KRA gets nod to collect Sh2.2bn VAT from oil firm

Kenya Revenue Authority has won a more than Sh2.2 billion tax battle with Africa Oil Kenya BV. 

The revenue body received the go ahead to collect the amount it is demanding from the company as unpaid VAT.

KRA will collect Sh 2,293,334,065 from Africa Oil Kenya for the year 2011,2012 and 2015.

In a judgment delivered last week, the High Court dismissed an appeal by the Africa Oil Kenya  challenging the Tax Appeals Tribunal's decision which endorsed KRA’s demand.

The court agreed with the tribunal's decision which was also KRA’s position that the farm out agreement is structured in a way that Africa Oil Kenya retains an overriding reversion ally interest in the farmed-out area of pay-out.

A farm out agreement is commonly used in the oil, natural gas and mineral industries, it’s an agreement signed by an property owner known as farm out when leasing their resource-producing property to another person.

The court further noted that once the farm-out is complete, the interest reverts to Africa Oil Kenya who may consequently work out an agreement for revenue sharing with other party in the agreement.

“A farm-out agreement can only be treated as a new economic venture between the farmour and farmee rather than a sale of property or services” the court ruled.

In its ruling, the tribunal had noted that the company being an oil and gas business with interests in various oil and gas exploration blocks in Turkana, it had entered into farm-out agreements for the various oil blocks where it assigned its rights to other companies and received income from them.

However, the company argued that the said farm-out transactions were a sale of its business and not a taxable supply subject to VAT under section 2 of the VAT Act 2013.