14 September 2012

Namibia: New Tax Ignites Oil Companies' Fury

FINANCE Minister Saara Kuugongelwa-Amadhila's tax reforms have ruffled the feathers of the oil exploration sector, whose exploration costs have increased by over 30% since she implemented withholding tax in March.

Oil exploration companies intend forming a pressure group to try and convince the minister to reconsider, The Namibian has learnt.

Withholding tax applies when a foreign company delivers a service to a Namibian-registered company. Since March 1, a local company must retain 25% of the fee charged by the foreign company and pay it over to the Ministry of Finance.

This has led to ballooning costs, players in the oil exploration industry say.

When a local company for instance charter a foreign rig to drill for oil, 25% of the cost charged must be retained as withholding tax, meaning that the foreign company only gets 75% of the amount it quoted. However, the foreign company still wants to get 100% of the original amount, so it simply inflates its quoting price to ensure breaking even.

This is not the first time Kuugongelwa-Amadhila's unilateral tax reforms have rocked the boat in the mining industry.

Last year, she had to backtrack after her proposals, which included 15% value-added tax (VAT) on exports and a 5% export levy on raw materials, threatened to shut down mines in Namibia. She soon buckled under pressure from the Chamber of Mines in Namibia and scrapped her VAT plan, and cut the export levy on raw materials to between zero and two per cent.

Approached for comment, Petroleum Commissioner Immanuel Mulunga said he was aware of the industry's concerns.

"One would have hoped that there would have been consultation between the Ministry of Finance and the Ministry of Mines and Energy before introducing the withholding tax," Mulunga told The Namibian.

Oil and gas exploration costs have jumped by about 33% as a result of the new tax, he said.

Mulunga said his ministry has managed to ignite a flurry of foreign interest in the hunt for oil and gas offshore Namibia, especially during the past two years. By year-end, there could be as many as 50 holders of exclusive prospecting licences (EPLs) for oil and gas, he said.

However, oil and gas exploration is costly and high risk and therefore investors shouldn't be scared away, Mulunga said.

"Maybe we could have introduced withholding tax if we already discovered oil."

So far, all wells drilled to find the potentially 12 billion barrels of oil Namibia might have, have come up dry. So the environment luring investors should be as friendly as possible, Mulunga said.

"The investors currently involved in oil and gas exploration didn't come to Namibia because of oil. They came mostly because Namibia is politically stable," he said.

Mulunga said it is imperative that Namibia remains as investor-friendly as possible, as the country has to compete with other countries worldwide with oil and gas riches.

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