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Capital gains tax, who pays what?

By  Patrick Kagenda

On August 3, 2010 Tullow Oil’s Chief Operating Officer Paul Mcdade and Graham Martin, Tullow’s General Counsel and Secretary, arrived in Uganda. As they jetted into the country, Tullow Oil Uganda’s General Manager Brian Glover was on his way to the USA. The two officials, according to sources inside Tullow, held private talks with Ministry of Energy officials, including Minister Hillary Onek, and other top government officials. The Tullow employees later left the country but by Aug 11 Graham returned to continue the discussions. A source privy to the discussions told The Independent, “Tullow Oil and the government of Uganda are still embroiled in talks which remained incomplete last week because the key players were out of the country.”

Also in the country at the same time was Tower Resources (the parent company of Neptune Oil) Chairman Peter Kingston. In an interview Kingston told The Independent he was in the country over his company’s performance. He confirmed that Tower Resources had contracted Envoi, a specialist in marketing, acquisitions and advisory services to the International Upstream Oil and Gas Industry Company, to seek out a partner willing to join Neptune in the exploration of oil in its Block AE5 in Northern Uganda. Kingston said Uganda has become a hot oil investment destination and many companies are willing to come to Uganda for oil exploration. “By September this year we hope we shall have the partner,” said Kingston. He said they had zeroed in on certain areas which had a high possibility of having oil discoveries in their licence area.

Tullow officials are in the country supposedly to put pen to paper on the Heritage Oil deal that has hit the media headlines over Heritage challenging government’s capital gains taxation.

Tullow has been working closely with the government of Uganda on a farm down of its 100% interest in blocks 1, 2 and 3A to Total and China National Offshore Oil Corp (CNOOC). The new partners will each have a one-third interest across all three licences. Accelerated exploration and appraisal drilling have already commenced with two rigs now operational within the licensed areas. Tullow and the new partners will be working together during the second half of 2010 to deliver a basin-wide development plan to the government of Uganda.

A source who preferred to remain anonymous told The Independent, “Heritage sold its investors shares, which the government of Uganda cannot tax. Besides, it should have sold through a company with a tax haven to avoid the legal battle. I hope they will settle their misunderstandings,” said the source.

Another anonymous source said: “Tullow Oil farming out process could be the reason its bosses are in the country. try. They could be discussing how much tax Tullow will pay to government since it is selling some of the assets it has acquired from Heritage to Total and the CNOOC.”

According to an article in The Economic Times of India, a daily business newspaper, on March 25, 2010, India`s Oil and Natural Gas (ONGC) was outbid by CNOOC in a bid to acquire the Heritage assets in Uganda. CNOOC, China’s biggest offshore oil producer, offered as much as US$2.5 billion for the 50% stake compared to India`s US $2.1 billion.

Prior to the Income Tax Act 1997, capital gains have not been taxable in Uganda. The section that brings capital gains into the scope of business income is section 19(1) (a) and it took effect from April 1, 1998. Capital gains tax is computed on the net gain from the disposal of business assets as determined by applying the rules provided in Part VI of the Income Tax Act 1997.

Enos Tumusime, a lawyers with Tumusime Kabenge and Company Advocates, interprets capital gains as the tax charged on money earned when a company invests a small amount in business and after a small time frame sells that business at a higher price.

Dickens Kamugisha, the Chief Executive of the Africa Institute for Energy Governance (AFIEGO), told The Independent: “This is a problem of wanting everything to remain secretive and when disagreements arise they bring them to the public,” he said.

Kamugisha added that the Ministry of Energy has admitted that Uganda’s petroleum laws are weak but policy makers are incapable of negotiating better deals on behalf of the country. “The people of Uganda should not expect money if the tax dispute is resolved in the arbitration court,” he said. “Our laws will not be relevant and besides Uganda doesn’t have the capacity to handle such a case. We have no indigenous lawyers with the experience in oil related matters.”

At the Tullow Oil Uganda office on Yusuf Lule Road, Brian Glover said, “As seller, Heritage Oil and Gas Limited is potentially subject to capital gains tax. Tullow does not have any capital gains liabilities.” Glover’s response follows the July 26, 2010 deal when Tullow Oil Uganda completed the acquisition of a 50% interest in Blocks 1 and 3A in Uganda from Heritage Oil & Gas Limited. According to the Heritage Oil Ltd press release on July 27, 2010, they have disputed a tax assessment of US$404,925,000 and deposited US$121,477,500 with the Uganda Revenue Authority, representing 30% of the contested amount. The balance of US$283,447,500 remains in an escrow account and will be released following the outcome of discussions between Government of Uganda and Heritage over the tax dispute.

The dispute started in December last year when Heritage Oil and Gas Ltd announced it was selling its 50 per cent interest in Blocks 1 and 3A in Uganda. Italian oil company Eni SpA expressed interest and was ready to pay US$1. 5 billion to Heritage Oil. Tullow Oil could not allow the deal between the two. Instead, it immediately announced its right to excercise pre-emption regarding the proposed sale by Heritage Oil and Gas of its 50 percent interest, potentially nullifying a December agreement between Heritage and Eni SpA.

As the two took on themselves over who had what right over the oil finds, Minister Hillary Onek said, “Neither Heritage, nor Tullow, can claim rights to Uganda’s oil blocks. All transactions are void until the government gives its ok.” He told the media he was unhappy that Tullow had not provided the government with relevant documents regarding their proposal to buy the oil blocks, of which Tullow already owns 50 per cent. “The government would only approve transactions which are in line with its policies. Oil companies are licensed by the government to develop the oil resources on its behalf and are allowed to recover their costs and get a return on their investments without compromising the interest of the country,” said Onek.

However Onek has stood his ground saying, “These people invested only US$150 million and they are now going to earn $1.5 billion. Why don’t they want to pay tax?”


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