Ensure transparency when signing agreements with oil companies

Thursday September 12 2019


By Doreen Namara

Due to tax disagreement between the government Uganda and Tullow Oil (U) Ltd, Total E&P (U) B.V. suspended all operations on the East African Crude Oil Pipeline (EACOP) project. The disagreement on tax resulted from Tullow’s intention to sell its stake to French Total E&P (U) B.V. and China National Offshore Oil Corporation (CNOOC) where the Ugandan government insists that Tullow must pay the Capital Gains Tax (CGT) in accordance with Part VI of the Income Tax Act. Capital Gains Tax is computed on the net gain from disposal of a business asset, which in this case, Uganda expects 30 per cent from Tullow Oil (U) Ltd from the transaction.
Tullow is expecting $900m from the intended transaction and the government expects $300m, which is a third of the amount. However, Tullow is disagreeing to that because it thinks the transaction is not taxable because the same money is going to be re invested within the country. Uganda was faced with similar dispute in 2010 when Heritage Oil, which was one of the major players in Uganda’s petroleum sector, sold its exploration licences in the Albertine Rift to Tullow Oil. Heritage and Tullow jointly owned a 50 per cent stake in two lucrative exploration blocks 1 and 3A), but when Heritage sold its stake, Tullow became the sole company licensed to operate in those areas.
Tullow purchased Heritage’s stake at $1.45b and the dispute arose when Uganda Revenue Authority (URA), which was acting on behalf of the government, requested $434m or 30 per cent of the sale in capital gains taxes. Heritage disputed the tax, saying its lawyers believed that the sale was not taxable, given that the Production Sharing Agreements (PSAs), which the company signed with the government, failed to mention such a payment.
Such disputes in the oil sector are caused by secrecy while signing PSA because the government officials who sign these PSG lack capacity to negotiate and sign good PSG that favour the citizens. Such tax disputes in the oil sector, which is a young developing sector in the country, have immense implications for our revenue and the investment climate by:
Scaring away potential investors. Such disputes scare away other investors that would be willing to invest in Uganda although Uganda is endowed with different resources. Such disputes delay projects, for example, this negation have been ongoing for two years, but now that the negotiations failed, Tullow has to again start from scratch delaying the oil production and wasting time.
Wastage of tax payers’ money. We remember after the tax dispute between the government Uganda and Heritage Oil came to the surface in May 2011, arbitration commenced in London to resolve it because the PSA that Uganda signed with Heritage designated the United Kingdom as the jurisdiction for the resolution of disputes. Ugandans questioned why the government failed to go to Ugandan courts to arbitrate issues related to the country’s because this would be costly in terms of legal fees and other expenses.
Abuse of public funds. Such disputes have accelerated the misuse of public funds. On November 23, 2011, when the court in London ruled against Heritage Oil and in favour of URA, President Museveni awarded Shs6b to 42 government officials who handled the Heritage Oil case. This was an abuse of public fund. Even the President admitted that it was wrong that the “Presidential Handshake” money was deducted from URA accounts without the knowledge of its board. That being said, we call upon the government to make sure that the oil companies pay taxes. Uganda should not succumb to oil company’s pressure. Maybe because we are so desperate for oil to be produced by 2022, the government is acting well within the law to demand that Tullow Oil (U) Ltd pays the Capital Gains Tax of $167m due to government.
To make sure that the oil companies respect the national laws on taxation, part VI of the Income Tax Act, is very clear and Capital Gains Tax is computed on the net gain from disposal of a business asset and where a company earns a profit from the sale of its assets, the company must pay a 30 per cent CGT. Therefore, Tullow Oil must pay the $167m (Shs609b) the government demands. Taxes needed to offset oil impacts. The fact that the oil activities affect the environment and livelihoods, this tax is needed to offset the side effects that will be caused. The companies’ activities are going to degrade the environment and will negatively impact Ugandans’ incomes, water access, food security, cultures and good health.
Transparency while signing the PSAs. Such persistent disputes show that Ugandan government does not sign good PSAs as it also stated that there is inconsistence between the PSA signed between Tullow and the government and what the Income Tax Act provides. To ensure that public funds are not abused, citizens must demand that government recovers the Shs6 billion that the President awarded to 42 government officials.
The government should fast-track the process of joining Extractive Industry Transparency Initiative (EITI). Government should also ensure that after joining EITI, an EITI Bill should be tabled before Parliament to create an EITI law in Uganda. This law will be an important instrument in entrenching transparency, accountability and good governance in the extractive industry.
The country will be required to publish an annual EITI report disclosing information on contracts ,licenses, volumes of oil, how much is produced, how is paid and how much is received.
Ms Namara is a legal assistant AFIEGO.