The Use of Tax Havens in the Ownership of Kenyan Petroleum Rights | Tax Haven

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As an emerging petroleum producer, Kenya has the opportunity to use the benefits of its natural resource wealth to further economic and human development.  The main factor within the government’s control that will determine the amount of potential government revenue from Kenya’s petroleum wealth is the set of fiscal (tax) terms offered to international oil companies to explore for new sources of oil and natural gas. There is growing concern among resource-rich developing countries in Africa and beyond that multinational companies are employing aggressive tax avoidance strategies in order to increase their share of divisible revenue. Of the potential mechanisms through which companies seek to minimize their revenue payments to governments, an area of concern is the use of subsidiaries registered in tax havens. This report reveals the widespread use of tax havens and low tax jurisdictions in the corporate structures of companies holding petroleum rights in Kenya. 
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    The Use of Tax avens in the Ownership of Kenyan Petroleum Rights Don Hubert, PhD Resources for Development Consulting May 2016 www.oxfam.org      2 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 The text may be used free of charge for the purposes of advocacy, campaigning, education, and research, provided that the source is acknowledged in full. The copyright holder requests that all such use be registered with them for impact assessment purposes. For copying in any other circumstances, or for re-use in other publications, or for translation or adaptation, permission must be secured and a fee may be charged. E-mail policyandpractice@oxfam.org.uk   Published by Oxfam GB for Oxfam International in May 2016. Oxfam GB, Oxfam House, John Smith Drive, Cowley, Oxford, OX4 2JY, UK. Oxfam GB is a registered charity in England and Wales (no 202918) and Scotland (SC039042). Oxfam GB is a member of Oxfam International.    3  Table of Contents INTRODUCTION ....................................................................................................... 4 TAX HAVENS AND SECRECY JURISDICTIONS ................................................................ 6 COUNTRIES APPEARING ON VARIOUS TAX HAVEN LISTS ................................................ 7 THE ALLOCATION OF PETROLEUM RIGHTS ................................................................... 9 THE TRANSFER OF PETROLEUM RIGHTS ..................................................................... 11 CURRENT STATUS OF KENYAN PETROLEUM RIGHTS ..................................................... 12 CORPORATE STRUCTURES AND TAX HAVENS .............................................................. 17 TAX HAVEN CASE STUDIES ....................................................................................... 19 NOTES .................................................................................................................. 31    4 INTRODUCTION  As an emerging petroleum producer, Kenya has the opportunity to reap the benefits of its natural resource wealth to further economic and human development. Many of the key factors that will determine the amount of potential government revenue from Kenya’ s petroleum wealth fall outside of the governmen t’s control. The most important of these are the volume of commercially recoverable oil in the country and the price for that oil when it reaches international markets.  The main factor within the governments’  control is the set of fiscal (tax) terms offered to international oil companies to explore for new sources of oil and natural gas.  These fiscal terms are set out in a series of  production sharing contracts that the government has signed with international oil companies. The fiscal terms establish the broad framework that determine how much of the divisible, or ―after cost‖, revenue will be allocated to the company and how much will be allocated to the government. During the exploration phase, the interest of the companies and the government are broadly aligned –  both sides are hoping that exploration success can be rapidly converted into large-scale petroleum production. Once production begins, however, tensions between the parties can arise as both sides seek to maximize their share of project revenues.  There is growing concern among resource-rich developing countries in Africa and beyond that companies are employing aggressive tax avoidance strategies in order to increase their share of divisible revenue. 1  There are a number of potential mechanisms through which companies seek to minimize their revenue payments to governments. One specific area of concern is the use of subsidiaries registered in tax havens. Multinationals have increasingly organized their corporate structures around tax havens and low tax jurisdiction in order to take advantage of international loopholes. 2  Tax havens provide the attractive combination of zero or very low tax rates combined with high levels of secrecy. Creating ―conduit‖ subsidiary companies in between the productive company overseas and the parent company at home allows companies to shift both profits and costs and in the process significantly reduce tax payments. While developing countries have complained about these practices for many years, following the recent economic crisis, developed countries have now recognized that they too are losing vast amounts of potential tax revenue. 3   The problem is particularly acute in the extractive sector, where large multi-national companies establish complex corporate structures in order to minimize tax payments and maximize profits. Research on the 10 largest extractive sector companies in the world demonstrates that they control over 6,000 subsidiaries of which more than a third were located in tax havens or secrecy jurisdictions. 4  Zambia provides a concrete example where billions of dollars in revenue were lost due to copper being sold on paper to a subsidiary of Glencore registered in the low-tax jurisdiction of Switzerland. 5   The first step in analyzing the potential for government revenue loss due to tax havens is to understand the corporate structures of the companies that hold petroleum rights in Kenya.  This paper therefore analyzes the initial allocation and subsequent transfer of rights to the 41 petroleum blocks currently licensed to international oil companies. Having identified the
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