An evaluation of the relationship Between tax cash flows and the key factors determining the quantum of indirect taxes in the oil industry case study of Mobil oil Kenya ltd

Abstract

One of the major factors facing the oil industry in Kenya is the high level of taxation of petroleum products, a factor that impacts significantly on the cash flows of the oil marketing companies. The potential impact is for taxes to increase the risk exposure (cash flow variability) of these companies. This study therefore endeavoured to establish whether there is a significant relationship between the variability of an oil companies tax related cash flows and changes in the three major factors that influence the quantum of indirect taxes payable; rates of taxes, the Kenya Shilling - US Dollar exchange rate and fuel prices. The research methodology was based on the case study design and focused on the operations of Mobil Oil Kenya Ltd. Data was collected from both external and intemal sources and the principal technique of analysis, multiple regression analysis, applied. This involved regressing the changes in the net present values of the projected cash flows of the various indirect taxes against changes in the values of tax rates, the Shilling- US Dollar exchange rate and fuel prices. The major findings were that exchange rate movements and fuel price volatility significantly influenced the variability of VAT cash flows. Fuel price changes also impacted heavily on the risk exposure to value based import duty. Additionally, it was found that the effect of tax rates changes on the company's cash flows depended on the product on which it was imposed, with changes in the rates of indirect taxes of some products being critical in the management of risk exposure.