Drilling for oil in western Uganda. Tullow Oil Company was been ordered
to pay $407 million to the Uganda Revenue Authority. File
By GAAKI KIGAMBO, Special Correspondent
In Summary
- According to industry insiders, a court award in favour of the taxman could affect whether and when Tullow, CNOOC and Total E&P proceed with the $8 billion investment required to develop Uganda’s oil resources to the production stage, and also set a precedent for future deals on the continent.
- The bone of contention is the validity of the capital gains tax exemption originally granted by the minister to Hardman Oil for EA2, which Tullow insists it only inherited when it bought Hardman’s assets.
Regulatory uncertainties and delays in passing
laws are top constraints to the development of the oil and gas sectors
in many African countries, says PricewaterhouseCoopers.
In its 2014 report titled: On The Brink of a Boom:
Africa Oil & Gas Review, which highlights current developments in
Africa’s oil and gas industry, PwC also singles out corruption, poor
physical infrastructure/supply chain, access to funding, lack of skilled
resources and taxation requirements as key constraints.
It notes that, with the exception of corruption,
these constraints rank among the top 10 factors most likely to impact on
the ability of businesses to operate successfully in the next three
years.
This is the dilemma that Uganda finds itself in,
with regard to a $407 million tax dispute between Tullow Oil and Uganda
Revenue Authority. The courts have ruled in favour of URA, putting the
future of the country’s oil industry at risk.
At the centre of it is the Public Finance Bill,
which provides guidelines on petroleum revenue management, but which has
been in the works for more than two years now.
According to industry insiders, the court award
could affect whether and when Tullow, CNOOC and Total E&P proceed
with the $8 billion investment required to develop Uganda’s oil
resources to the production stage. They say that Kampala cannot finance
the development phase without entering into partnerships with
international oil companies who have both the expertise and funds.
Top concerns
The PwC report, which ranks safety, health,
environment and quality among the top concerns for companies investing
in the oil and gas sectors, notes that the onus is on governments to
ensure that they continue or begin to provide acceptable regulatory
environments with attractive fiscal systems in order to attract the
investment needed to develop the industry in Africa.
“These constraints present extra pressure on
companies to rethink and re-evaluate their core business focus and model
in order to hold out for the long haul, maintain flexibility and the
agility necessary to succeed in an environment that offers diverse and
numerous challenges,” notes the report released on July 23, in
Johannesburg, South-Africa.
On July 16, the Tax Appeals Tribunal (TAT) in
Kampala ruled against Tullow on the tax exemption contained in the
Production Sharing Agreement for Exploration Area 2 (EA2 PSA), approved
by a former minister of Energy and Minerals Development, saying he had
no legal authority to grant such an exemption. Consequently, the
tribunal ordered Tullow to pay $407 million to URA in capital gains tax
relating to the partial sale of stakes in oil fields in the country two
years ago.
Tullow sold 66.67 per cent of its interests in
Exploration Areas 1, 2, and 3A to China National Offshore Oil
Corporation (CNOOC) and France’s Total E&P for $2.93 billion in
2012. In order to qualify to legally launch an appeal at the TAT, Tullow
had previously paid $142 million, or 30 per cent, of the total amount
in dispute on capital gains tax on the sale of interests it had
inherited from Heritage and Energy Africa.
The bone of contention is the validity of the
capital gains tax exemption originally granted by the minister to
Hardman Oil for EA2, which Tullow insists it only inherited when it
bought Hardman’s assets.
URA argued that in law, Tullow’s capital gains tax
exemption should have been granted by the Minister of Finance, not the
Minister of Energy. But Tullow was of the view that the exemption had
been signed by the government of Uganda, which was now breaching its own
PSA.
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