The Draft Income Tax Bill has proposed a tax amortization of expenditure and development at the rate of 20 percent per annum from the year of production.
According to a report analysis of the Bill by Deloitte Kenya, the proposal will ensure that the government receives a share of petroleum and mining revenue as early as possible after extraction/production begins. At present, the expenditure is deductible in the year it is incurred including the year production starts.
Other Proposals
The Bill also proposes a loss carryforward of up to 14 years to be allowed to mining companies. Currently, there is no time limitation for tax losses to be carried forward.
The Bill has also removed the “loss carryback provisions upon cessation of petroleum operations in a license area” which is currently allowed up to three years.
“These measures appear aimed at protecting the tax-base. This is irrespective of the nature of prospecting/ exploration activities, which may take many years to fruition,” the report states.
Another change in the Bill on farm-out transactions proposes “work obligation will not be part of taxable farm-out consideration where it is not deducted for income tax purposes.” That means that “work obligation on behalf of a farmor will not be deductible by the farmee unless such work obligation has been included in the computation of tax payable in a transaction.”
According to Deloitte’s analysis, this proposal aims to ensure that the parties involved in a transaction do not receive double benefits “although this provision may be redundant in a tax paid PSC.”
