A Canadian based oil firm, Africa Oil BV Kenya has suffered a major setback after High Court Judge Justice David Manjanja upheld Sh2.2billion tax demand by the Kenya Revenue Authority (KRA) against the firm.
Effectively, High Court allowed KRA to demand the arrears from the oil and gas exploration firm in unpaid taxes for selling oil blocks in Turkana fields.
In a judgment delivered yesterday, the High Court dismissed an appeal by Africa Oil Kenya challenging the Tax Appeals Tribunal’s decision which endorsed KRA’s demand
The court agreed with the tribunal’s decision which was also KRA’s position that the farm-out agreement is structured in a way that Africa Oil Kenya retains an overriding reversion ally interest in the farmed-out area of pay-out.
The dues that the foreign company owes the taxman arise from VAT on farm-out transactions from 2011 to 2017.
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Farm-out agreements, which are common in the oil and mineral sector are where an owner of a project cedes part or whole interest to a third party for development.
KRA says Africa Oil Kenya BV earned income for ceding part of its interest to Tullow Oil, Marathon Oil and Maersk Oil of oil blocks in northern Kenya and never paid the VAT.
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“Its positions on the various tax liabilities were consistent and at no point did it admit liability or demonstrate that it willfully neglected to pay the taxes demanded by the commissioner. I hold that the company, honestly but mistakenly believed that it did not have to register for VAT as it thought its farm-out transactions were capital in nature,” said Justice Majanja.
However, the firm has expressed intention to appeal the High Court decision.
Justice Majanja dismissed an appeal filed by the oil firm challenging the decision of the Tax Appeals Tribunal confirming the KRA’s demand for unpaid taxes.
The tribunal had observed that the company, being in the oil and gas business with interests in various oil and gas exploration blocks in Turkana had entered into farm-out agreements for the various oil blocks where it assigned its rights to other companies and received income from them.
The company had stated that the said farm-out transactions were a ‘sale of its business’ and not a taxable supply subject to VAT under section 2 of the VAT Act, 2013.
Tullow has a 50 per cent stake in the Kenya project, while Africa Oil and Maersk each own 25 per cent of the two blocks where discoveries were made in 2012.
KRA carried out a tax audit of the company’s tax affairs in the year 2017 for the years of income 2012 to 2017 in respect of Corporation Tax, VAT, Pay as You Earn (PAYE) and Withholding Tax.
The audit also included a review of its farm-out transactions where the company assigned its exploration rights for Blocks 12A, 13T and Block 9 to third parties such as Tullow Oil, Marathon Oil and Maersk Oil in 2011,2012 and 2017.
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It was the position of KRA that these farm-out agreements constituted taxable supplies and thus ought to have been charged VAT.
The tribunal, in agreement with the KRA’s position, stated that a farm-out is a supply of a capital asset and that supply of capital asset is a taxable supply in accordance with section 5(1) of the VAT Act.
Africa Oil Kenya BV was aggrieved by the decision taken by the Tribunal and appealed to the High Court. In the judgement, the court allowed KRA to collect Sh2,293,334,065 from the company being unpaid VAT for the years 2011, 2012 and 2015.
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