KRA's tax shocker for oil marketing firm acquisitions [Business Daily (Kenya)]

(Business Daily (Kenya) Via Acquire Media NewsEdge) Any transfer of assets involving both exploratory and marketing oil companies will be subject to the new withholding tax, the Kenya Revenue Authority (KRA) has stated.

The taxman's statement, which came on a day when KenolKobilannounced that buy-out negotiations with Swiss-based Puma Energy had collapsed, was met with sharp reaction by experts who argued that it contradicts intention of the new tax.

The experts argued that Finance minister Njeru Githae, who proposed the new tax, intended to recoup a share of the gains being made by exploration companies that have been selling their mining licences for huge amounts, but not to affect acquisitions of marketing firms.

"The law says 'oil companies' without any exception, therefore all oil companies are captured. There is no oil company whose sale of property or share is exempted from this taxation," said KRA in a statement sent to the Business Daily.

Mr Githae proposed the new tax on the sale of property or shares of oil companies, mining companies or mineral prospecting companies in his June 2012 budget speech, which was later passed into law in the Finance Act.

The new law imposes a withholding tax of 10 per cent of gross value of property or shares transacted where the seller is a resident taxpayer and 20 per cent where the seller is a non-resident.

(Read: State now slaps 20 per cent tax on mining sector deals) Andre DeSimone, the executive director of Kestrel Capital, the transaction advisors in the KenolKobil-Puma deal, said the new tax "was not a factor" in the negotiations which were announced to have collapsed on Friday.

"I cannot comment on the legal or tax interpretation of the new withholding tax law or how it may eventually be applied," said Mr DeSimone, adding however that applying it on acquisitions of oil trading and marketing companies like KenolKobil is similar to "applying mining laws to jewellery shops." He added that his understanding was that the intent of the new law is to protect natural resources of the country and ensure Kenya benefits from natural resource exploitation and development.

Investors had earlier last week expressed fears that the Sh25 billion deal could be affected by the new tax, which would have raised the total transaction costs.

(Read: New tax on oil companies clouds KenolKobil-Puma deal) The Director of oil industry consulting firm Petroleum Focus, George Wachira, said the aim of the tax was to tax the upstream oil and gas companies, borrowing from the experience of Uganda which through its capital gains tax raised a tax bill of Sh39 billion ($450 million) when Heritage Oil sold its shares in oil and gas fields to Tullow Oil.

"I think the withholding tax was easier to administer in the absence of a capital gains tax. This tax may have been intentionally extended to cover other extractive sectors like mining where speculative transfer of licenses also takes place.

"So my guess based purely on above trend of events leads me to suspect that the withholding tax was purely meant for extractive industries," said Mr Wachira.

"If you deviate to petroleum distribution which is a downstream service sector, then you are talking of unfair discrimination because then it should apply equally to all service sectors like banks and ICT.

"Then you are talking of potential impacts on Mergers and Acquisitions transactions across all sectors of the economy. This then may require parliamentary debate due to its cross-cutting weighty implications," added Mr Wachira.

He said that it requires the Minister for Finance to clarify the policy objectives and exactly where it is targeting since KRA does not handle tax policies, but implements what is handed down by the ministry.

Mr Nikhil Hira, a partner and tax consultant at Deloitte, said that while KRA is within the provisions of the Finance Act in its definition of oil companies, his reading of the law as presented by the Minister of Finance was that it meant to cover only exploratory oil firms and not downstream companies like petroleum marketers and traders.

He added that the move to include oil marketers in the tax net would likely see some move to court similar to the way financial institutions have moved to court to challenge an amendment to the Customs and Excise Act which imposed a 10 per cent excise duty on 'other fees' charged by banks, which was not defined in law.

They got an injunction stopping KRA from collecting the duty.

On the KenolKobil deal, Mr Hira noted that questions were bound to be asked as to why the parties in the deal should pay the extra tax, yet a similar deal involving a fellow listed company that is not in the oil sector would not.

This, he said, may lead to making the oil companies unattractive to investors, at both upstream and downstream level. It may also lead to double taxation since the old taxes applicable to such deals were not repealed.

"The issue of double taxation could come in. I don't think that the oil companies would have any problem with the tax if it were well defined, since the issue here seems to be the definition of the term oil company.

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