Africa Oil Kenya B.V. paid Sh1.16 billion as part of an out-of-court settlement with the Kenya Revenue Authority to avoid a protracted tax dispute with the authorities.
Its parent firm Africa Oil revealed the decision that was taken in March this year, adding that it is in talks with the KRA and the Treasury for a waiver or reduction of the interest and penalties on the remaining amount.
The KRA had been in November last year cleared by the High Court to collect some $18.7 million (Sh2.7 billion at current exchange rates) as unpaid Value Added Tax (VAT) from the oil firm for 2011, 2012 and 2015.
But Africa Oil appealed the ruling a month later, setting the stage for a drawn-out dispute with the taxman.
Three months later, the oil firm made a U-turn and agreed to settle the matter out of court, when the multinational confirmed exiting a joint oil search venture with Total and Tullow Oil in South Lokichar.
“On March 1, 2023, Africa Oil Kenya BV (AOKBV), the Company’s wholly-owned subsidiary in Kenya, reached an agreement with the KRA,” the parent firm disclosed in regulatory filings.
“In line with this agreement, reached pursuant to an Alternative Dispute Resolution process provided for under Kenyan law, AOKBV has paid Sh1.163 billion (approximately $8.8 million) to the KRA in respect of the principal of the VAT assessment.”
The High Court had upheld an earlier ruling by the tax appeals tribunal that declared that Africa Oil had entered into farm-out agreements for the various oil blocks where it assigned its rights to other companies and received income from them, thus liable to pay VAT.
Farm-out agreements are mostly used in the mineral and oil sectors and involve the property owner (farmor) leasing a resource-producing property to another person or firm (farmee). The farmor in turn receives royalties on any income that is generated by the outsourced production or development.
Besides the VAT claims, KRA also sought to collect an undisclosed amount of Corporate Income Tax (CIT) from Africa Oil. But the taxman agreed to drop an earlier CIT demand as part of the deal for the out-of-court settlement with the oil firm.
“KRA has agreed to drop the Corporate Income Tax (CIT) assessment. AOKBV expects to complete the negotiations with the National Treasury of Kenya during the year in relation to a waiver or reduction of the interest and penalties due on such principal,” Africa Oil further disclosed.
Africa Oil relinquished its 25 percent shareholding in the oil-rich blocks of the South Lokichar basin in May.
