Why government accepted less pay in Tullow case

Kampala. As the build-up to the 2016 presidential elections took a lion’s share of the media coverage, the government was at work. Unexpectedly, the government entered negotiations with Tullow Oil in a tax dispute that could have earned Uganda $473m (Shs1.6 trillion). However government decided to settle for less at $250m (Shs824b).
For three years, the battle was in the courtroom. In the legal battles, it appeared Uganda had the upper hand in a Shs1.6 trillion dispute against Tullow Oil. But almost a year after the Tax Appeals Tribunal (TAT) ruled that Tullow should pay the money to Uganda Revenue Authority (URA), the government yielded.
On Monday, Mr Fred Ruhindi, the Attorney General, confirmed the government had settled with Tullow to pay Shs824b, much lower than what the government wanted. He said the government ceded some ground after realising the case was not as strong as earlier anticipated.
“We did have an exemption clause for income tax with Tullow, so we did not stand a good chance in an international jurisdiction. So in that way, it was prudent that we negotiate to reach that conclusion which is nonetheless good for both Uganda and Tullow,” Mr Ruhindi told Sunday Monitor.
Notably, the Tax Appeals Tribunal had in July 2014 ruled in favour of URA over the tax assessment. URA was upbeat at the time, insisting the payment would boost tax revenue.
The final $250m settlement was reached on the advice of the Attorney General after consultation with the contracted international legal firm, Curtis. The Attorney General convinced Cabinet that the settlement was the right decision.

The tax exemption confusion
One sticking point in the ruling from the tax tribunal was a tax exemption given to Tullow on Exploration Area 2. In as much as Tullow Oil was enjoying the exemption, the tribunal ruling in July 2014 noted that the minister of Energy had no powers to grant a tax exemption. The powers to do so, according to the Uganda Constitution, are vested in Parliament. The law also provides for the minister of Finance to update Parliament on the status of tax exemptions.
In the ruling, the tribunal noted that it had not come across any Act of Parliament where the minister of Energy and Mineral Development is given powers to grant tax exemptions.
To this point, the ruling declared the exemption null and void. Tullow was disappointed, making it the basis for their appeal to the High Court and arbitration at the International Centre for Settlement of Investment Disputes (ICSID).
At the time the Ugandan tribunal ruled in favour of the government, Tullow was confident its appeal had a good chance during international arbitration.
“Tullow believes that the TAT (Tax Appeal Tribunal) has erred in law and 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,” Tullow said in a statement at the time of the ruling.
Mr Elson Karuhanga, a partner at Karuhanga, Kasajja & Co. Advocates, in an interview with this newspaper in July 2014, queried whose error it was if the tax exemption was granted by the Energy minister but signed in the Production Sharing Agreements (PSA) on the advice of the Attorney General.
He noted that on this basis, Tullow could appeal – which it did in the High Court and also move into international arbitration. In international arbitrations, Mr Karuhanga noted that the chances of Tullow winning the case were higher.
Aid agency, Action Aid Uganda, agrees with this reasoning. “In the halls of international arbitration, there tends to be a favouring of corporate interests. Here, they are not so keen on imploring the Ugandan Constitution, but will look at the agreement that was signed between the government and Tullow,” reads a statement from Action Aid.
The ICSID has not been a hunting ground for government taken there by oil companies or corporations. Governments, especially in Latin America, have been told to pay billions of dollars to compensate corporations for varying contract breaches.
Mr Robert Kirunda, a partner at Kirunda and Wasige Advocates, told Sunday Monitor that settlements are reached in view of the risks involved in the case.
“Sometimes when you walk into a legal process you evaluate your legal options and see which one works for you. People go to arbitration because they think the process will be more independent.
Investors fear the judges in the country of jurisdiction could be biased. For the sake of that independence, that is one of the factors investors always choose to go for international arbitration, outside jurisdiction. I think the settlement was a good outcome for the Uganda government and saves you a lot of time, work and money,” he argued.
The government had racked up legal costs of close to $10m on an American firm, Curtis, Mallet-Prevost, Colt & Mosle LLP by end of December 2014.
If there is a team that is disappointed, it is URA. Their assessment, in various defences in the TAT, was one they defended at all costs. In fact, URA officials went as far as accusing Tullow that “through the inappropriate manipulation of figures and distortion of the Uganda tax law,” the oil company was trying to avoid paying income tax on the largest transaction in Uganda’s history.
In 2012, Tullow sold 67 per cent of its stake to CNOOC and TOTAL for $2.9b, making it the largest transaction to date in Uganda’s history.
URA remains tightlipped on the case as all their hard work had been undone. Off the record though, officials at URA still had confidence that this case could be won despite Cabinet’s contrary thinking.
However, the government is getting $250m up from $142m that Tullow had been arguing was the right tax assessment. The amount will come in handy and boost URA’s revenue collection surplus in the current financial year. Upon reaching the agreement, Tullow made a payment of $72m (Shs240b), an amount that could see URA’s collection target for 2015 reach nearly Shs10 trillion.

Oiling 2016
As Uganda goes to polls in 2016, it will also mark 10 years since discovery of commercial oil reserves in the country. President Museveni has also made passionate remarks of how “our oil” will finance the country’s critical sectors.
Expenditure that is important, especially in an election year.
Taxation has been one of the sticking points in the protracted negotiations on granting licences – both exploration and production. The government appears to have made some more concessions on taxation of oil – something they were not willing to compromise on – at least according to Tullow.
“In recent months, the government of Uganda has proposed welcome and necessary changes to its tax regime for oil and gas investments which it is hoped will enable substantive progress to be made towards the sanction of the Lake Albert oil development,” said Mr Aiden Heavey, CEO Tullow Oil plc in London.
Once the compromise was struck on the dispute, Mr Jimmy Mugerwa, the general manager, Tullow Uganda, was quick to suggest production of the first oil is close.
“The settlement of this dispute is good news for both Tullow and Uganda as it confirms that we are moving in the right direction to resolve the critical issues that will allow us move towards a Final Investment Decision (FID),” Mr Mugerwa said in an email response to Sunday Monitor.
An FID is reached once a company is granted an oil production licence – Tullow has also been waiting for this for the last four years.
This settlement, according to Mr George Boden, a lead campaigner at Global Witness, “could help clear the path for the granting of production licences.”
“Agreeing to move forward with the production licences would send a positive signal for investors in the upstream and mid-stream sectors,” he argued.
However, Lwemiyaga County MP Theodore Ssekikubo, who chairs the Parliamentary Forum on Oil and Gas, in an interview, said government traded the country’s interests because they needed a source of quick money to bankroll their upcoming activities.
“Why on earth would any government request an oil company to settle matters out of court moreover a decision taken by Cabinet alone sitting in the dead of the night? Mr Ssekikibo said. “ I have it on good authority that actually Uganda got more than the $250m but we’ll expose them some day,” he added.

Tullow case timeline

February 2012: Tullow completes the 66.7 per cent sale of its Ugandan licences to CNOOC Limited and TOTAL for $2.9 billion. URA in turn makes an assessment and says Tullow is liable to pay $473m. Tullow agrees to place $142m in escrow account. The oil company went ahead to file a suit in the Tax Appeals Tribunal contesting the assessment.
July 2014: The Tax Appeals Tribunal (TAT) rules in favour of the government and orders Tullow to pay the full amount of $473m. Tullow contests the ruling and promises to appeal to the High Court and also go to International Arbitration.
June 2015: Government and Tullow reach a settlement out of court. Tullow agrees to pay $250m and withdraws all capital gains tax related cases against the government.

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