Business Profits Tax (BPT)

Every person registered for PGST is subject to BPT from January 01, 2023. Business Profits Tax (BPT) will replace your Gross Revenue Tax (GRT) reporting obligation. You do not have to register for BPT. You will be automatically registered when you register for PGST.

Who BPT applies to

BPT applies to all businesses who are registered for PGST, including:

• Foreign Investment Approval Certificate (FIAC) holders
• Following State-Owned Enterprises (Palau Public Utilities Corporation, Palau National Communications Corporation, and Belau Submarine Cable Corporation)
• financial institutions (e.g. banks).

BPT does not apply to government entities (national, state & foreign) and commissions, boards, authorities, and most public entities.

See also: Palau Goods and Services Tax (PGST) Registration

What you need to know?

BPT is a tax on your net income (gross revenue less allowable deductions) that is determined at the end of your tax year.

During the year you will make installment payments that will be credited toward your BPT tax payable at the end of the year. Planning ahead for your tax is important to help maintain a healthy cashflow. BPT helps allows you to do this and this is how it works.

• You make quarterly installments payments based on:
  • Year 2023 or any other year that you have no BPT payable, 2% of gross revenue is used as basis for your BPT installment payment
  • 25% of your BPT tax liability in the previous year
• For year 2023 or if you had no BPT payable in the previous year, you may apply to vary the installment amount to a lower rate to the Director of the Bureau of Revenue & Taxation by completing the Tax-502B 2023 BPT Vary Quarterly Installment Form.
• When you file your BPT Return at the end of your tax year, the installments you paid during the year will be used to offset against your BPT tax liability.

BPT allows you to carry forward losses during your tax year to offset future profits for the next 4 years.

BPT Rate

Business Profits Tax is assessed an applied at the rate of 12% on the person’s net income for each tax year.

Accounting method for BPT

When accounting for BPT you must use the accrual accounting method unless a request for cash basis accounting was approved by the Director of the Bureau of Revenue & Taxation.

Accrual Method of Accounting

Under the accrual accounting method revenue is recorded when it is earned and expenses when they are incurred.

Revenue recognition following the accrual accounting method

• gross revenue is recognized when you have fulfilled the performance obligations.
• prepayment (deferred revenue) will not be counted as gross revenue until the performance obligations are fulfilled.
• for payment to be received later (accrued revenue), payment will be included in gross revenue as performance obligations are fulfilled.

Cash basis method of accounting

Under the cash basis method of accounting revenue is recorded when payment has been received and expenses have been paid for.

Calculating gross revenue

Your gross revenue for BPT should be calculated and determined following the accounting method for BPT – accrual accounting method unless a request for cash basis accounting was approved by the Director of the Bureau of Revenue & Taxation.

The following are considered when calculating gross revenue:

• income derived from businesses sourced in Palau
• gain on disposal of assets
• interest, dividends, royalties, rentals, and fees (not including dividends from resident entities).

Gross revenue for BPT purposes does not include:

• refunds, rebates, and returns;
• monies held in a fiduciary capacity;
• gross receipts from the sale of bonds or other evidence of indebtedness or stocks, or from the sale of land;
• income in the form of wages and salaries; and
• the cost of senior citizen discounts.
• exempt income;
• an amount subject to non-resident tax or international transportation tax
• Amount of PGST charged and collected from customer.

Exempt Income means:

• a distribution by a resident entity;
• the income of a nonprofit corporation that is a resident;
• an amount to the extent exempt from tax under Chapter 9 of Title 28 or an international agreement;
• an amount derived by a non-resident from the operation of a ship or aircraft if the Director is satisfied that an equivalent exemption is provided to a resident by the country in which the non-resident resides;
• an amount derived by the national government or a state government or a political subdivision of the national government or a state government.

What this means for you?

BPT is imposed on your net income, which calculated as your gross revenue less allowable deductions.
The shift to BPT means tax is imposed on your profits rather on your entire turnover for GRT.

Administration of BPT

Payment installments are due by the 15^th day of the month following the end of the 3^rd, 6^th, 9^th, and 12^th months of your tax year.
An annual return for a tax year must be filed within 3 months of the end of the tax year.

Tax year

The beginning and end date of a tax year differ, depending on what type of taxpayer you are.

Company

For a company, the tax year means a period of 12 months, ending on the date of the annual balance of your company’s financial accounts. For example, if you balance your company’s financial accounts on September 30, then the tax year is the period from October 01, to September 30. Many companies will have a tax year that is the same as the calendar year.

Any other taxpayer

For any other taxpayer, it is the calendar year, January 01 to December 31 of the relevant year.