Petroleum Africa
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Friday, January 30, 2015
There is some concern that Kenya’s opaque tax policy position on farm-down transactions could limit interest in the country’s petroleum potential. Tax experts Deloitte East Africa said that this issue could derail the momentum Kenya has garnered to date in the industry. Deloitte East Africa took issue with the assumption that all farm-down transactions result in windfall profits.
Kenya’s oil industry is filled mainly with independent E&P firms, but farm-down transactions provide an opportunity for major E&P firms to pick up a piece of the country’s petroleum sector. The major E&P firms bring deeper pockets to the mix, allowing for more capital intensive programs that the smaller independent firms cannot afford.
“Such transactions raise finances but also manage exploration and development risks in the sector. Countries that place onerous requirements on assignment of petroleum interests can potentially discourage FDI in the sector,” the Deloitte experts say in the ‘Kenya’s Petroleum Fiscal Regime’ report.
For companies wanting to farm down their holdings in Kenya, various taxes apply including income tax that applies to net gains arising in relation to the disposal or assignment of a petroleum interest, at the corporation tax rates ranging from 30% to 37.5%. Work obligations or future carry are excluded from the proceeds deemed to be earned on the disposal of a petroleum interest.
There are other taxes on investors carrying out exploration in Kenya, such as the value added tax. This tax applies to the supply of services at a rate of 16% unless such services have been specifically exempted. Exemptions to the value added tax cover supplies imported or purchased for direct and exclusive use in oil, gas, or mining prospecting or exploration by a licensed company. Farm outs do not fall within the realm of this exemption.
While the unclear tax policy on farm downs is a negative, Deloitte says the petroleum fiscal terms adopted by Kenya are favorable for FDI.
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