A third of petroleum companies operating in Kenya could avoid tax

More than a third of companies that own petroleum rights in Kenya hold them through tax haven subsidiaries, a new report shows.

The report by Oxfam, a global development charity, suggests that Kenya is at risk of losing tax revenues through these arrangements.

An oil rig used to drill at the Ngamia-1 well in Block 10BB in the Lokichar basin, Turkana County. Kenya has seen a surge of interest in new blocks after striking oil in 2012. [PHOTO:FILE/STANDARD]

The report, Protecting Future Oil Revenues Priorities in Advance of Production, says that 27 parent companies own petroleum rights in Kenya either as operators or as joint-venture partners.

Out of these, 12 of them own rights through a tax haven subsidiary, while another eight own rights through what are known as low tax jurisdictions. The report further says that 17 out of the 27 use additional tax havens in their wider corporate structures and only four seem to make no use of tax havens at all.

Oxfam Kenya, which commissioned preliminary analysis of companies holding petroleum rights in Kenya, found that Kenya could now lose revenues from these subsidiaries registered in tax havens and low tax jurisdictions.

“The vast majority plan to use tax havens and low tax jurisdictions to minimise revenue payments in Kenya,” Charles Wanguhu, one of the authors of the Oxfam report, told journalists yesterday when presenting highlights of the report.

Kenya has an estimated 600 million barrels of oil in the Turkana find and it is estimated that this will earn the country at least Sh280 billion ($2.8 billion) a year if the price rises above the projected Sh8,500 ($85) per barrel in the next four years when full production is expected to commence.

But the increasing interest in companies with subsidiaries in tax havens is raising fears of revenue losses. According to the report, the practice is that a local subsidiary buys services or licences from an affiliate in a low-tax jurisdiction. The price is inflated, reducing the local subsidiary’s profits.

This in turn reduces the taxable income and therefore public revenues in the host country are suppressed.

According to the Oxfam report, some of the companies holding Kenyan rights through tax haven subsidiaries include Africa Oil Corporation, Camac International Corp and Ophir Energy Inc.

Cayman Islands

Others are ERC Energy Inc, Midway Resources International, Milio International, Octant Energy Corp, PTT Public Company and Vanoil Energy. Rift Energy Corp, Swiss Oil Holdings International and Swala Energy are the other companies listed in the report.

Some of the favourite tax havens include the Cayman Islands, Bermuda, British Virgin Islands, Mauritius and Bahamas. It is, however, not illegal to register companies in low tax jurisdictions under the laws of Kenya, only that it offers the companies a window to avoid taxes.

The report has also raised concerns that the country seems to be under a mistaken presumption that audits for costs incurred by oil prospecting companies are required only after production begins. “Companies are incurring costs now that they will “recover” once production starts. Every $1.00 in ineligible or inflated costs will cost the government $0.60 in future revenue. Government needs to initiate “cost recovery audits” immediately,” the report adds.

Oxfam Kenya conducted the research on tax and extractives and has generated three reports, among them the new fiscal systems of petroleum in Kenya, the mapping of petroleum companies in Kenya incorporated in tax havens and low tax jurisdictions and an analysis of potential loss to future Government revenue. The reports are expected to be officially released next week.

Kenya has 46 petroleum blocks. Of these, 41 have active production-sharing contracts. The remaining five are still vacated. The report recommends that to protect the country, Kenya needs to increase transparency in the petroleum sector by ensuring there is full disclosure of all existing production-sharing contracts, as well as all operators and joint venture partners.

The Government should also prepare an economic analysis of revenue implications. There should also be no new contracts signed before the Petroleum Bill and other regulations are passed. The other concern is the need for cost-recovery audits that will allow for an audit of exploration expenses to protect future revenues.

The Government should also consider a review of the tax treaties and use of tax havens to ensure that they do not put the country at a disadvantage, the report noted.