Kenya’s move to replace withholding tax with income tax on assignment of rights targeting the extractive industry has received praise from tax experts who say this move will encourage farm-outs especially ahead of the country’s planned oil production.
“To streamline industry’s tax regime, I have proposed to replace the current withholding tax with income tax on assignment of rights, (farm-outs) based on net gain in line with international practice. This will address the inherent challenges and promote mining, gas as well as oil exploration and extraction operations,” finance cabinet secretary Henry Rotich said during the budget speech.
According to tax expert Group Chief Executive at RSM Ashvir Ashiff Kassam this move will go a long way in encouraging foreign investors into the country as the use of income tax will see companies pay tax on their net gains unlike before where tax was based on the entire sale.
“Starting now companies who farm-out can pay tax based on their net profit which is the common practice internationally. This is particularly important as mining and exploration activities are in top gear in the country,” Kassam told OilNews Kenya.
This is particularly important as companies such as Tullow Oil and Africa Oil, which have already discovered oil in Turkana, plan oil production with the two lacking the financial capabilities to go it alone meaning there could be a few farm-outs soon similar to the situation in Uganda to CNOOC and Total in the Albertine basin.
“This move is not focused on the oil and gas sector alone, it is generally good for business for anyone in the extractive industry,” he added.
A number of farm-outs have already occurred in Kenya with a number expected in the coming months including one by Far Limited and Rift Energy.