Tullow partner frets over capital gains tax

Money Markets

An oil rig worker at Ngamia 3 in Turkana. Africa Oil says a capital gains tax of between 30 and 37.5 per cent may discourage explorers. PHOTO | FILE 

By JOHN GACHIRI, jgachiri@ke.nationmedia.com

In Summary

• Africa Oil says it is in talks with Kenya Oil & Gas Association (KOGA), an industry lobby, to push for an amendment to reduce the tax rate.
• Africa Oil said it had begun looking at how the new tax will impact future negotiations with other firms which may want to work with it.
• Analysts at Citi said the rate of between 30 and 37.5 per cent, which is higher than earlier estimates of between 10 and 15 per cent, will make it difficult for companies like Africa Oil to farm out or sell interests in their blocks.

Turkana explorer Africa Oil says the re-introduced capital gains tax will make it harder for companies to invest in the industry which is still in its early stages.

In an update, the Canadian explorer and Tullow Oil partner said it was in talks with Kenya Oil & Gas Association (KOGA), an industry lobby, to push for an amendment to reduce the tax rate.

Africa Oil said the tax rate of between 30 and 37.5 per cent was not sustainable and may end up discouraging other explorers who the industry needs to take development to the next level.

“Africa Oil, alongside the industry representative body (KOGA) are working closely with all levels of the Kenyan government to discuss the potential negative impact such a tax policy will have on the development of the still early-stage oil exploration industry.

‘‘This will include potential barriers to entry for new investors, erosion of present investor confidence and potential delays to exploration and development activity,” said chief executive Keith Hill in response to the enacting of the Finance Act 2014 which re-introduced the tax scrapped in 1978.

Africa Oil and Tullow are currently exploring for oil in blocks 10BB, 10A, 12A and 13T with Marathon Oil. The law becomes effective on January 1.

The tax rate is much lower for proceeds made from the sale of assets such as stocks and bonds which attract a five per cent rate. Africa Oil said it had begun looking at how the new tax will impact future negotiations with other firms which may want to work with it.

“In addition, the company is reviewing its approach to structure any potential future strategic transactions to ensure they minimise or eliminate any such taxation,” said the explorer.

Analysts at Citi said the rate of between 30 and 37.5 per cent, which is higher than earlier estimates of between 10 and 15 per cent, will make it difficult for companies like Africa Oil to farm out or sell interests in their blocks.

READ: Capital gains tax expected to hit long-term investment

This is important for attracting larger companies with better exploration capabilities.

“This is a big disappointment and will make an outright sale of Africa Oil’s Kenyan assets in future less likely given the material tax leakage, in our view,” said the Citi analysts.

Proper guidelines

Tax lawyers said while the tax was expected it is fraught with administrative uncertainties since the Treasury and Kenya Revenue Authority are yet to come up with proper guidelines three months to the effective date.

“It is no great surprise that CGT should be brought back, but what is of concern is to see the rushed measures taken to do so and that the Government has not sought to modernise or update the old Eighth Schedule provisions which go back into the mists of time.