Tullow opposed the $473 million assessment and appealed against it before the Tax Appeals Tribunal. Not satisfied with local arbitration, the Irish company took the matter to the U.S. for international arbitration. Finally, the company paid but lesser than URA’s initial bill.
This time, it appears, Tullow has come up with a different tax avoidance strategy, which officials are referring to as a “tax engineering scheme”. It all has to do with how Tullow structured the deal allegedly to avoid paying some taxes, according to critics.
Although Tullow’s deal is worth $900 million, it has structured it so that it only gets $200 million in cash; that is, $100 million on completion of the transaction and $50 million at the point of the Final Investment Decision (FID) and $50 million production of first oil.
The remaining $700 million is supposed to be deferred and used by Tullow to fund the company’s share of the costs of further exploration and the export pipeline project.
URA is insisting that Tullow pays CGT on the entire deal. But it is also making different calculations. Although CGT is 30 percent of the gain made after investing and would be $270 million on the $900 million deal, The Independent understands that URA is demanding only slightly over $160 million. But insiders say Tullow is opposed to this.
Apart from the size of the tax, insider say, URA is opposed to Tullow structuring the deal with Total and CNOOC in such a way that CNOOC and Total E&P should be in position to recover the costs incurred by Tullow, insiders say. These recoverable costs can wipe out any claims URA might make on Tullow.
Already, insiders say, the final recoverable cost for the Production Sharing Agreements (PSAs) between oil companies and government between 2001 and 2011 shows the total recoverable sum stands at $935 million out of the $1 billion claimed by the companies.
These disputes appear to have halted key processes necessary for; especially the oil companies to decide on when to start investing in the requisite oil infrastructure.
Initially officials indicated that the companies would reach the Final Investment Decision (FID)—or a decision to start making these investments towards the end of this year or early next year.
But now, The Independent understands that it might take another one and a half or two years for the companies to reach this decision.
Given that after FID, companies need another three years to complete the infrastructure like the $3.35 billion, the implication is that Uganda could see first oil in 2025 as opposed to the target of 2020 that government had set for the oil companies.
To explain why it might take all this time, a source close to these processes told The Independent, that the government and the companies have at least fourteen agreements to sign before the companies can reach FID.
These agreements include; the Host Government Agreements, Shareholders’ Agreements, Financing Agreements and Transportation Agreement between Shippers of oil from Tanga port to the international market, among others.
The tax disagreement is the latest in a series of challenges this deal has faced since 2016 when Tullow first announced plans to farm-out.
Initially, Tullow announced it would selling 21.57 percent of its assets to Total E&P. Months later, CNOOC exercised its pre-emption rights and jumped it to acquire 50 percent of these assets.
When the deal was about to be concluded, another huddle emerged—this time over who would operate the assets previously under Tullow. Total E&P had already designed these assets under its Tilenga project.
The Chinese were opposed because this gave Total E&P more control. Yet already, the Chinese company protested, Total E&P was controlling the pipeline project and had also offered to take out a stake in the refinery. In effect, this meant that the French giant would control upstream, midstream and downstream.
The issue was too big that Total S.A’s Vice President for Africa, Guy Maurice and another top official flew into Kampala mid-November 2017 to meet President Museveni.
Maurice’s delegation, which camped in Kampala for about half a week, met the president but left unhappy. It was the second time Maurice was coming into a town in a few months.
His meeting followed another by CNOOC’s Vice-President Xu Keqiang from China, who together with the Chinese ambassador, met Museveni and raised concerns over Total E&P’s growing dominance.