The Kenyan Tax Regime for the Oil and Gas Sector: An International Tax Perspective to Policy and Practical Challenges

Revista Derecho Fiscal N° 14, enero-junio 2019

17 Pages Posted: 31 May 2019

Date Written: May 8, 2019


Many countries, especially the developing countries, offer various tax incentives to attract foreign investment for sectoral growth and development. This phenomenon presents even more in the extractive industry because the sector is not only highly specialized but is also capital and technology intensive. There is currently a major concern of illicit financial flow from Africa and the threat it posess on domestic resource mobilization. The Mbeki report (2015) highlights tax incentives, abuse of tax treaties, transfer pricing, weak tax administrations, poorly designed tax regimes and poorly negotiated extractive contracts as some of the main causes of illicit financial flows. It follows that granting tax incentives, especially if not properly designed, to the extractive industry can exacerbate the problem. Eastern Africa has in recent years become an area of interest for many international oil and gas companies. Oil was discovered in Uganda and Kenya in 2006 and 2012, respectively, while Tanzania and Mozambique have vast gas reserves (Augé, 2015). This presents an opportunity for the region to prepare the ground by putting in place the right legislative framework to benefit fully from the extractive activities. The paper examines the policy and practical challenges of the oil and gas tax regime from an international tax perspective. The paper analyzes tax incentives available in the oil and gas sector and whether they are harmful or not within the scope OECD BEPS Action 5, international tax risk areas, available interventions in the current law, and makes policy recommendation. The tax regime has addressed most of the international tax risk areas. The ITA requires arm’s length pricing of transactions. Tax incentives should target specific industries, apply for a limited time period, leave little room for personal discretion, and be reviewed to ensure their efficiency and effectiveness. The ITA has Transfer Pricing Rules, Ring-fencing rules, thin capitalization rules and provides for taxation of net gain on indirect transfers However, there are challenges such as inadequate capacity to audit costs, lack of quality comparables data, exploitation of the debt to equity ratio interest restriction through increasing capital, and dispute resolution. The paper recommends building more capacity, enhancement of legislation and cooperation between government agencies to keep up with the growing needs of the industry.

Keywords: Tax Incentives; Extractive Industry; Oil & Gas

Suggested Citation

Wanyagathi Maina, Anne, The Kenyan Tax Regime for the Oil and Gas Sector: An International Tax Perspective to Policy and Practical Challenges (May 8, 2019). Revista Derecho Fiscal N° 14, enero-junio 2019, Available at SSRN:

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