity and insurance. Telstra will contribute $US270 million in equity.

Professor Howes said perceived national security risks from China had been used to justify the government financing Telstra’s takeover of Digicel Pacific.

“Mention the word China, and the government just writes cheques,” he said.
“It’s huge risk shifting to the government. Telstra is getting all of the profit, and none of the risk.”
Professor Howes estimates EFA is providing a subsidy of at least $US200 million to Telstra.

If Telstra takes over Digicel, the Australian telco has agreed with the PNG government to pay extra taxes worth at least 41 million kina each year, plus undertake major infrastructure investment including 115 new towers in PNG.

Telstra’s 30 per cent corporate tax rate in Australia is similar to PNG’s tax rate, so there is no tax shifting benefit.

A PNG-based industry source said Fiji-headquartered Amalgamated Telecom Holdings was expanding in PNG and wanted to challenge Digicel and Telstra’s stranglehold on the market.

Amalgamated Telecom Holdings has plans to build about 1000 telecommunications towers, compared to Digicel’s 1100 towers.
*Source Australian Financial Review


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