KRA in Sh5.2bn tax row with Turkana oil firm

The taxman is locked in a Sh5.2 billion dispute with Africa Oil, the Canadian firm involved in exploration of Turkana oil fields in a joint venture with British firm Tullow.

The Kenya Revenue Authority (KRA) is demanding the amount in the form of corporate income tax and value added tax that it says Africa Oil should have paid on acquisition transactions completed in the five-year period between 2012 and 2017.

Africa Oil has disputed the claim and says it is prepared to lodge an appeal against the taxman.

“The company’s Kenyan branch, of its wholly owned subsidiary, Africa Oil Kenya B.V., has been assessed corporate income tax and value added tax by the Kenya Revenue Authority relating to farm-out transactions completed during the period 2012 to 2017. …The KRA-assessed tax is $51.5 million,” says Africa Oil in its latest regulatory filing.

The Canadian firm did not, however, respond to our queries on the details of the KRA’s tax demand or the transaction it refers to in its filing.

It is not clear whether the transaction refers to the Global conglomerate Maersk Oil’s acquisition of a 25 per cent stake of the Turkana exploration licences.

Africa Oil received $427 million or Sh44 billion from Maersk.

In addition to Tullow Oil, French oil giant Total also has a stake in the Turkana fields.

Africa Oil says its objection to the claim was based on facts and the Kenyan tax law.

“The company has objected to the assessment and is prepared to appeal any further claims made by the KRA in regard to this matter. Management has determined that based on the facts and Kenya tax law that the probability of paying the assessed tax is low,” the company says.

Protracted row

The Africa Oil dispute with the KRA mirrors another protracted row between its Kenyan joint partner, Tullow, and the Uganda Revenue Authority in 2015. Tullow agreed to pay Sh10.9 billion ($108 million) in 2015, making a total of Sh25.2 billion ($250 million).

The URA had demanded Sh47.7 billion ($473 million) in relation to capital gains tax arising out of Tullow’s sale of its rights following the discovery of oil in Uganda.

“This sum comprises $142 million that Tullow paid in 2012 and $108 million to be paid in three equal instalments of $36 million.

The first of these was paid upon settlement and the remainder will be paid in 2016 and 2017,” said Tullow in a statement in 2015.

The current dispute with the KRA could be a pointer of things to come once the Turkana oil starts flowing to the international markets.

The Kenyan government has expressed concerns over the accounting for exploration costs, which the multinational firms currently engaged in the Turkana fields will be seeking to recover.

The Ministry of Energy in 2016 sought a consultant to audit Tullow’s expenses, which by the time had hit more than Sh100 billion. This was after the first attempt to get a consultant in 2013 was unsuccessful.

Incurred costs

The auditor was expected to come up with details on costs that the company and its partner, Africa Oil had incurred in finding the Turkana oil deposits.

British charity Oxfam had expressed fear that oil firms operating in Africa could be tempted to overstate the costs in order to get as much benefit as possible from their operations, thereby denying local people and the authorities the revenues they deserved to get.

However, the Kenyan government found it difficult to get a specialist in auditing oil exploration-related costs even as it remained sceptical of the financial reports that they continued to receive from the oil companies.

The firms involved in the exploration were required to submit to the State work programmes and budget updates to the government on a quarterly and annual basis.

But the Energy ministry said it could not vouch for the authenticity of the numbers given without audit by an independent party.

Despite putting out a notice seeking auditors, little was heard of it after that.

Tullow said that it had incurred $1.5 billion (Sh150 billion) in exploration costs. It means that the company will retain the profits generated from the production continuously until it recovers all the costs before it can share the benefits of the discoveries with Kenyans or the revenue authorities.

Commercial oil was discovered in Kenya in 2012, indicating that the costs incurred have been accumulating, leading to potentially high claims on the exchequer.

Unethical

Charities contend that unless the oil firms are checked or audited, they could end up increasing the costs in an unethical manner by taking expensive shareholder loans or paying expatriates exorbitant salaries and allowances, including for non-core functions.

Besides the disputes on the exact costs, the oil firms have also had to contend with locals, including politicians, demanding tenders, jobs and social responsibility projects.

Tullow had to suspend transportation of oil to Mombasa recently following protests from locals.

This is despite the enactment of a law which gives the county government of Turkana 20 per cent of the revenue, the community five per cent and the national government 75 per cent.