Tax exemptions under oil, gas sector

If there is any space that is being keenly watched now, it is the oil sector whose doors for the development stage were flung wide.

The country had waited for almost five years. There was that on and off tempo until when it was certain with the signing of the Final Investment Decision (FID).

FID means that Ugandans are expected to harvest hugely from oil investments amounting to at least $10b as the country awaits first oil by 2025.

In all this, a lot of equipment is expected to be imported. Therefore, as any other business, there are related costs, among them taxes.   

Veronica Magembe, is the manager tax PricewaterhouseCoopers with specialty in oil and gas and she points out, the oil and gas sector, has been marked out for the development stage, with some of the imported equipment and inputs exempted from import duty.

All equipment and inputs, apart from motor vehicles, imported by a licensed company for direct and exclusive use in oil or gas exploration, development and distribution under the East African Community Customs Management Act, 2004, she says, are tax exempted.

 “For import of goods relating to the pipeline project, the EACOP Bill, 2021 provides for an exemption from customs or import duties imposed on equipment and inputs, engineering plant, capital goods and the temporary importation of any motor vehicles (subject to fulfilment of specific conditions) for direct and exclusive use in the EACOP project,” Magembe says.

 The exemption, she says, applies to export or excise duties or other taxes of a similar nature such as customs processing fees, African Union levy, and infrastructure levy, except for motor vehicle registration fees, and is not specifically restricted to the project company, contractors and subcontractors.

 However, Magembe notes that before importing in any related equipment, the importer will be required to obtain approval from Uganda Revenue Authority before applying for import and customs duty exemption.

 “This is a good policy as it allows importation of equipment for infrastructure projects in the sector at no import duty rates,” she says.

In the absence of exemptions, Magembe notes, the equipment would be subjected to import duties ranging from 0 percent to 25 percent depending on the nature of equipment.

They would also pay value added tax of 18 percent, Withholding Tax of 6 percent, Excise Duty for excisable goods and Infrastructure Levy.

However, for oil equipment relating to upstream projects such as the rig, there is no requirement to obtain approval from URA but the company can obtain pre-clearance of the equipment prior to reaching Uganda.

 In all this, Magembe also notes, the target is to significantly bring down the costs involved in the developing the pipeline and upstream projects.

 Ibrahim Bbosa, the URA assistant commissioner public and corporate affairs, says government has been deliberate in putting in place value added tax, excise duty, import duty and infrastructure levy on imported oil equipment but notes it is only registered companies that can benefit.

The exemptions are also provided under the East African Management Act.

Part B of the fifth Schedule of the East African Customs Management Act under the Oil and Gas Operations - Clearance Guidelines 2022 provides that provided the main contractors or subcontractors is licensed, they will benefit from different exemptions, among them import duty. 

“Machinery and inputs, but not including motor vehicles, imported by a licensed company for direct and exclusive use in oil, gas or geothermal exploration, development and distribution [are exempted] upon recommendation by a competent authority of a partner state,” the guidelines read in part.

The guidelines also indicate that in the event that a tier one contracted company imports plant and machinery, the company can apply for value added tax deferment.

“Temporary importation – Section 117 of the East African Community Customs Management Act allows the commissioner of customs to permit the importation of specified goods, machinery, and equipment to be imported into the country temporarily for a specified period of time,” Bbosa notes.

Oil imports and exemptions  

Machinery, spares and inputs for direct use in oil, gas and geothermal exploration, development and distribution

Under the East African Community Customs Management, machinery and inputs, but not including motor vehicles, imported by a licensed company for direct and exclusive use in oil, gas or geothermal exploration, development and distribution upon recommendation by a competent authority of a partner state, shall be exempted from 25 percent import duty, value added tax of 18 percent, withholding tax of 6 percent, excise duty and infrastructure levy. 

The exemptions seek to support the growth of the oil industry and mining in East Africa and particularly in Uganda.

Uganda is currently in the oil development stage that is expected to lead to first oil in about 2025. The country recently signed the Final Investment Decision.