Experts urge Kenya to modify tax policy to attract oil investors

Global tax analysts have called on Kenya to re-examine its current tax policy stance on upstream oil industry in order to attract foreign investors.

Deloitte East Africa experts said in a report that some aspects of the policy, which is generally favorable to Foreign Direct investments (FDI), needs to be relooked to sustain the momentum that is already building in the industry.

"An overly generous fiscal regime weakens government returns and can sow seeds of an adverse political backlash for the country, yet again a very tough one can stifle the incentives for oil companies to invest in the sector hence reduced FDI," said Denis Kakembo, senior tax manager at Deloitte East Africa.

The report said given that Kenya is competing for a limited pool of FDI with neighboring economies including Uganda and Tanzania, the fiscal regime needs to strike a balance between incentives to encourage foreign investments, while ensuring a return for its development agenda.

Kenya's legal framework for oil and gas is currently undergoing review for the first time since 1986.

The new report comes against a backdrop of a string of oil discoveries in Kenya by different oil exploration firms. It is expected that commercial production of oil could begin in 2017.

The report singles out farm down transactions, through which oil firms that have struck oil can sell a stake in their discovery rights to other firms to split the cost of investing into actual production, as one of the aspects that could be improved to attract foreign investors.

"Such farm down transactions present a real opportunity for big oil companies to acquire working interest in the country's petroleum sector that is originally dominated by smaller oil companies," the report said.

The report cautions the government against taking an exceedingly short term view of maximizing revenue collection from natural resource projects such as oil finds, saying that enforcing high and unsuitable taxes may affect investment to the nascent sector.

Kenya has drilled 69 wells since oil exploration began with encouraging discoveries in three basins.

In 2013, the country increased the number of oil blocks from 37 to the current 46. Presently, 41 have been licensed to 21 international oil companies. Endi