Taxman loses Sh1.2 billion VAT bid against Tullow Oil

A general view shows an oil rig used in drilling at the Ngamia-1 well on Block 10BB, in the Lokichar basin, which is part of the East African Rift System, in Turkana County.[Reuters]

Kenya Revenue Authority has lost a case in which it was demanding Sh1.2 billion from Tullow Oil as value added tax (VAT) following the sale of an oil block in 2015.

The taxman sent a demand to Tullow in 2019 to pays Sh1.19 billion as VAT after the sale of part of its stake in block 12A in Kerio Valley to Delonex Energy.

KRA said following an audit that the transaction constituted a supply of taxable services at the standard rate of 16 per cent.

Its position was that oil exploration blocks are held as current assets.

Tullow objected to the tax demand, noting that farm-outs are excluded from registering for VAT as they are disposal of a capital asset and also sale of part of a business.

The firm filed an appeal at the Tax Appeals Tribunal.

Tax assessment

In April this year, the tribunal ruled in favour of the oil firm and set aside KRA’s tax assessment.

In its ruling, the tribunal noted that while there is specific legislation in respect to taxation of petroleum operations in the Income Tax Act, there is an absence of similar legislation under the VAT Act.

It also added that interest in oil blocks is a capital asset and that “the transfer of the same is a sale of business as a going concern as the acquiring party is expected to continue with the business”.

Initially, Africa Oil had been licensed to explore for oil in the Kerio Valley block by the government. With time, it transferred 65 per cent interest as well as the status of the operator to Tullow.

Africa Oil gradually exited the block through sale of its stake to other companies.

Delonex would emerge as the major company within the block after successive acquisitions including 25 per cent of Tullow’s interest of rights and obligations under the production sharing contract and 25 per cent of the operating interest under the joint ownership agreement in 2015.

Tullow later transferred an additional 10 per cent and the operator status, or day-to-day operations, to Delonex in another farm-out agreement in 2018.

Petroleum system

Preliminary exploration by Tullow in 2016 showed the block has potential to become a key oil block.

After drilling the Cheptuket-1 well, the firm said it encountered oil shows as well as the presence of an active petroleum system with significant oil generation.

Tullow Oil then termed the find as the "most significant" well result to date in Kenya outside the South Lokichar basin.

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