State now slaps 20 per cent tax on mining sector deals

The government has raided the thriving mining sector for property transfer taxes as it seeks to plug huge revenue shortfalls ahead of devolution.

Players in the mining sector are now required to pay a withholding tax of up to 20 per cent on assignment of rights, sale of business or takeovers in accordance with Finance Act 2012. Locals involved in such transfers would be required to pay a withholding tax of 10 per cent.

Previously, the sector paid only three per cent as royalty to the State once commercial production began.

According to an estimate by the Industrialisation ministry, the government loses Sh300 billion from the frequent property transfers in the mining sector.

“Any person making payment to oil, mining and mineral prospecting company in respect of in respect of transfer of property and shares shall deduct withholding tax and pay to the Commissioner by the 20th of the subsequent month,” the Kenya Revenue Authority statement said.

In case of local business engaging in such transactions, the rate of withholding tax will be 10 per cent while foreigners will be asked pay double the rate.

The raid on the mining sector comes in the wake of poor half-year performance that has raised concern over the government’s ability to finance its expensive devolution programme from domestic resources.

The taxman collected just Sh342 billion in first six months to December, only 41.8 per cent of the targeted total of Sh817.5 billion that it hopes to net by the time the current fiscal year ends in June this year.

(Read: Tax revenue below mark seven months into the year)

With high stake politics of first quarter of the year set to extend deeper into the second quarter, KRA appears to be placing its bet on reliable sources to boost its collection.

The mining business has been very active lately especially after Tullow Oil announced oil find in Turkana late last year with subsequent discoveries signalling possible commercial quantities.

But the plan to introduce the 20 per cent withholding tax on property transfer has elicited strong reaction from the industry with some warning it could scare away investors.

Instead of taxes, industry players have proposed to scrap of the three per cent royalty in favour of 25 per cent production revenue to be shared between community, counties and national government.

(Read: EALA report puts Kenya mining laws under the spotlight)

When it held its latest last sitting in late January, the National Economic and Social Council (NESC) appeared to reinforce this position. The council called for overhaul of laws governing mining in the country to give more say to residents in the management of natural resources.

“Mining has not proportionally benefited the Kenyan economy and specifically has not benefited the local communities,” said the council in a statement read by member Vimal Shah.

Independent experts have also urged the government to tread carefully in its plan to introduce taxes in the mining industry saying it could be counterproductive.

Peter Kinuthia, a senior tax manager at the Ernst & Young, one of the consultants who worked on the new mining laws sees the withholding tax as a double - edged sword.

“Obviously, the government is targeting speculators who buy exploration blocks to make quick money but in the long run, it will end up stifling the industry,” he told the Business Daily on Wednesday.

The government has in recent months been embroiled in a tussle with ‘briefcase’ investors who seek to make money out of selling exploration blocks to investors.

“Kenya is still prospecting and yet to get the stage of oil production meaning it requires friendlier policies to attract investors,” Mr Kinuthia said.

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