Tullow, URA verdicts set a precedent for future deals

Two decisions by separate courts recently vindicated Uganda’s sovereign laws governing taxation, after oil companies were found liable to pay taxes in countries where they operate. Uganda and the Kenya-registered exploration company Tullow Oil and Heritage Oil and Gas, registered in Mauritius, were at the centre of taxation disputes that arose from the assessment of capital gains tax by the Uganda Revenue Authority.

While the decisions were arrived at based on events that took place in Uganda, legal experts said they serve as eye-openers for countries such as Tanzania, Kenya, South Sudan and DRC that already have, or have discovered substantial volumes of oil and gas, with regard to revenues due to them.

“The decisions have set a good precedent, where companies do not only come in to invest and make economic gains, but are also supposed to pay taxes. We do not have fair Production Sharing Agreements, so taxation is one of the ways countries can benefit from the resources,” said Abdu Katuntu, the shadow Attorney General and member of the Parliamentary Forum on Oil and Gas.

Given Tullow’s and Heritage’s experiences in Uganda, it is also expected that in future, other oil companies will tread carefully in countries where they have operations particularly.

Pricewaterhouse Cooper’s Africa oil and gas review 2014 released last week shows that companies will rely on farm-outs for financing, as the industry has become one of the largest for acquisitions and mergers in Africa.

According to the review, transactions worth $1 billion occurred every 17 days in the oil and gas industry in 2013, with more activity expected as new licensing rounds are opened up and regulatory uncertainty removed.

Depending on the country’s legal system, capital gains and income taxes are made during acquisitions and mergers. For a country to benefit, however, experts said there is a need to do legitimate business.

In Uganda’s case, Heritage exited the country after selling its interests in 2010 to Tullow without paying the full amount of the assessed tax. URA presented a tax bill of $435 million that arose from $1.45 billion paid in the acquisition, and an additional $100 million for contractual settlement.  

URA invoked the powers of the agency notice, which allows it to recover taxes from a person if it has information that that person owes the taxpayer (in this case Heritage). Tullow paid the money because it was also under pressure to farm down 66.6 per cent of its shares to CNOOC and Total. The government had made payment of this tax a pre-condition to allow it to farm down.

In February 2012, the farm down was concluded with Total and CNOOC acquiring 33.3 per cent of the shares at a cost of $2.9 billion.

URA again moved swiftly to assess capital gains tax of $405 million, but Tullow applied to the TAT on grounds that it had exemptions. It also argued it made losses amounting to over $20 million, but the tribunal ordered Tullow to pay $407.1 million in capital gains tax to URA and a third of the legal costs.