Uganda’s tax regime was upgraded in 2008 ahead of the development and production phase of the country’s oil and gas projects. It has successfully been tested locally and internationally.
Between 2010 and 2022, Uganda earned close to US$700million (approx. UGX 2.6 trillion) in Capital Gains Tax (CGT) on oil and gas transactions, after a long dispute arbitrated in local and international tribunals.
CGT is computed on the net gain from the disposal of business assets as determined by applying the rules.
This feat, of a poor country taking on International Oil Companies (IOC) was unheard of hitherto. Particularly, when Uganda first took Heritage Oil and Gas Limited (Heritage) head on, the odds seemed stacked against us, and so believed many pundits, local and international. After all other new oil and gas producers like Ghana, Guyana, and Tanzania had similar transactions and did not collect taxes.
Heritage transferred its participating interests to the Anglo-Irish Tullow Oil Uganda Ltd. Uganda assessed a CGT amounting to US$ 434,925,000 on the US$ 1.45 billion transaction before it could be approved.
Heritage objected to this tax assessment on the grounds that the transaction was not taxable in Uganda. Rather, the company offered to pay the Government US$ 36 million and later US$120m in what it called ex gratia, or a payment out of a sense of moral obligation than any legal requirement. The Government declined.
The company invoked the arbitration clause in the Agreements to file the dispute[s] in London Court of Arbitration (LCA).
The resilience of Uganda’s fiscal structure and its administrators were put to international scrutiny, and it stood the test of time.
The LCA dismissed the application with costs in favour of Government of Uganda, confirming the assessment of US$ 434 million. The High Court and Court of Appeal of London also dismissed similar claims.
Landmark Cases
The Government won the cases that set a historic ground-breaking precedent on stabilization clauses, and the duty of oil companies to meet their tax obligations. It was a true testament to URA’s resolve to assess, collect, and defend taxes in local and international adjudication bodies.
The Government position was later vindicated when the leaked Panama papers in 2016 by the Washington DC-based International Consortium of Investigative Journalists (ICIJ) detailed that Heritage knew of the CGT that URA imposed beforehand, and invented a scheme to work around it, including fighting head-on; the company engineered a re-domiciliation from the Bahamas to Mauritius. The plan to re-domicile from the Bahamas to Mauritius, according to the leaked documents, was “primarily due to the double tax agreement between Uganda and Mauritius.”
The Double Taxation Agreement (DTAs) enables only one of two countries where an individual or entity earns income to collect tax.
In another similar case, Tullow Oil PLC transferred 66.6% of its interests to France’s TotalEnergies, then trading as Total E&P Uganda (TEPU), and China’s National Offshore Oil Corporation (CNOOC) in a US$ 2.9billion transaction.
URA assessed US$ 473 million as CGT on the transaction. Like Heritage, Tullow immediately disputed the URA’s assessment of the tax, and lodged appeals before the Tax Appeals Tribunal. Subsequently Tullow took the highway of international arbitration in September 2013. The tax liability was settled as $250 million (UGX 919 billion) in a full and final settlement.
Later, Tullow Oil Uganda sold its entire stake in the Lake Albert Development Project in Uganda to TEPU for US$575 million in cash plus post first oil contingent payments, the government was paid US $14.6 million in CGT.
Time relieves and reveals all; the Heritage and Tullow cases vindicated URA, setting precedent on taxation on gains that accrue to an individual or a company on the transfer of property situated in Uganda, notwithstanding the anti-avoidance structures that may be created. But most importantly, it stands as a reminder to all entities operating in Uganda during the development and production phase to take their tax obligations seriously. Together, we shall have the industry create lasting value for society.
