Oil and gas firms based in Kenya want the taxation of proceeds from the sale and acquisition of exploration blocks reviewed in the new petroleum law.

The Petroleum (Exploration Development and Production) Bill 2015, with the attendant model production sharing contract (PSC), now in its second reading in parliament, is set to embed the capital gains tax (CGT) once it is enacted.

CGT guidelines issued by the Kenya Revenue Authority for the oil, gas and mining industry stipulates 30 per cent as the rate for resident firms, and 37.5 per cent for non-resident companies effective January 1, 2015.

Analysts said the high capital gains tax could deter foreign investment in the oil and gas sector. Kenya abolished a 30 per cent tax on profits from the sale of shares and property in 1985 to encourage investment. CGT was reintroduced when the Finance Bill 2014 received presidential assent on September 14, 2014.

The global oil and gas industry depends heavily on the partial sale of shares (farmout) of exploration blocks to attract firms with technical and financial capabilities to take the projects up to the production phase.

The Kenya Oil and Gas Association (KOGA) said the 30 and 37.5 per cent CGT needs to be revised down to 5 per cent.

Patrick Obath, a managing consultant at Eduardo, said the CGT should be well structured.

“During farm-in and farm-out of interest in exploration blocks, there is no gain. Capital gains tax can only be applicable when either commercial oil or gas has been discovered, and the amount of resource quantified,” he said.

KOGA said high taxes would be a barrier to new investors, erode investor confidence, and delay exploration and development activity.

READ: Tax capital gains only after discovery, says oil, gas industry

Treasury Cabinet Secretary Henry Rotich said CGT rates for the extractives industry pertaining to the petroleum sector can only be reviewed in the next budget.

“That is how it is in the law. What we agree on will be put in the 2016/2017 Finance Bill to address industry concerns,” he said.

Section 39 of the Petroleum Bill states, “Any assignment pursuant to this clause shall be fully disclosed by the assignor to the Kenyan tax authority. Any tax arising from any assignment pursuant to the Income Tax Act will be paid by the assignor in the manner specified in the Income Tax Act.’’

A company will not transfer an interest in a petroleum agreement without the written permission of the Energy Cabinet Secretary, who also has to be furnished with copies of all agreements and deeds related to the deal.

Consulting firm KPMG said CGT was reintroduced in 2014 to broaden Kenya’s tax base, increase revenue collection, and align the country with its regional counterparts.

“One of the reasons cited is the need for Kenya to balance its ever increasing budget,” said the firm. Uganda levies 30 per cent CGT. Foreign owned companies in Tanzania pay 20 per cent and residents 10 per cent.

The impact of the CGT on the oil industry could be disruptive if the interests of investors and the government are not balanced.

Eduardo and Associates, a consulting firm, said capital gains tax may discourage investors from prospecting other parts of the country; currently commercial oil has been found in the Lokichar basin in northwestern Kenya.

Tullow Oil and Africa Oil Corporation have discovered 600 million barrels of crude oil in the South Lokichar basin. Commercial oil production is expected to start from 2018.