Economic and Business News By Leo Odera Omolo in Kisumu
Heritage has demanded to settle the tax dispute at the
international court of arbitration
AFTER two decades of search for oil and gas, huge commercial reserves have been confirmed. However, Uganda’s ability to transform the assets into cash is in balance.
East Africa’s third largest economy has been entangled in a $404.9m tax dispute arising from a proposed $1.35b transaction, posing a serious challenge to Uganda’s capacity to raise oil revenues.
Heritage Oil and Hardman Resources, which later sold its stakes to Tullow Oil in 2004, ran a successful exploration campaign that enhanced the value of their licenses at least 10-fold.
Now the petroleum exploration is moving into the development and production phases that requires huge risk capital, access to project finance and long-term investments
Heritage sells stake
Heritage with little resources decided to cash out from the oil stakes it held in Uganda. After spending just $135m, the firm in December last year decided to sell the holdings to Italian giant Eni for $1.35b.The said offer was later pre-emptied by Tullow. The two firms are equal partners in the blocks.
However, the approval of the transaction was delayed due to disagreements over a $404.9 capital gain tax. Uganda rightfully claims 30% of the $1.35b deal.
Heritage was against paying the tax “based on comprehensive advice from leading tax experts in Uganda, the United Kingdom and North America.”
It demanded to settle the tax dispute via the international court of arbitration in London on depositing $108m.
Heritage is entitled to claim this money if the London Court rules that the firm is not required to pay taxes.
Heritage deposits $121m on URA account
In a dramatic twist of events, Heritage sold its assets to Tullow on depositing $121,477,500 of the disputed tax of $404,925,000 on a Uganda Revenue Authority account. The balance of $283,447,500 has been deposited in an escrow account held on Standard Chartered Bank pending resolution of the tax stalemate.
This is totally in contradiction with the energy minster, Hilary Onek’s, resolve to ensure that the land-locked country got the taxes it deserves.
Early this week, Onek told the media that Heritage will have to pay the full amount of tax ($404,925,000).
“They (Heritage) have been doing all sorts of things to avoid paying the tax but they will have to pay the full amount and the earlier they pay the better,” he said.
“Look, these guys are making super-normal profits. They just invested a tiny little figure of $150m and now they are going to earn $1.5b, why don’t they want to pay tax on that money?” Onek wondered.
President cautioned
There were also reports that Uganda Revenue Authority (URA) had advised the President not to accept the arbitration in London because Uganda will not be able to collect any tax.
President Yoweri Museveni has been assuring parliamentarians and the public that the tax arising from the $1.5b oil deal must be paid fully.
Legal analysts
Legal experts and analysts predict the rush to accept the deal will deny the nation the earliest opportunity to earn oil revenues; even before the first barrel is pumped out of the earth crust.
“Ugandans should not expect money if the tax dispute is resolved in the arbitration court because our laws will not be relevant,” Dickens Kamugisha, the African Institute of Energy Governance (AFIEGO) boss, observed.
“Uganda is a sovereign state and, therefore, all oil companies and any transactions should be subjected to national laws. By going to London, it means that Uganda accepts it is not supposed to levy any tax.”
The income tax laws clearly explain that any transaction in Uganda is subjected to 30% of the capital tax gain.
“The minister says that taxes should be paid and later you hear that the transaction has taken place. This is a bad precedent, which will encourage oil companies to go away without paying taxes,” said a petroleum expert.
Experts have revealed that Uganda could also lose revenues in form of tax in the proposed farm-down process where Tullow intends to partition two-thirds of its interest to Chinese National Oil Off-Shore Company (CNOOC) and Total.
“I don’t think Tullow will accept to pay any tax if Heritage does not pay. Tullow will try avoiding the tax since Heritage will have created a dangerous precedent,” Kamugisha explains.
“Government officials should serve Ugandan interests by forcing the companies to pay all the taxes in Uganda, not in London,” he said.
Tullow Uganda is selling part of its interest–two-thirds each – to CNOOC and Total – to get the much needed risk capital for the development phase Uganda’s oil industry.
Kamugisha advised that any further oil transaction should be stopped until “sufficient and strong laws are put in place to prevent oil companies from fleecing us.”
“Under what laws are the transactions taking place? Already the energy ministry admitted that the current petroleum laws are weak and, therefore, this means that policy-makers don’t have the capacity to negotiate better deals on behalf of Uganda,” he observed.
This will not be the first time tax in the oil sector has been avoided.
No taxes were levied when Tullow bought Australian firm Hardman Resources assets at about 860 million pounds.
Uganda wants to license several oil firms to avoid monopoly.
The firms must also support the Government’s development strategies, including early commercialisation of the oil resources, value addition and training of Ugandans in oil-related activities and processing.
Highlights
• Tullow has paid the agreed cash consideration of $1.35b;
• 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 has received cash of US$1,045,075,000
• Heritage has disputed a tax assessment of $404,925,000 and deposited $121,477,500 with the URA, representing 30% of the disputed amount;
• The balance of $283,447,500 remains on an escrow account and will be released following resolution between the Government and Heritage of a mechanism to resolve the tax dispute
• Heritage intends to pay a special dividend of up to 100 pence per share in August 2010.
Ends