Kenya, Tanzania, Uganda, Burundi and Rwanda have imposed an import tax of 10 percent on base oils and additives and 25 percent on finished lubricants. Besides making local products more competitive, these duties are expected to boost the countries revenues.

However, Elvis Kahi, lubricants territory manager at National Oil Corp. of Kenya, said, Despite the 25 percent duty on imports, lubricants, especially from UAE, still land in Kenya at competitive prices. Kenya is home to an estimated 30 oil importing and marketing companies, some with operations in other East African countries. Kahi said the pricing could be a result of economies of scale in the manufacture of lubricants and other products in the Middle East, which is the main source of oil and oil products to the regions market, estimated at nearly 100,000 metric tons.

Previously, market analysts had indicated that the tax on base oils, additives and finished lubricants would trigger an adjustment in retail prices by oil marketers to reflect the additional levy. For instance, an analysis of Tanzanias 2016/17 budget by Deloitte stated, The move [to impose a tax] will result in price increases for these products since the manufacturers and importers will be forced to adjust their prices to reflect the higher excise duty rates.

Tanzanias Minister of Finance and Planning, Philip Mpango, announced an increase in the excise duty on lubricating oils of from TSh 665.50 per liter (U.S. $0.30) to TSh 699/liter ($0.31). The minister also announced a duty of TSh 0.79 per kilogram on lubricating greases, up from TSh 0.75/kg. Consumers will, therefore, be required to dig deeper into their pockets to continue purchasing these products, Deloitte said. According to Kahi, the increased duty on base oils and additives should favor local blending in East Africa, especially Kenya and Tanzania, resulting in more jobs, economic growth and additional earnings for the governments.

Uganda Revenue Authoritys Commissioner Domestic Taxes, Henry Saka, said the Finance Act of 2016 increased the excise duty on motor vehicle lubricants from the Common Market of East and Southern Africa from 5 percent to 10 percent, effective July 2016. The goal is to boost the countrys earnings. It is our plan to continue our efforts to further strengthen tax revenue, said Saka.

According to the Director General of Kenyas National Bureau of Statistics, Zachary Mwangi, lubricant imports have dropped in the last year, indicating that the import tax, combined with low global oil prices, may have achieved the desired effect. He added that although imports of lubricating greases increased from 442,800 tons in 2013 to 717,700 tons in 2014, the rise was reversed in 2016 when the value of fuel and lubricant imports dropped 12 percent.

KenolKobil, the second largest oil marketer after Total, is the sole distributor of Castrol lubricants in Kenya under a 10-year agreement. The company wants to reduce imports and, hence, import taxes by setting up a U.S. $15 million blending plant in Mombasa. This would allow the oil company to import only base oils and additives for the plant, thereby reducing tax payments.

When you import, you pay 25 percent, but when you blend locally, you pay 5 percent tax, said David Ohana, KenolKobils group managing director, in an interview. For top tier oil marketers in East Africa such as KenolKobil, the challenge is determining how the restrictive taxes would achieve the desired results, especially where enforcement is inadequate.

Enforcement challenges could see finished products smuggled into the region and distort the market, said National Oils Kahi. He added that the entry of unauthorized products has affected lubricants and liquefied petroleum gas to some extent, but the full impact will be known once a multiagency investigation into the practice is complete.

Another issue is the increased volume of inferior lubricants made from partially recycled base oils by small market players that sell the products at low prices, especially to owners of old vehicles. Deloitte estimated that by 2014, about 80 percent of Kenyas total vehicle fleet was second-hand, which drives the proliferation of cheap lubricants.

Oryx Energies has taken action to counter the challenge posed by poor quality, counterfeit lubricating oils, which the company said are damaging vehicles, the economy (including lost tax revenues) and the environment. The Swiss-based company exports to Kenya, Uganda, Zambia, Democratic Republic of Congo and Rwanda, and blends and packages products for third parties. In recent years, it has opened lubricant shops dedicated to selling its products, making it easier for customers to purchase genuine Oryx lubricants at competitive prices.

Oryx has operated one of the few blending plants in Tanzania for more than 15 years. Thus, it benefits from paying only the 10 percent import tax on raw materials, as opposed to the 25 percent levy it would have to pay for importing finished lubricants.

Kenya, Tanzania, Uganda, Rwanda and Burundi have yet to agree on how to implement the East African Community (EAC) Rules of Origin, which govern how to tax goods, including lubricants, produced in EAC Partner States and traded across their borders. In principle, no lubricants or other goods produced within the region should be subject to taxation by any EAC member once agents have determined the products eligibility.

The current lack of clarity has persisted since 2012, when customs agents from EAC Partner States investigated the eligibility of lubricants from Kenyan and Tanzanian blending plants for tax exemption. Unfortunately, they voted unanimously that the lubricants did not meet the threshold required for tax exemption under the Rules of Origin, partly because the base oils and additives used in the finished lubricants were imported.

Only lubricants produced within East Africa, using materials generated within the region, can qualify for preferential treatment under the Rules of Origin. Despite the taxation challenges facing East Africas lubricants industry, analysts believe consumption of automotive, industrial and mining lubricants is expected to remain high, both in the medium and long term, supported by expanding economies, high urbanization rates and increasing infrastructure investment.