Investors exposed to losses as sneaky mining tax regime kicks-in

Investors in the extraction business will be forced to increase their operations costs as withholding tax in the mining and petroleum sector formally took effect on July 1.

Experts are now sounding an alarm over the sneaky move by the Government, arguing that a new gesture in the Finance Act 2021 now raises further concerns among foreign investors about the risks of doing business in Kenya.

An analysis by accounting firm KPMG while reacting to the Finance Act, 2021 has warned that its implication will increase the cost of operating in Kenya’s extractive sector and could as well jeopardize the ongoing attempts by the State to acquire a new principal investor and operator for the Turkana oil project.

“No formula has been provided in arriving at the rate of 10 per cent and that change will increase the cost of operating in the extractive sector in Kenya,” reads in part the report by KPMG.

The Act has increased the withholding tax rate for the fees paid to a nonresident for the provision of services to a licensee or contractor in respect of mining or petroleum operations from a rate of 5.625 per cent to 10 per cent.

The 5.625 percent had been arrived at by factoring the nonresident corporation tax rate of 37.5 percent multiplied by the estimated revenue of 15 percent but there was no explanation on the 10 percent rate.

Kenya’s economy has historically been dependent on low-value exports, but the country has an abundance of largely untapped natural resource wealth which has attracted considerable investor attention in recent years.

Flagship projects like Base Titanium’s Kwale Mineral Sands project, and the discovery in 2012 of over 300 million barrels worth of oil reserves by Tullow Oil and Africa Oil, signal the strong potential for growth in the sector with the possibility to create thousands of jobs for local people, which would generate extensive revenue.

But that dream now looks bleak and is not only under threat from the Coronavirus pandemic but now with the introduction of the new taxation regime whose outcome now threatens to push away potential investors.

Government estimates show that the extractive sector currently contributes just 1 percent to Kenya’s GDP, which amounts to less than 2 percent of total export revenues – against the potential of 10 percent of the GDP.

“The opportunity to use the sector to catalyze national development and economic growth requires careful planning at this critical stage,” warns a write-up study findings by Adam Smith International.

The extractive sector (ES) consists mainly of oil, gas and mining activities. But owing to the existing challenges in the sector, stakeholders continue to encourage the systematic integration and implementation of public finance management principles in the government activities and programmes among other factors.

Other proposals include the rationalization of the public sector and re-evaluation of the devolved county structures to control government expenditure so that ES revenues are not used solely to bridge budget deficits but for capital investments.