Capital gains tax to slow activities in oil, gas exploration, says study
A Nairobi Securities Exchange employee checks the stocks trading on board at the exchange’s head offices in Westlands. Re-introduction of capital gains tax has been met with diverse reactions, with experts warning that it will have an impact on trading activities. FILE PHOTO | EVANS HABIL |
What you need to know:
- Kenya’s preparation of commercial crude drilling faces hurdles.
- Consultancy firm Deloitte says that the charge will have a negative impact on the nascent sector in Kenya.
A consultancy firm has warned that capital gains tax could discourage large international oil and gas companies from the local industry even as Kenya prepares for commercial production.
A study of Kenya’s petroleum regulatory environment carried out by Deloitte singled out administration of capital gains tax on farm down transactions as having the potential to slow down exploration.
Farm down refers to the practice by oil and gas companies to sell all or part of their exploration interests to other firms.
Deloitte urges the government to develop guidelines on administration of the tax that ensure it is only applied to the portion of the gains from such transactions that are not meant to be re-invested in exploration and production activities.
FISCAL REGIME DRAWBACK
“The only drawback with the fiscal regime, which has the potential to derail the momentum building, is the unclear tax policy position on farm down transactions. Not all farm down transactions generate windfall profits. They represent a real opportunity for big oil companies to acquire working interest in the country’s petroleum sector originally dominated by smaller oil companies,” reads the report.
International oil and gas exploration companies enter into farm down agreements for various reasons, including fund-raising for future undertakings, and to make profits out of exploration.
The most common such transactions are those involving small-sized exploration firms, which are the original exploration licence holders, selling their interest to large companies, mostly after acquisition of data, which indicates high potential of oil and gas deposits in the specific areas.
Capital gains tax was suspended in 1978 to accelerate growth of the capital markets and real estate sectors, but was re-introduced last year as a move to increase revenue collection by the government.
The tax, which became effective on the January 1, will be applied at the rate of 30 per cent on gains involving sale of rights by resident companies in the extractive sector and 37.5 per cent in similar transactions involving non-resident firms.
Since its re-introduction, the tax has been met with varied reactions, with some analysts and investors expressing fears that it will discourage investment in the local sectors.
Last year, Africa Oil Corporation of Canada — Tullow Oil’s exploration partner — announced that it would team up with the Kenya Oil and Gas Association (Koga) an industry lobby, to push for an amendment to reduce the tax.
“Africa Oil, alongside the industry representative body is working closely with all levels of the Kenyan Government to discuss the potential negative impact such a tax policy will have on the development of the still early-stage oil exploration industry.
“This will include potential barriers to entry for new investors, erosion of present investor confidence and potential delays to exploration and development activity,” chief executive Keith Hill said in response to the Finance Act 2014.
On Thursday last week, Mr Hill said the company was in talks with the government to resolve the remaining tax and fiscal issues this year. Kenya has discovered oil at Lokichar basin estimated at over 600 million barrels, which is above the minimum threshold for commercial exploitation.
