A Review of the fiscal regime and tax compliance in the oil and gas industry in Kenya
Chakava, Lillian Andia
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The recent discovery of oil and gas in Kenya is an opportunity to establish sound policies to support the generation of revenue. For citizens not directly benefiting from the oil and gas industry, revenue to the nation will be shared for the benefit of all, including future generations. Protecting this revenue throughout the life of the finite resource then is a major consideration for policy makers. Taxpayers are not always of the same conviction as the Government of the revenue they should pay, hence revenue from macroeconomic projections and actual revenue collected can vary. Worldwide, disputes arising from oil and gas have resulted in loss of revenue to Governments. In addition to revenue forecasting, it is prudent to plan for collection through taxpayer compliance management in order to mitigate against revenue shortfalls resulting from realized tax compliance risks. Progressive taxation planning is an international best practice in oil and gas revenue planning that allows policy makers to move to seal loopholes as and when they occur since it is difficult to foresee all challenges facing the fiscal regime in oil and gas. This research sought to add to knowledge in progressive taxation planning by reviewing Kenya’s oil and gas fiscal regime and tax compliance factors for optimized revenue collection. Revenue regimes and tax compliance factors in the research were determined by studying fiscal regimes and compliance actions in the oil and gas industry in Africa from publicized cases that have been determined and concluded in a court of law. Fiscal regimes were compared with Kenya’s corresponding fiscal regime and tax compliance factors that work in Kenya were deduced from taxpayer compliance actions using qualitative content analysis methods. It was found that Kenya’s fiscal regime in the oil and gas industry provides for collection of tax on Transfer of Interests and Signature Bonus, meaning that the fiscal regime was robust enough to facilitate for scenarios of collection of taxes from Transfers of Interest and Signature Bonus from oil and gas. However, the fiscal regime did not provide for staying proceedings in order to seek arbitration provided under Production Sharing Contracts (PSCs), which pointed to an area of possible loss of revenue collection through parallel and unrelated processes for tax dispute resolution. The factors of tax compliance found to apply in Kenya were deterrence, norms, opportunity for evasion, fairness and trust, economic and financial factors and industry practice. It was deduced that a taxpayer in the oil and gas industry: unlike other industries, has favorable and robust options in dispute resolution processes; may want to avoid prolonged disputes; and can enjoy protection under the PSCs that fiscal regimes are not enforceable when they default. Overall, the taxpayers in the oil and gas industry showed preference for functioning PSCs that provided for the demands of the industry; clearly defined fiscal regimes and incentives; mitigation of issues that can result in reputational risks, disadvantages to the business and financial losses; and a good-natured working relationship with the Government leaning heavily on legal compliance. PSCs were found to be strong tax compliance instruments leveraged by International Oil Companies and needed harmonized with fiscal regimes for optimal revenue collection.