How disputed oil cargo threw KRA into a spin over Sh5.1b tax bill

A worker fills the tank of a vehicle at a petrol station in Nairobi. The Middle East war has exposed Kenyans to major fuel price shocks. [File, Standard]

The Kenya Revenue Authority (KRA) has for months been grappling with how to deal with the Sh5.1 billion in taxes that oil marketing companies had paid the taxman for the fuel cargo aboard the vessel MT Paloma, which was rejected and for which the owners were directed to remove the cargo from the Kenyan market.

The fuel, imported by One Petroleum under an emergency tender, was rejected after its discharge into Kenya Pipeline Company's (KPC) storage systems between March 28 and 30 this year, but the Energy and Petroleum Ministry directed its withdrawal after it failed to meet local standards but also been imported outside the Government-to-Government framework.

The ministry also told the 37 oil marketers who had expected to uplift and distribute the fuel locally not to uplift it and not to pay for the cargo.

The companies had, however, already paid the taxes after a self-assessment on how much KRA would be demanding from them once they sold the fuel locally.

KRA said it had to reallocate the taxes to future cargoes. In submissions to the Senate Committee on Energy, the tax authority said as of June 9, it had allocated Sh2.8 billion of the taxes to cargoes that had been imported since April after the recall of the MT Paloma cargo by One Petroleum.

“The committee further observed that KRA assessed and collected taxes amounting to approximately Sh5.1 billion in respect of the MT Paloma PMS consignment, which were paid by various Oil Marketing Companies (OMCs) upon self-assessment and entry filing in iCMS,” said the committee in a report after an inquiry into irregularities in Kenya’s petroleum supply chain.

“Following a subsequent policy directive by the Ministry of Energy and Petroleum restricting the MT Paloma consignment from the local market because it had been procured outside the G-to-G framework and instructing that it be re-consigned to the transit market, the committee noted that KRA cancelled the local customs entries and initiated a process to reallocate the Sh5.1 billion in taxes already paid by OMCs to customs declarations for subsequent vessels.”

KRA had told the committee that it had, as of June, reallocated more than half of the money to cargoes that had since been imported by the affected oil marketers.

“Of the taxes paid on the cancelled declarations, approximately Sh2.8 billion has been applied against new customs declarations from subsequent vessels by the affected OMCs collected. The balance is being administered in accordance with the applicable customs and tax procedures,” said KRA in submissions to the committee dated June 9.

The committee's inquiry was prompted by the crisis that Kenya fell into following the war on Iran, which triggered concerns about the security of fuel supply in the country and led to the now-contentious emergency importation of fuel. The war has also exposed Kenyans to major price shocks.

The process of importing the emergency was put in motion following a March 18 meeting by the Vessel Alignment Committee that determined that super petrol stocks in the country at the time were low.  

The meeting had noted that the failure by the vessel MT Elka Apollon to transit through the Strait of Hormuz meant that the next scheduled cargo was not expected to arrive in Mombasa until between April 3 and April 5, 2026, which would have been too late.

Anticipating a potential fuel supply shortfall, the Energy and Petroleum Ministry decided to import emergency cargoes. After inviting bids from select oil markets to import the emergency cargo, One Petroleum and Oryx Energies were selected to import 60,000 metric tonnes of super petrol each.

One Petroleum managed to bring the cargo aboard the MT Paloma, but the fuel was found to have higher sulphur content than what is allowed by Kenyan standards and was later withdrawn, according to the Ministry of Energy and Petroleum.  

The fuel had a sulphur content of 43 parts per million (PPM) against the Kenyan standard of 10 parts per million. The Trade and Industry  Ministry issued an exemption to allow the vessel to discharge and later relaxed the standards to allow imports with sulphur content of 50PPM.

The tenders were cancelled before the cargo procured by Oryx Energies had been discharged into Kenya's fuel storage systems.

KPC told the Senate Committee that the fuel has since been re-exported to South Sudan and the Democratic Republic of Congo.

“To date, 48.12 million litres of the product had been consigned to regional buyers, comprising consignments destined for South Sudan and DR Congo,” said KRA in the June 9 submissions, adding that the balance of 18.17 million litres was being held by One Petroleum at the time, pending disposal to regional markets.