Kenya Revenue Authority (KRA) is set to collect over Kes 2.2 billion in taxes from Africa Oil Kenya BV.
This is after winning a court battle with the oil company of Kes 2.2 billion in unpaid VAT for the years 2011,2012 and 2015.
The High Court dismissed an appeal by 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 so 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 a property owner known as a farm-out when leasing their resource-producing property to another person.
Further, the court noted that once the farm-out is complete, the interest reverts to Africa Oil Kenya, which may consequently work out an agreement for revenue sharing with another 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.