Oil and gas industry to face ‘net gains’ tax in revised Finance Bill

The Finance Bill has proposed a new taxation regime for the country’s oil and gas sector.

It proposes total overhaul of the ninth schedule of the Income Tax Act to match recent developments following discoveries of commercial quantities of oil, increased investor appetite and multibillion deals in sale of part interests in licensed blocks.

The National Treasury wants to tax the net gains of such sales if the value of a transaction is 20 per cent or more of the total transaction value.

It proposes that the amount of net gain be included as income chargeable to tax if the interest derived is more than half (50 per cent) of its value from sale of oil blocks, or the full amount of the net gain.

While the deals are subject to taxation on income from sale of the resources, a fresh challenge arises from the fact that most of these transactions are happening offshore, as admitted Mr Pancrasius Nyaga, KRA’s commissioner for domestic taxes, in a recent interview.

“Income from exploration and premium will be based on the quantity  of value of minerals. This is calculated  from the gains  or profit of the licensee. The net gain income is that which was derived from Kenya,” National Treasury Cabinet Secretary Henry Rotich says in the Bill to be tabled in Parliament for enactment.

'DOUBLE TAXATION'

Under the Withholding Tax introduced two years ago, sale of shares or assignments of rights by an oil company will attract 10 per cent charge for resident firms, and 20 per cent for non resident firms.

However, this was amended in July last year after lobbying by exploration firms, who said it amounted to double taxation.

Deloitte Touche’s Nikhil Hira, for instance, says such acquisition should not attract taxation.

While the existing law needs to be overhauled, he says, tax on oil assets should apply at the production stage when revenues accrue to oil firms.

“There is no gain from farm out or farm-ins because of future commitments between parties on future sales. Tax income should be charged only after a discovery is made,” he said on telephone.

“The current law on oil and gas is outdated. This is a review of the whole Act, but the Withholding Tax was challenged based on global best practices,” he added.

Industry players also opposed the new taxation. “There are no gains made during farm outs, but reimbursement of costs on past expenditure. So what are you taxing? “asked an official of Zahara Oil, one of the 24 licensed prospectors in Kenya.

At the moment, Capital Gains Tax remains suspended since 1985. Such transactions effectively change the control of shares of Kenyan assets to a third party.

Cove Energy recently sold 100 per cent of its interests in Mozambique and Kenya, bucking the trend of partial sales known as farm-in and farm-outs.

This prompted the government to demand the equivalent of 30 per cent of the total cost of the oil blocks.

According to the Kenya Revenue Authority (KRA), there have been several such transactions, which earned the government nothing in tax due to the way the deals were structured.

Two years ago, the government dropped a tax demand of about Sh3 billion from sale of five oil blocks in Kenya from Cove Energy, following its acquisition by a Thai company. One of the five was Block L10A — where an oil find was announced  this week.