Mapping Risks to Future Government Petroleum Revenues in Kenya: A framework for prioritizing advocacy, research and capacity building | Taxes | Valuation (Finance)

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The loss of government revenue due to tax avoidance strategies by multinational companies has received significant attention in recent years in both developed and developing countries – it is widely accepted that the extractives sector is particularly vulnerable. Kenya has the opportunity to benefit from the lessons learned in other jurisdictions in order to maximize the revenue benefits it receives from oil and natural gas. This report seeks to provide a framework for assessing the risk of potential revenue loss and for prioritizing possible responses.
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  Don Hubert PhD Resources for Development Consulting March 2016 MAPPING RISKS TO FUTURE GOVERNMENT PETROLEUM REVENUES  in kenya   A Framework for Prioritizing Advocacy, Research and Capacity Building www.oxfam.org  Oxfam Research Reports are written to share research results, to contribute to public debate and to invite feedback on development and humanitarian policy and practice. They do not necessarily reflect Oxfam policy positions. The views expressed are those of the author and not necessarily those of Oxfam. For more information on this report, email the Tax Justice Programme Manager on wkinyori@oxfam.org,uk  © Oxfam International May 2016.  # Table of Contents INTRODUCTION ........................................................................................................... 4 THE CHALLENGES OF TAX AVOIDANCE/EVASION ........................................................... 4 TAX BASE EROSION ..................................................................................................... 6 SOURCES OF GOVERNMENT OIL REVENUE ..................................................................... 9 COST RECOVERY ........................................................................................................ 10 SPLITTING PROFIT OIL ................................................................................................ 10 WINDFALL TAX ......................................................................................................... 11 STATE PARTICIPATION .............................................................................................. 11 OTHER POTENTIAL SOURCES OF GOVERNMENT REVENUE .............................................. 12 REVENUE RISK ANALYSIS ........................................................................................... 12 RISKS FROM DEPRESSED OIL PRICE ............................................................................ 12 RISKS FROM INFLATED COSTS ................................................................................... 14 COST RECOVERY RISKS .............................................................................................. 15 THE IMPACT OF INFLATED COSTS ................................................................................ 17 PROTECTING GOVERNMENT REVENUES ....................................................................... 18 NOTES ...................................................................................................................... 21  $ Introduction The loss of government revenue due to tax avoidance/evasion strategies by multinational companies has received significant attention in recent years in both developed and developing countries. It is widely accepted that the extractive sector is particularly vulnerable to tax evasion. Kenya has the opportunity to benefit from the lessons learned in other jurisdictions in order to maximize the revenue benefits it receives from oil and natural gas. This paper seeks to provide a framework for assessing the risk of potential revenue loss and prioritizing possible responses. The analysis below is based on four different sources of information. First, the research focused on the existing legal framework and production sharing contracts. Although a new Petroleum Law and model production sharing contract are currently under review, it is the existing production sharing contracts that will determine potential government oil revenue in the coming years. A second key source of information was the growing body of literature on the challenges of tax administration in the extractive sector. 1  Third, case studies have been used, where possible, to illustrate the risks that governments, developed and developing, face in trying to secure a fair share of extractive sector revenues. Finally, estimates of the potential scale of revenue loss have been generated from an economic model developed to forecast potential government revenues from Turkana oil. The Challenges of Tax Avoidance/Evasion Concern about tax avoidance and evasion has been growing in recent years in both developed and developing countries. There are some common sets of challenges that affect all countries and all sectors including treaty shopping, transfer pricing and the use of tax havens and low tax jurisdictions. Ultimately, however, the threats to government revenue from tax avoidance measures are sector-specific, and sometimes even project-specific. There is no doubt that the extractive sector is particularly vulnerable to tax evasion strategies. But as the text box below illustrates, there some characteristics of petroleum and mining that increase vulnerability to revenue loss and other characteristics that decrease vulnerability. 2  
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