How URA-Tullow tax row could affect oil, gas production in Africa

Business

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.

READ: Uganda wins $407m Tullow case

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.

READ: Tullow, URA verdicts set a precedent for future deals

“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.