Category Archives: oil industry

KPMG on Kenya Taxes in 2021

KPMG East Africa has a summary of some tax proposals in the Finance Bill that will be used to plug the country’s ambitious Kshs 3.6 trillion 2021/22 budget.

Here are some excerpts

For investors

  • Depositories are to enhance the identity of investors i.e buyers and sellers of securities.
  • Creation of post-retirement medical funds in retirement benefits schemes.
  • Clarifies the definition of an infrastructure bond.
  • A capital markets tribunal shall deal with matters before it within 90 days.
  • Moving from 16% to exempt after July 1, 2021, are the transfer of assets into real estate investment trust (REIT’s) and asset-backed securities.

Competition

  • Opens up reinsurance to players other than Kenya Re to certify reinsurance contracts.
  • Opens the door to private electricity companies; no longer required to offer their supply to the national grid and they are eligible for investment deductions. Also, if government licenses them, they can compete with KPLC.

Prosecutions

  • Tax cases will not stop where there is an ongoing criminal or civil case.
  • Abolishes the amnesty on rental income tax before 2013 (which had since expired).
  • Rewards for informing on tax dodgers; The Kenya Revenue Authority (KRA) can reward up to Kshs 500,000 (up from 100,000) for information and up to 5% or Kshs 5 million of taxes recovered.
  • Taxpayers are to keep records for 7 years and KRA can assess claims of up to 7 years from the date of a taxpayer’s last return.

Digital Taxes and market

  • PIN’s required for digital marketplace transactions.
  • Digital service tax is removed from residents (only applies to non-residents).
  • Non-resident businesses can maintain records in convertible currencies (not necessarily Kenya shillings).

Large investors

  • To stop base erosion and profit shifting, multinationals / ultimate parent companies are required to file a report on their activities (revenue, profit, taxes paid, employees, assets, cash) in Kenya within 12 months of their financial year-end.
  • Ends group VAT registration for groups of companies; each entity will report its own VAT on transactions.
  • To encourage large investments, there is an exemption for import declaration fee (IDF) and railway development levy (RDL) for investments over Kshs 5 billion or with the approval of the Treasury Cabinet Secretary.

Value Added Tax

  • Introduces VAT on bread.
  • Several items move from 16% to exempt, which means the Treasury CS can exempt them on request. These include infants foods, medical ventilators, lab reagents, gas masks, x-ray equipment, anti-malaria kits and doses, and artificial body parts.
  • Also moving from 16% to exempt, are vehicles for oil & mining companies, and equipment for solar & wind generation.

Other

  • A 20% betting tax returns after being briefly for a year.
  • Bank loan fees no longer incur excise duty.
  • Remove a requirement for VAT regulations to be approved ahead by Parliament; instead they will be shared with legislators under the statutory instruments Act.
  • Withholding tax in oil and mining sectors will be 10%
  • Removes the 10 year limit on carrying tax losses
  • Excise tax goes up on motorcycles and is introduced on jewellery and nicotine substitutes.
  • Reintroduces excise duty on locally-manufactured sugar confectionery and white chocolate that was removed in 2019.

Kenya’s Money in the Past: IMF Transparency Evaluation

Last week a team from the International Monetary Fund (IMF) released a Report known as the Fiscal Transparency Evaluation Update on Kenya. The country has had an on – and – off history with the IMF and World Bank and one of the key objectives of this report was to estimate Kenya’s balance sheet and take into account all the public sector entities which were believed to have grown significantly since 2014.

Size: The report found that there are 519 entities, including 213 extra-budgetary ones, 47 county governments, social security funds, the Central Bank and 14 financial intermediaries, and 136 public corporations. It estimates that assets are liabilities are 30% greater than in 2014.

The stock of Kenya’s public sector liabilities (mainly pensions) is high (at 30% of GDP) compared to other emerging markets and low-income developing economies and creates potential fiscal risks. Fortunately, it finds that Kenya’s public sector net worth, estimated to be -5% of GDP in 2017-18 is broadly comparable to other similar economies.

It cites some glaring issues. Nairobi County has the largest amount if negative net-assets followed by Mombasa and Isiolo, Garissa, then Murang’a. Nairobi inherited a loan it has been servicing but which still has a Kshs 3 billion balance. Also, Nairobi has guaranteed a Kshs 19.1 billion loan, which is in its books, but this relates to assets that were transferred to another entity – the Athi River Water Service Board.

PPP: Concern about public-private partnerships (PPP) projects: There are 78 PPP’s (67 by the national government and 11 by county governments) in the pipeline, worth $11.4 billion and it notes that no risk analysis is undertaken for pipeline projects, which are sizable and growing in number.

PPP projects are 13% of GDP and half of the amount relates to six projects that are at the procurement stage. These are the Nairobi Mombasa highway, Mombasa petroleum hub, Nairobi – Nakuru – Mau Summit highway, 140MW geothermal at Olkaria, road annuity programs, and a second Nyali bridge project

State Corporations: High-risk public corporations lost Kshs 23 billion in 2017–18. These were topped by Kenya Broadcasting Corporation which lost Kshs 9 billion. Its losses were equal to 436% of revenue and it has a net worth of Kshs -54 billion. Others were Kenya Railways Corporation (which lost 6 billion), Nzoia Sugar Company Limited -3 bn, and South Nyanza Sugar Company -2 bn. Also losing 1 billion each was the National Oil Corporation of Kenya (which was supposed to be an IPO candidate), Chemelil Sugar, Agro-Chemical and Food Co., Muhoroni Sugar, and the Nairobi City Water and Sewerage Co. These ten account for 95% of the loss-making entities.

Oil & Mineral prospects: Kenya has small reserves of natural resources accounting for 3.2% of GDP but non-oil mining could be 10% of GDP by 2030 with oil boosting it by another 1.5%. Neighbour Uganda has better prospects with greater amounts of proven oil (1.7 billion barrels in Lake Albert) and gas reserves and has taken steps to ensure transparency, establishing a sovereign wealth fund and moving towards joining the Extractive Industries Transparency Initiative (EITI). Uganda which has two major upstream projects – a domestic refinery and an export pipeline through Tanzania, is expected to start production after 2023 and reach a peak of 230,000 barrels per day.

Summary: The big headline so far is that approximately 500 projects are stalled with an estimated cost of Kshs 1 Trillion (12% of GDP).

Rubis Kenol Deal Details

The Directors of Kenol Kobil have recommended that their shareholders accept a buyout offer from Rubis Energie as more details have been availed about the deal.

Kenol is second largest in the country of 60 oil marketers. It has 13% market share boosted by 47% share in civil aviation. In retail, they have a 10% share behind Vivo/Shell and Total. Rubis is listed on the Paris Euronext Exchange. It has grown in 15 years by acquiring and managing companies and all its individual businesses are now profitable. SBG Securities have confirmed that Rubis have enough funds for the takeover.

Deal Excerpts

Special Shareholders

  • The offer is a 50% premium price and it is billed as offering shareholders a 100% cash return without broker charges.
  • Rubis owns just under 24% of Kenol that it bought from Wells, on October 2018 at Kshs 15.3 per share. If it takes over the company before October 2019, it will pay Wells an equivalent of the difference that other shareholders are receiving over and above what Wells received.
  • If Kenol announces any dividend now, an amount equivalent of the dividend shall be deducted from the amount due to be paid to any shareholder.
  • Kenol shareholders can only accept the offer in full, not partially. Kenol can vary its offer up to 5 days before the closing date and any shareholder who had accepted will be deemed to have accepted the new terms.
  • Rubis has received irrevocable undertakings from Tasmin Ltd with 4.2% and CEO David Ohana with 5.7% comprising 88 million shares he was granted in an ESOP in January 2017.

Way Forward:  

  • The offer closes Feb 18, 2019, with results announced on March 12.
  • Rubis reserves the right to extend the offer, with the approval of the CMA, but not beyond July 30, 2019. 
  • Shareholders, local and foreign, individual and corporate have been invited to register their interest in accepting the offer electronically on Rubis site  – this takes care of an issue cited in the stalled Victus-Unga buyout in which no response was received from 8% of their shareholder), as either they did not receive their documents through their post office mailboxes in time or did not respond, perhaps because they hoped that a better offer for their Unga shares would materialize.
  • If Rubis attains 90% support, they will force other shareholders to accept, and move on with delisting. If they gain 75% support but fall short of 90%, they may seek shareholder and regulatory approval to delist. Rubis will vote in favour of that and, if 75% approve and not more than 10% oppose it, they will proceed to delist Kenol. If it does not delist, it will remain listed until approvals are obtained or CMA asks the NSE to delist the shares. They caution that if Kenol is not delisted, after the conclusion of this deal, the remaining shareholders will find that the liquidity of their shares will go down, – noting that less than 0.06% shares traded each in a six month period prior to the deal announcement.

Rubis Énergie to takeover Kenol Kobil

A day after a huge block of shares of Kenol Kobil, exchanged hands on the Nairobi Securities Exchange (NSE), came an announcement that Rubis Énergie intended to buy out all the remaining shares and delist the company.

Rubis had acquired 24.99% of Kenol from Wells Petroleum, at Kshs 15.30 per share on October 23, in a deal that was the highlight of the day at the NSE. The offer to other shareholders of Kenol, to buy the shares at Kshs 23 per share, a 53% premium, values the oil market leader in Kenya and the East Africa region, with 350 retail outlets, at Kshs 36 billion ($353 million).

Making the announcement in Nairobi was the Rubis Energie  CEO Christian Cochet and CFO Bruno Krief. French company Rubis operates over 50 subsidiaries and its downstream business had 2017 sales revenues of Euros 2.7 billion and net income of Euros 187 million while its midstream business has sales of Euros 895 million and net income of Euros 53 million. It is a subsidiary of Rubis SCA Group which is listed on the Euronext Paris stock exchange.

The company which operates in Southern Africa, Western Africa, North Africa and islands off the continent, intends to appoint a majority of the board of directors and use Kenol to extend its reach in East Africa as a part of Rubis operations and development strategy through acquisitions which may mean lower dividend payments. 

If the deals succeeds, they will pay Wells an amount equal to the difference in the price they paid on October 23 and what other Kenol shareholders will get. Rubis intends to acquire the other 75% of the company in addition to new shares from Kenol CEO David Ohana who has already undertaken to sell the shares which were granted to him through the Kenol ESOP to Rubis. Once they get the approval of 90% of Kenol shareholders, they intend to delist the company and will move to trigger this once they get to over 75% of shares. The transaction advisors are Stanbic Bank Kenya and SBG Securities who also double up as the sponsoring broker and lead acceptance agent.

However, a few hours after receiving a notice about the Rubis cash offer for Kenol, Kenya’s Capital Markets Authority announced that it was launching an investigation into suspicious trades in relation to the takeover transaction and asked Kenya’s Central Depository and Settlement Corporation to place a freeze on the suspected accounts.

The Rubis deal comes a few years after Kenol tried to engineer a majority sale to Puma Energy and Kenol is also in the process of acquiring fuel stations in Rwanda land Uganda in two separate deals.

Excerpts from the 2016 Kenol AGM of shareholders.

KPMG on the 2018 Finance Bill Amendments

The President of Kenya signed the Finance Bill 2018 after a stormy debate in Parliament last week that saw chaotic arguments about vote procedure methods used and actual vote counting mainly with regards to VAT on petrol products.

Some of the earlier clauses in the Finance Bill had been highlighted and KPMG, which has done a series of articles,  has provided a further update on aspects of the laws in Kenya and which they termed “..the changes present an unprecedented disruption of the tax regime that will impact the economy and citizenry for years to come.”

Their perspective on the signed Finance Bill implications:

  • Excise duty on services: The President accepted Parliament’s decision to drop a Robin Hood tax of 0.05% on money transfers above Kshs 500,000 (~$5,000). But the shortfall was replaced by an increase in taxes on all telephone and internet data services, fees on mobile money transfers, and all other fees charged by financial institutions which all now go up by 50% – and which KPMG writes may have a negative impact on financial inclusion.
  • A national housing development levy was approved. With the country’s wage bill of Kshs 1.6 trillion, KPMG estimates that government can potentially collect Kshs 48 billion a year (~$480 million) from the levy, (Kshs 24 billion of which will be from employers) – a massive amount when compared to the Kshs 12.8 billion that NSSF – the National Social Security Fund collects in a year. Regulations for the National Housing Development Levy Fund (NHDF) have not been set, other than that the payments are due by the 9th of the following month. For employees who qualify for affordable housing, they can use that to offset housing costs but for those who don’t qualify, they will get a portion of their contributions back after 15 years.
  • Petroleum VAT: KPMG says that a significant portion of the government’s tax targets for 2018/19 was dependent on value-added tax (VAT) on petroleum products and that is why they have been insistent on having this implemented. Sectors that supply exempt services such as passenger transport (PSV’) and agriculture producers are expected to raise their charges to customers as they are unable to claim back the 8% VAT tax.
  • Kerosene, which is used by low-cost households, takes a double hit with the introduction of VAT as well as an anti-adulteration tax of Kshs 18 per litre. Already kerosene now costs more than diesel in some towns around the country.

  • Excise duty on sugar confectionery, while opposed by sugar industry groups, was reinstated in a move similar to other countries that are trying to address lifestyle diseases by introducing taxes on sugar products.
  • The betting industry, whose survival which was at stake, gets a reprieve as the gaming and lotteries taxes, introduced on January 1, were reduced from 35% to 15%. Many of the prominent betting companies had scaled back their advertising and sponsorship and had turned to engage in serious lobbying efforts ever since. Also, an effective 20% tax on winnings has now been introduced. The earlier tax law allowed bettors to claim some deductions if they kept records, but that has been removed altogether.