Drilling for oil in western Uganda. Tullow Oil Company has been ordered to pay $407 million to the Uganda Revenue Authority.
What you need to know:
The firm’s chief executive, Aiden Heavy, said Tullow is concerned by the ruling because it ignores a contractual term signed by a government minister.
Tullow Oil Company has been ordered by a tax appeals tribunal to pay $407m (about 1.069 trillion Ugandan shillings) to Uganda Revenue Authority (URA).
The money is Capital Gains Tax that URA had levied on the oil company after it sold its interests in Uganda’s oil sector, valued at $2.9b, to China National Offshore Oil Corporation (CNOOC) and Total in 2012.
Ms Mwajumah Nakku Mubiru, URA supervisor, litigation, yesterday told the Daily Monitor: “We have no indication that they are willing to appeal although they can do so within 30 days if they so wish.”
Following the 2012 completion of the farm-down of 66 per cent of its interests in Exploration Areas EA1, EA2 and EA3 to CNOOC and Total, URA issued Tullow with a capital gains tax assessment by of $472m.
Tullow, however, challenged the assessment in the a upon payment of 30 per cent of the assessment (approximately $142m) as legally required to launch an appeal. Tullow’s challenge was, among others, based on the argument that no tax would be payable in respect of a farm-down of its interests.
In his testimony, Mr Martin Graham, the firm’s general counsel, said Tullow understood Article 23.5 of the EA2 production sharing agreement to mean that the assignment or transfer of an interest under the agreement would not be subject to any tax, fee or other impost levied either on the assignor or the assignee.
However, the tribunal, chaired by Mr Asa Mugenyi ruled against the oil company.
“The tribunal orders that the applicants (Tullow) pay capital gains tax of $407,095,366 basing on the evidence adduced before the tribunal being the amount after the pre-investment relief.
“The applicants (Tullow) will deduct the statutory 30 per cent paid from the $407,095,366 and the balance outstanding shall attract an interest of 2 per cent per month from the date of this ruling till payment in full,” the ruling reads in part.
The tribunal noted that this is the biggest case, involving the largest transaction of $ 2.9b, in the legal history of Uganda. It ordered that the applicants pay two-thirds (2/3) of the costs of this application to the URA.
A statement released by URA’s legal supervisor yesterday also quoted the ruling, saying the total amount of capital gain tax before any re-investment relief was $542,793,821.2) “The applicants are entitled to a re-investment relief of $135,698,455,” it said.
According to the URA release, the tribunal ordered Tullow to “furnish URA with evidence of re-investment in an asset of a like kind to the tune of the above mentioned amount … within three months from the date of this ruling.
The said re-investment in an asset of a like kind should have been made in the period between 21st February 2012 and 21st February 2013. In the event that the applicant does not comply with this order, the said relief or that amount of relief which has not been proved will crystallise into capital gains tax on the expiration of the said period and will attract interest of 2 per cent per month till payment.”
Disappointment
URA indicated that under the Tax Appeal Tribunal Act, the portion in respect of the re-investment relief is remitted to URA to the effect as stated herein above. Tullow said the tribunal erred in law.
“Tullow is extremely disappointed that the tax appeals tribunal ruled that the then Minister of Energy did not have the legal authority to grant such an exemption. Tullow will challenge the EA2 assessment through the Ugandan courts and international arbitration but hopes that further direct negotiation with the government can resolve this matter,” the firm’s statement said.
Tullow also believes that the amount already paid exceeds its liabilities in relation to capital gains tax on EA1 and EA3A. “However, there are specific points in the ruling that Tullow may wish to challenge relating to these two areas,” the statement reads.
The firm’s chief executive, Aiden Heavy said Tullow is concerned by the ruling because it ignores a contractual term signed by a government minister.
“...Over the last 10 years, Tullow has spent $2.8b in Uganda and discovered 1.7 billion barrels of oil. This money was spent by Tullow on the understanding that our contracts with the government, which contained important incentives to invest that were vital at a time when no oil had been discovered in Uganda, would be honoured,” he said.
He added: “We will now carefully consider all our options to robustly challenge this ruling.”
The tribunal, however, observed: “...having found that the exemption granted to the applicants in respect of EA2 cannot hold; that the doctrines of estoppel and legitimate expectation do not help the applicants and having discussed the rules that apply to the transfer of interests of petroleum agreements, have to apply what was discussed in computing the applicants’ tax liability taking into consideration the evidence adduced.”
When contacted, Mr David Mugenyi, the acting manager public and corporate affairs, at URA said the ruling is a landmark achievement.
“For us, the institution and the country as a whole, it is important that we won the case after such a long legal battle. The court victory has come at the right time because we needed to start the new revenue collection calendar strongly.”
