Total trade between the UK and Kenya has risen to £1billion this year, according to UK Trade and Investment figures. The internal Oil and Gas market in Kenya is poised to develop, creating waves of optimism.
Steady streams of opportunities have opened up across Africa in the last decade. Oil and Gas exploration is becoming increasingly important to East Africa, which until this decade has been in the shadow of both West Africa and North Africa.
The Kenyan government has recently taken steps to safeguard its tax return from hydrocarbon and mining industry activities. The Kenya Finance Bill 2014 has been passed by the Kenyan Parliament and agreed by President Uhuru Kenyatta. It means that capital gains tax (CGT) has been reintroduced for the first time in nearly 30 years. The standard rate of CGT in the country will be 5%, but the Oil and Gas sector will be taxed at 30% or even 37.5% depending on the company’s tax residency status.
Introduction of the CGT means that the previous withholding tax regime is now abolished and popular ‘farm-out’ agreements, which are between resource owners and outside companies providing services, can be completed in a more tax effective way. These transactions are currently taxed at 10% or 20% of the gross investment with deductions. From 2015, a company making an acquisition will be taxed at 30% on the net gain once the initial cost of acquisition is deducted from the sales value. An amendment may be made to future finance bills to include the additional costs incurred up until the time of sale.
For investors, the move means Kenya’s tax laws are more aligned with its neighbouring nations, than was previously the case. It sets defined boundaries for companies entering the country. Our Kenyan counterpart firm, UHY Kenya, is aware that the rate might be higher today than it was before the Bill was passed, however I am assured that it now offers a greater degree of transparency for all parties involved.
There is optimism surrounding the opportunities in Kenya. It is a fast moving market and you need to make your mark sooner rather than later. It carries a risk, no doubt, but the rewards for commitment will see skills developed in the North Sea put to use in another part of the world. Once operators are settled, the skills of familiar support companies from UK shores will be called on, as they have been in the past.
Appetite for this new opportunity is increasing among the world’s largest Oil Majors and many are being invited by Kenyan regulatory organisations to set up bases in the country. Oil and Gas companies with plans to move into the East Africa region will be doing so as a strategic investment and it is unlikely this tax change may put them off. They know the infrastructure and cultural hurdles that exist and with a long-term plan will make gains. There will be no quick wins.
Britain has historical ties with Kenya and today remains its principal trading partner, but it has stiff competition. Kenya’s global outlook has changed and it has gained new key partners since independence. Indian and Chinese partners are now building infrastructure in East Africa.
President Kenyatta has actively sought significant Asian investment in recent years, highlighted when he struck a $5 billion USD intergovernmental deal for energy projects and related infrastructure while on a trade mission to China. Chinese National Offshore Oil Company (CNOOC) is one of the pioneering companies conducting exploratory works on Kenyan territory.
Companies headquartered in the UK, Canada and Australia are also making significant inroads. They are in a position to offer advice on a range of matters. Initial estimates have suggested several billion bbl of oil offshore Kenya, with one company announcing there is $3.7 billion bbl in the country’s Lamu basin.
The Kenyan Oil and Gas Association (KOGA) is working with the government to strike a balance between promotion of its anticipated Oil and Gas internationally and achieving sufficient revenue from the industry. As Kenya becomes more active on the global scene, it secures a productive future.
Ian is chairman of Campbell Dallas LLP, head of renewables and a member of the firm’s tax consultancy group and corporate finance group. He has more than 25 years’ experience in the energy sector.
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