Experts call for clear tax policies on farm down transactions in Kenya

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Tax experts Deloitte East Africa have expressed fear that the unclear tax policy position on farm down transactions may be a draw back with the potential to derail the momentum in the industry.

The experts took issue particularly with the assumption by policy makers that all farm down transactions generate windfall profits warning that this could discourage investors wishing to make their entry.

They note that Farm down transactions represent a real opportunity for big oil companies to acquire working interest in the country’s petroleum sector originally dominated by smaller oil companies injecting much needed money to fund the capital intensive phases.

“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 experts say in a report dubbed Kenya’s Petroleum Fiscal Regime.

In Kenya the minister for energy has does not unreasonably withhold consent to any proposed assignment.

The MPSA does not however provide for exemption from the application of transfer taxes on the assignment of interest.

For companies wishing to engage in farm down transactions 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, including information and shares of the petroleum company 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.

Another applicable tax to investors carrying out exploration in Kenya is the value added tax that applies to supply of services and is pegged at a rate of 16% unless where such services have been specifically exempted such as 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.

Lastly every instrument relating to property situated or to any matter or thing done or to be done, in Kenya, is chargeable with stamp duty.

Apart from the unclear taxes when dealing with farm downs the experts say to the greatest extent, the petroleum fiscal terms adopted by Kenya are favourable for FDI.

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Author: Samuel Kamau Mbote

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