Is East Africa Ready For The Petrodollars?

Is East Africa Ready For The Petrodollars?
East Africa has emerged as a new global frontier of energy exploration

AFRICANGLOBE – Following oil, gas and mineral discoveries in East Africa, a lot has been said and written about the potential billions of dollars in revenues that the countries will receive. But little is being said about the collection of these revenues and the policies that will guide taxation.

Most African countries with oil, gas and minerals are still grappling with tax evasion, capital flight and taxation competencies. In East Africa, questions have been raised about the countries’ readiness to handle the newfound natural resources wealth through prudent tax administration.

For example, what are the competencies of tax administrators in East Africa’s potential new oil and gas producers — Uganda, Kenya and Tanzania? Equally, whereas the revenues will start coming several years from now, do these countries have the capacity to properly tax these resources?

On its part, the Kenyan government, through a recent gazette notice, announced that deals involving stakes in oil and mineral blocks will be subjected to capital gains tax, indicating that the country’s Treasury is keen on extracting more revenue from natural resources.

Kenya’s first commercial oil discovery is set to generate about $10 billion over a 30-year period. The Finance Bill 2014 proposes that a firm acquiring more than 50 per cent stake in mineral blocks should pay a net gain tax on the value of the transaction after deducting attendant costs.

The Bill also proposes a total overhaul of the 9th schedule of the Income Tax Act to match recent developments that have seen discoveries of commercial quantities of oil, increased investor appetite and multimillion dollar deals in the sale of part interests in licensed blocks.

“Income from exploration and premium will be based on the quantity of value of minerals. This is calculated from the gains or profit of the licensee. The net gain income is that which was derived from Kenya,” says the Bill.

Nikhil Hira, a tax administrator at Deloitte &Touche said that oil and gas are a new and complex industry especially for tax administration.

“Clearly it is not just the tax authorities that lack the competencies but, to my mind, it is being taken seriously. All the authorities in the East African region are gearing up to deal with this sector and it is important that they focus on the big picture and not get bogged down in general compliance issues by the players in the industry. Most of the East African countries’ laws in this area also need attention, as they are old and perhaps not relevant to today’s environment.  Kenya has tried to address this issue in the recent Finance Bill,” said Mr Hira.

Revenue Collection

Tanzania is still struggling to collect revenues from its gold mining, partly due to its inability to monitor and effectively collect taxes in this sector. Last month, Statoil ASA and ExxonMobil announced that they had made high-impact gas discovery in the Piri prospect offshore Tanzania.

It is estimated that significant gas production will start after 2022, with the Tanzanian government revenue expected to rake in revenues of $2.5 billion per year, an amount that far exceeds foreign aid flows.

Dr Thomas Kinyonda, an economics professor, said that it is now the right time for the Tanzanian government to formulate policies that will ensure the commercial viability of gas production.

“We have seen the loopholes that gold mining has exposed in the Tanzanian tax system. It is my belief that with the gas finds, the various relevant authorities including parliament and the Finance Ministry will put in place the right tax measures to ensure the country benefits in its pro development programmes,” said Dr Kinyonda.

A 2013 report by Deloitte &Touche titled The Deloitte Guide to Oil and Gas in East Africa says that even though Tanzania has had modest gas production since 2004, the tax framework of law and practice is not well developed.

For Uganda, the recent oil find means that the country may receive more than $2 billion a year in oil revenues once production starts, which is more than most of its donor aid. The discovery shows that Uganda has about 2.5 billion barrels of oil.

The government is currently building a $4.6 billion oil refinery in Kabale-Buseruka, which is to be commissioned in 2015.

Uganda has a pending Public Finance Bill that includes appropriate safeguards and transparency provisions. In 2012, it imposed income tax on the sale of shares in oil and gas companies.

Uganda has the Oil Revenue Management Policy (2012) and the Public Finance Bill, which is currently before parliament. The proposed finance law provides for a single petroleum fund at the Bank of Uganda, where all oil revenue collections will be deposited.

Petroleum Fund

It also proposes that all the oil revenue collections and administration be done by Uganda Revenue Authority while the Ministry of Finance, Planning and Economic Development will be in charge of the petroleum fund with a delegated authority of management of the petroleum funds.

Francis Tumusiime, a researcher in Natural Resource Law and Policy and a partner in the Governance of Africa’s Resources Research Network, said that oil production in Uganda should wait until a law is in place that regulates the collection, management and application of oil revenues.

“As the country gets ready to start production, the focus should be on creating an enabling legal, policy and institutional environment, in order to ensure that oil yields lasting benefits. Currently most of these institutions have not been streamlined to match the capacity and expertise required for effective handling of oil revenues,” he said.

Investment expert Aly Khan Satchu said that there is evidently a great deal of variability incompetence of tax administrators in East Africa’s revenue authorities and the most important thing is that most countries are reworking their finance administration.

“While revenues from oil, gas and natural resources will come several years from now, there is a super opportunity to leapfrog into the 21st century best practices by these countries putting in place the capacity to properly tax these resources,” said Mr Satchu.

To address weaknesses in tax collection and auditing, some countries like Angola have outsourced some tax compliance duties to international audit firms. This could be the way to go for the East African region in order to reduce loopholes and maximise revenue collection. Kenya for example has outsourced audit of VAT refunds to audit firms.

“My only concern about involving audit firms is that there could be potential conflicts of interest and there are very few firms that can deal with all the technical issues in this complex industry,” said Mr Hira.

Mr Hira added that the current laws on oil and gas are outdated. There should be a review of this so that tax on oil assets can only apply at the production stage.

Sovereign Wealth Fund

In April, the Kenyan government announced that it would set up a sovereign wealth fund to invest revenue from future output of oil. Central Bank chairman Mbui Wagacha said the draft framework was in the Attorney General’s office for finetuning before it heads to parliament for debate.

“The fund will be used as saving for future growth, shielding the economy from changes in commodity prices,” Dr Wagacha said.

Such funds have been set up in various oil-producing African countries, with Botswana having $670 million, Nigeria $96.7 million and Ghana $67.1 million. Other countries that have suchfunds are Angola and Equatorial Guinea.

Thanks to oil revenue, Angola’s GDP jumped from $11 billion in 2003 to $114 billion in 2012.

Angola pumps about 1.8 million barrels a day offshore and aims to produce two million a day by 2017.  Crude makes up 97 per cent of its exports and 80 per cent of tax revenue.

Taxable income is determined according to the rules set in each block Production Sharing Agreement (PSA) and Concession Decree. Companies engaged in oil production are subject to tax on income from oil, oil production tax, oil transaction tax, surface charge; and training contribution tax.


By: Allan Olingo