Rigid tax regime stands in the way of oil exploration

PHOTO | COURTESY | FILE According to the Finance Act 2012, players in the mining industry are required to pay a withholding tax of up to 20 per cent on assignment of rights, sale of business, or takeovers.  NATION MEDIA GROUP

By GRIFFINS OMWENGA gomwenga@ke.nationmedia.com
Posted  Tuesday, April 23   2013 

IN SUMMARY

• Prospective oil and gas explorers are turning away from Kenya, discouraged by high       taxes slapped on mining activities, say experts

Kenya is losing billions of shillings as foreign investors interested in oil exploration turn away, discouraged by unfavourable tax systems.

Professional services firm RSM Ashvir last week said it had consulted for many firms intending to invest over Sh50 billion in the sector but the changing taxation regime had made them hold back.

The firm said the 20 per cent withholding tax that was slapped on mining activities conducted by foreign firms was not only retrogressive but also unwelcome for development of the industry.

“This is a major disincentive and a great setback to oil exploration activities and as such, there ought to be enough consultations in drafting laws governing taxation in the country to put them in sync with international best practices,” said Mr Ashif Kassam, chief executive and managing partner of RSM Ashvir.

Players in the mining industry are now required to pay a withholding tax of up to 20 per cent on assignment of rights, sale of business, or takeovers in accordance with the Finance Act 2012. Kenyans involved in such transfers would be required to pay a withholding tax of 10 per cent.

Pumping money

Mr Kassam noted that many mining firms spend the first 10 years of their activities pumping money into projects without any corresponding revenue income.

Therefore, the 20 per cent tax charge could kill the mining industry even before Kenya can discover commercially viable oil quantities to warrant large-scale production.

According to an estimate by the former Industrialisation Ministry, the government loses Sh300 billion from frequent property transfers in mining businesses.

President Uhuru Kenyatta has already constituted a ministry to oversee mining in the country.

Kenya is also under increasing pressure to review its mining laws after the East African Legislative Assembly (EALA) adopted a report that calls for the code to be aligned to a continent-wide initiative.

The assembly called for establishment of an institutional mechanism by the EAC secretariat to tighten mining regimes.

The regional parliament wants member states to develop a human resource capacity for contract negotiations with multinationals and revenue collection in order to enhance skill transfer in the sector.

Other experts in the oil industry have called for liberalisation of the oil sector, including establishment of institutions and regulatory authorities in line with international best practices so as to prepare the country for benefits that would accrue from the discovery of oil and other energy resources.

A recent Pinebridge Investment conference in Naivasha for stakeholders from East Africa said Kenya needs to abolish concentrated responsibility and authority in the sector, as was the case initially when the industry was under the Energy Regulatory Commission.

Oil expert George Wachira said opaque business practices, ineffective fuel subsidies, and production sharing deals should be tackled as the country develops an oil industry.

Revenue sharing

“We need to emulate countries like Ghana and Norway that have the best global practices to avoid pitfalls that come with oil discovery,” said the economist and director of Petroleum Focus, a consulting firm.

The experts said the current Act governing the industry was outdated and called for a draft energy policy to govern operations in oil and gas exploration.

“What is urgently needed are policies and legal and institutional frameworks to define the working relationship between the government, explorers, and other parties to govern the operations from exploration to revenue sharing,” Mr Wachira said.

He added that Kenya and the rest of East Africa need an updated “Upstream Oil and Gas Act” guided by appropriate policies.

The experts want the government to become a member of the Extractive Industries Transparency Initiative (EITI) — a coalition of governments, companies, and civil society groups that set standards for transparency in the oil, gas, and mining sectors
.