The Tax Appeals Tribunal Holds that Product Gains on Petroleum Products are not Subject to Additional Duties and Levies

Introduction

Anjarwalla & Khanna recently represented a taxpayer before the Tax Appeals Tribunal (the Tribunal) in an appeal on whether product gains on petroleum products should be subjected to additional duties and levies. The Tribunal held that:

  1. the tax point for all petroleum products imported into Kenya for home use is at the point of importation;
  2. product gains on duty paid petroleum are not subject to additional duties and levies;
  3. product gains and losses on petroleum products should be treated as profits and losses in the books of the oil marketing company (OMC) and subject to income tax.

Due to the nature of petroleum products, OMCs in the global oil and gas industry experience product gains and losses during the storage, handling and transportation of petroleum products. In Kenya specifically, the key product gains and losses are:

  1. Kenya Pipeline Corporation (KPC) gains and losses arising from commingling of petroleum products in the KPC pipeline during transportation;
  2. temperature gains and losses arising from expansion and contraction of petroleum products;
  3. hospitality gains and losses; and
  4. storage and terminal gains and losses at the OMC’s terminals.

The Tribunal’s decision is a relief for OMCs from whom Kenya Revenue Authority (KRA) has been demanding payment of additional duties and levies for product gains on petroleum products arising post importation, resulting in double taxation of petroleum products.

Facts of the Case

The Commissioner of Investigations and Enforcement (the Commissioner) in a review decision demanded payment of additional duties and levies amounting to approximately KES 9.9 billion (principal tax) on product gains arising from KPC gains, temperature gains, hospitality gains and storage and terminal gains. Aggrieved by the review decision, the taxpayer lodged an appeal to the Tribunal against the decision of the Commissioner.

The key issues for determination on appeal were:

  1. Whether the Commissioner erred in assessing duties and levies on the product gains; and
  2. How petroleum product gains and petroleum product losses should be treated for tax purposes.

Whether Cuties and Levies Should be Assessed on Product Gains on Petroleum Products

The Tribunal held that there was no basis for levying additional duties and levies on the product gains since the duties and levies on the petroleum products had been paid at the point of importation.

The duties and levies payable on imported petroleum products are import duty, excise duty, road maintenance levy (RML), import declaration fee (IDF), petroleum development levy (PDL) and petroleum regulation levy (PRL).

The Tribunal held that the tax point for payment of these duties and levies with regard to petroleum products is at the point of importation when the petroleum products are entered for home use and measured at 20 degrees Celsius (20°C), a process which takes place prior to the release of the petroleum products from the customs area to the OMCs. The Tribunal highlighted that petroleum products are only released to the OMCs after payment of the applicable duties and levies.

The Tribunal’s finding was based on the following legal provisions:

The East African Community Customs Management Act, 2004 (EACCMA)

Section 120 of EACCMA which provides that import duty shall be paid at the rate in force at the time when the goods liable to such duty are entered for home consumption.

The Excise Duty Act, 2015 (EDA)

Sections 6(4) of the EDA which provides that excise duty on petroleum products imported for home use shall be paid at the point of importation or at such other time as may be specified by the Cabinet Secretary by Notice in the Gazette. Section 4(2) of the EDA defines the time of importation for excisable goods cleared for home use as the time of customs clearance.

Prior to enactment of the EDA, which came into force in 2015, payment of excise duty was regulated by the Customs and Excise Act (Cap 472 of the Laws of Kenya) (CEA). Section 124 (1) of CEA provided that excise duty shall be paid at the rate in force when the goods liable to excise duty are entered for home use.

The Customs and Excise (Petroleum Oils) (Excise Regulations), 2005 (the Petroleum Oils Regulations) which were enacted under the CEA but were still in force at the commencement of the EDA since no subsidiary legislation had been made under the EDA, made provision for assessment and payment of taxes on petroleum products upon release by Customs.

The Road Maintenance Levy Fund Act (Act No 9 of 1993) (RML Fund Act)

Section 5 of the RML Fund Act levies a road maintenance levy on petroleum products at the time of importation.

The Miscellaneous Fees and Levies Act, 2016 (MFLA)

Section 7(1) and (2) of the MFLA provides for the levying of an import declaration fee on all goods, including petroleum products, imported into the country for home use.

The Petroleum Development Levy Order (L.N. 28/2006) (the Order)

The Order provides for payment of a petroleum development levy on all petroleum products consumed in Kenya. The Third Schedule to the Order prescribes the rate of  the levy for the petroleum products measured at a temperature of 20°C.

The Energy (Energy Regulatory Commission Petroleum Levy) Order, 2014

Petroleum regulation levy is payable on five petroleum products (Petroleum Motor Sprit (PMS), Regular Motor Sprit (RMS), Automotive Gas Oil (AGO), Dual Purpose Kerosene (DPK) and Industrial Diesel Oil (IDO) consumed in Kenya at a rate prescribed in the order for petroleum products measured at a temperature of 20°C.

Tax Treatment of Product Gains and Product Losses on Duty paid Petroleum Products

Based on the finding that there was no legal basis for levying additional duties and levies on product gains on duty paid petroleum products, the Tribunal held that product gains should be dealt with under the Income Tax Regime which levies income tax on the gains and profits of a business.

Conclusion

Taxes can only be levied based on clear and specific provisions of the law. However, KRA has been demanding payment of additional duties and levies by OMCs on product gains arising on duty paid products even though the laws provide that the tax point is at the point of importation. The Tribunal’s decision is a welcome relief to OMCs who have previously been required to pay additional duties and levies for product gains on duty paid petroleum products.

The effect of the Tribunal’s judgement is that KRA is now stopped from demanding payment of additional duties and levies on product gains on duty paid petroleum products.


Should you require more information, please do not hesitate to contact Daniel Ngumy, Kenneth Njuguna or Wangui Mwaniki.

Daniel Ngumy
Partner
ALN Kenya | Anjarwalla & Khanna
dng@africalegalnetwork.com
Kenneth Njuguna
Partner
ALN Kenya | Anjarwalla & Khanna
kkn@africalegalnetwork.com
Wangui Mwaniki
Of Counsel
ALN Kenya | Anjarwalla & Khanna
wmw@africalegalnetwork.com

 

*Contributor: Margaret Muchoki, Associate


The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter.

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