Steve Umidha @UmidhaSteve

Investors in the extractive sector expect a surge in operations costs as withholding tax in the mining and petroleum sector started to bite threatening growth prospects in the sector.

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

Reacting to the Finance Act, 2021, accounting firm KPMG warns that its implication will increase the cost of operating in Kenya’s extractive sector, and could jeopardise 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  a report by KPMG.

Withholding tax

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 per cent was arrived at by factoring in the nonresident corporation tax rate of 37.5 per cent and the estimated revenue of 15 per cent but there was no explanation on the 10 per centage 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 with the introduction of the new taxation regime whose outcome now threatens to push away potential investors.

For example, Covid-19 had hit Tullow operations hard with the firm threatening late last year to invoke a force majeure – which is unforeseeable circumstances that prevents firms from fulfilling contracts —  which move would have seen them pull the plug on operations in Kenya.

But the State quickly extended the firm’s licence to the end of the year to allow Tullow Oil and its partners Africa Oil and Total deliver a work programme together with a budget by December 2021.

Currently, with the license set to expire this year, the British firm is auditing volumes in Kenya’s oil reserves to in preparation for extraction plans before its licence expires.

Government estimates show that the extractive sector currently contributes just 1 per cent 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,” noted global advisory firm Adam Smith International in an article on the extractive sector.