Tullow Oil set to challenge Ugandan tax tribunal ruling

Out-Law News | 22 Jul 2014 | 3:27 pm | 1 min. read

UK-based Tullow Oil is set to challenge a ruling by a tax appeals tribunal in Uganda which has ordered the company to pay $407 million in capital gains tax (CGT) relating to the partial sale of stakes in oil fields in the country two years ago.

In its ruling, the tribunal rejected a tax exemption contained in a production sharing agreement with Tullow, approved by a former Ugandan energy minister, saying the minister had no legal authority to grant such an exemption.

However Tullow Oil, which has already paid about 30% of the amount to lodge an appeal against an earlier ruling in the case by the Uganda Revenue Authority, said it believes the tribunal “has erred in law”.

Tullow chief executive officer Aidan Heavey said the ruling “ignores a contractual term signed by a government minister in Uganda”.

Heavey said: “Tullow is Uganda’s largest foreign investor and a major taxpayer. Over the last 10 years, Tullow has spent $2.8 billion in Uganda and discovered 1.7 billion barrels of oil. This money was spent by Tullow on the understanding that our contracts with the government, which contained important incentives to invest that were vital at a time when no oil had been discovered in Uganda, would be honoured. We will now carefully consider all our options to robustly challenge this ruling.”

Tullow said: “Following the completion of the farm-down of 66% of its assets in Uganda to the China National Offshore Oil Corporation and Total in 2012, Tullow was issued with a CGT assessment by the Uganda Revenue Authority of approximately $472m. Tullow paid 30% of the assessment (approximately $142m) as legally required to launch an appeal.”

Tullow said: “The (tribunal’s) ruling is lengthy and deals with a number of different issues and will therefore require significant further legal evaluation. However, Tullow can confirm that the tribunal has ruled against Tullow on the key issue of the express tax exemption contained in the production sharing agreement for exploration area 2.”

Tullow said it believes the amount already paid “exceeds its liabilities in relation to CGT” for the exploration areas in question, but said “there are specific points in the ruling that Tullow may wish to challenge relating to these two areas”.

Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-Law.com said: "When making investment decisions, companies need to be able to rely on agreements which have been negotiated in good faith with governments. Otherwise, the risk of changes in tax law will be priced into the project, and could ultimately mean that costs rise significantly for the countries seeking to attract foreign investment."

Self said: "Some NGOs have argued that tax incentives are inefficient or inappropriate, and take funds away from poorer countries. But there is a difference between changing the tax rules for the future, and seeking to walk away from agreements signed in the past. The former is prudent policy-making, but the latter creates uncertainty and volatility."