Taxman freezes BG Group’s accounts in $500m tax row

Left, TRA commissioner general, Alfayo Kidata at a press briefing. PHOTO | FILE 

By ERICK KABENDERA

In Summary

Background

• Shell officially acquired the BG Group stake in a $55 billion deal , touted as the biggest energy deal in more than a decade — positioning Tanzania as one of the continents’ top suppliers of gas— in February.
• The takeover gave Shell a 16 per cent controlling stake in the world’s liquefied natural gas (LNG) business, with Tanzania and Egypt as its anchor operation areas on the African continent. Tanzania has proven reserves of 55 trillion cubic feet of natural gas, which is expected to generate almost $5 billion annually.
• The country is expected to construct an LNG plant at the start of next year, with a target completion date of 2024, depending on Shell’s strategies.

The Tanzanian government has issued an order to the taxman to freeze the bank accounts of British oil giant BG Group in a bid to recover $502 million in unpaid capital gains tax.

The EastAfrican has established that the Tanzania Revenue Authority (TRA) has issued instructions to BG Group’s bankers Citi to freeze their accounts.

TRA is demanding the sum from proceeds of the sale of BG’s 60 per cent stake to Royal Dutch Shell, Exxon Mobil, Ophir Energy and Statoil. The deal also included BG’s interests in gas blocks 1 and 4 in Southern Tanzania.

Sources in the Ministry of Finance and TRA said that a directive had been issued to freeze the BG Group accounts until the capital gains tax was paid. After the accounts were inspected, it was found that the money in the bank was only $5 million, about 1 per cent of what TRA is claiming.

The decision casts a shadow on the appeal BG Group has filed with the Tanzania tax tribunal disputing how the assessment was arrived at.

BG Group says it is unable to pay the tax because it had allocated $850 million of the total acquisition price to the Tanzania unit.  BG Group further says its Tanzania subsidiary had already spent $1.5 billion, hence indicating a capital loss.

According to Tax Revenue Appeals Act (2006), any person who is aggrieved by a tax assessment may object in writing to the Commissioner General.

Section 12 (3) of the same law says “where a notice of objection to an assessment is given, the person objecting shall, pending the final determination of the objection to an assessment by the Commissioner General in accordance with section 13, pay the amount of tax that is not in dispute or one-third of the assessed tax, whichever amount is greater.”

Lawmakers and experts called for the government and BG Group to resolve the impasse which could delay the final investment decision on the $30 billion liquefied natural gas (LNG) plant which the latter plans to build in partnership with the Tanzania Petroleum Development Corporation (TPDC).

The construction of the 10 million-tonne-a-year LNG plant was initially expected to be complete around 2020. Under the country’s laws the construction cannot be approved until the tax is paid.

The government has maintained silence on the matter, but TRA Commissioner-General Alphayo Kidata said he hadn’t been briefed on the matter, while Minister for Energy and Minerals, Prof Sospeter Muhongo directed The EastAfrican to TPDC director-general Dr James Mataragio, who declined to comment.

There have been fears that the tax dispute could have a negative impact on foreign investors looking to invest in Tanzania. 

Analysts believe Shell has through the BG stake strategically positioned itself to acquire exploration licences in Zanzibar now that it co-owns BG with the government. Shell has struggled for over 10 years to secure exploration licences ion the Isles.

Subiro Mwapinga, a consultant at Mnazi Bay Consulting Group, an oil and gas consulting firm, said the current tax dispute has put the LNG investment in jeopardy and could potentially impact other projects such as the $10 billion Uganda-Tanga crude oil pipeline.

“If TRA’s tax calculations were conducted along all international best practices and in compliance with the laws, there is little that BG Group can do to avoid paying the tax but this has a big implications in terms of changing the structures of the LNG plant, which is planned to be built in partnership with all the players. The most likely scenario is for other players to build their individual LNG plants,” Mr Mwapinga said