Uganda Revenue Authority (URA) has won multimillion dollar case in which it was sued by Tullow Oil, protesting payment of over US$ 472 million as income tax.
In 2011, Tullow Uganda Limited and Tullow operations PTY Ltd (applicants) filed an application before the Tax Appeals Tribunal challenging initial assessments of income tax of US$472,748,128((Shs1, 229,145,132,800) by the respondent (URA) in respect of a transfer of their interests in Exploration Areas EA1, EA2 and EA3 to CNOOC and Total for the consideration of US$ 2,933,330,400. The said assessments were eventually revised by URA to US$ 467,271,971 being capital gains tax. The applicants being aggrieved by the said assessments appealed to the Tribunal.
In their ruling on Thursday, the tribunal chaired by Mr. Asa Mugenyi ordered that the applicants pay capital gains tax of US$ 407,095,366 basing on the evidence adduced before the Tribunal being the amount after the pre-investment relief. The total amount of capital gain tax before the pre-investment relief was US$ 542,793,821.
The tribunal also ordered that the applicants will deduct the statutory 30% paid from the US$ 407,095,366 and the balance outstanding shall attract an interest of 2% per month from the date of this ruling till payment in full after which the applicants are entitled to a re-investment relief of US$ 135,698,455.
“In addition to payment of two-thirds (2/3) of the costs of this application to the respondent, applicants are required to furnish the respondent with evidence of re-investment in an asset of a like kind to the tune of US$ 135,698,455 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 February 21, 2012 and February 21, 2013. In the event 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 gain tax on the expiration of the said period and will attract interest of 2% per month till payment,” read the ruling in part.
On the 8th October 2001, both the applicants and the Government of Uganda executed a Production Sharing Agreement (PSA) under which they were granted exploration, development and production rights in Exploration Area EA2. It was signed by the then Mineral and Energy Development minister, Ms Syda Bbumba, Mr. Edward John Ellyard (Managing Director) on behalf of Hardman and by Mr. Andrew Wyndham Nel (Chief Operating Officer) on behalf of Energy Africa.
Another PSA, in relation to EA1, was entered into on the July 1, 2004 (the “EA1 PSA”) between Energy Africa, Heritage Oil and Gas Limited and the GOU. The EA1 PSA was signed for and on behalf of the government by Energy state minister Daudi Migereko, Mr. Brian Smith on behalf of Heritage and by Mr. Rhimwaan Gasaut on behalf of Energy Africa.
On September 8,2004 another PSA, in relation to EA3A, was entered between Energy Africa, Heritage and the government and was signed Ms Bbumba on behalf of government, Mr. Smith on behalf of Heritage and by Mr. Wyndham on behalf of Energy Africa.
On August 29, 2002, Heritage and Energy Africa agreed to continue with the Joint Operating Agreement (JOA) between Heritage and Energy Africa for EA3, under which the first applicant’s (Tullow Uganda Limited) participating interest was 50%.
The applicants through their exploration activities discovered hydrocarbons in the respective exploration areas.
On January 17, 2010, Tullow Uganda Limited (TUL) invoked its pre-emptive rights under the JOA for the purchase of 50% participating interests of Heritage in Exploration Areas EA1 and EA3A (the Heritage interests”) at a consideration of US$ 1,450,000,000 subject to approval from the government.
On January 26, 2010, TUL and Heritage signed a Sale and Purchase Agreement (the “SPA”) under which TUL would acquire Heritage’s 50% participation rights in Exploration Areas EA1 and EA3A. Subsequently, on July 6, 2010, government of Uganda granted a conditional approval to the transaction between Heritage and TUL.
On October 18, 2010, URA raised assessment number SA/LTO/2569 of US$ 390,924,460 and assessment number SA/LTO/2570 of US$ 84,999,660 on both applicants respectively being income tax (Capital Gains Tax) but objected to the assessments.
Consequently, URA on February 24, 2011 made an objection decision that adjusted the assessment on the TUL. Assessment No.SA/LTO/2569 of US$ 390,924,460 was amended to US$ 387,748,469 while assessment No. SA/LTO/2570 of US$ 84,999,660 was unaffected, resulting in a total of US$ 472,748,128.
However, the applicants were not contented with the authority’s move and on March 25, 2011, the applicants filed an application for review before the Tax Appeals Tribunal, contesting the assessments.