Uganda Revenue Authority wins USD435M Oil Tax case against Heritage Oil

Uganda Wednesday won the first round of the $435m oil tax a decision that reaffirms its ability to control and manage the nascent oil and gas industry.

The Tax Appeals Tribunal after a three hour session upheld that the transaction was taxable and the amount ($434.9m) assessed by URA remains the same.

“This is a landmark victory not only for URA but for Uganda as a whole because, being the first of such transactions in Uganda, we have now set the standard that this and such future transactions are taxable in Uganda,” Paul Kyeyune Manager Public and Corporate Affairs Division stated in a press statement

The tax dispute started when Heritage Oil and Gas Ltd announced its intention to transfer its Ugandan petroleum assets to Italian giant ENI in December, 2010.

But Tullow Oil Uganda, which had 50% stakes in the assets, exercised its first right of option under the same terms. But Uganda Revenue Authority (URA) demanded 30% of the $1.5m deal in capital tax gain tax before the transaction was approved.

Heritage was against paying the tax “based on comprehensive advice from leading tax experts in Uganda, United Kingdom and North America” that the transaction was not taxable in Uganda.

The firm demanded to settle the tax dispute via the International Court of Arbitration in London.
But went ahead and deposited only $121m on the treasury. The balance of $283.5m was deposited in an escrow account held by Standard Chartered Bank in United Kingdom (UK). The money will be released after the case has been resolved.

But Uganda insisted that the tax case should be held in Uganda and in accordance and rushed to the Tax Appeals Tribunal.

Heritage in December last year rushed to the High Court to stop the case. But the High Court upheld that the tax dispute be heard in Uganda.

Different stakeholders yesterday expressed delight at the ruling. “We are very much happy about the ruling. The ruling will have a very bid impact on all other cases to follow. This is a good pointer,” Irene Muloni, the energy minister, commented yesterday.

And Peter Nyombi, the Attorney General, said that the victory was “very important because the money will remain in Uganda for development purposes.

“This is a sign that we are going to win the case in London. If we win the case, it will mean that a lot of money will be available.”

At URA’s base in Nakawa all staff were jubilating and praising the management and legal teams.
Akol Doris, Commissioner legal affairs in a memo to her colleagues wrote, “This morning in a three hour ruling, the Tax Appeals Tribunal handed URA victory in the tax case, filed by Heritage, challenging the assessment of US$ 434.9million on the capital gains earned by Heritage in the transfer of its interests to Tullow,” she stated.

The ruling means that future transactions will be taxable. Already Tullow Oil Uganda intends to transfer 66.6% of its Ugandan interests to France’s TOTAL and China’s National Offshore Oil Corporation (CNOOC) at a cost close to $3b.

With the ruling, it means that such a deal will be subject to 30% capital gains tax for Uganda which is close to $800m.URA were yesterday celebrating the Court case victory.

Genesis of tax dispute
• September 2009, Heritage announces agreement with Italian giants, ENI. to sell the oil assets at $1.5m

•But Tullow Oil who had 50% interest hand the first right of option

•In January 2010, Tullow exercise its rights and accepts to pay

• Tullow has paid the agreed cash consideration of $1.45b;

• A further $100m was paid by Tullow in full and final settlement of a potential contractual dispute between the parties relating to the contingent deferred amount

•Heritage received cash of US$1,045,075,000

•But Uganda Revenue Authority (URA) says Heritage must pay 30% of the money in tax

•Heritage disputed a tax assessment of $434.9m and deposited only $121,477,500 with the URA, representing 30% of the disputed amount;

•The balance remains on an escrow account and will be released following resolution between the Government and Heritage of a mechanism to resolve the tax dispute

•November, 2011, Uganda Tax Tribunal rules in favour of Uganda

By Ibrahim Kasita
The Newvision Newspaper