Tullow Oil ordered to pay $407m tax bill
AccountancyLive.com reported on 17th July 2014 that a Ugandian Tax Appeals Tribunal (TAT) had ordered Tullow Oil to pay a $407m (£237m) bill relating to capital gains tax (CGT) from the partial sale of its oil assets in Uganda.
The case, which was described by the TAT as the biggest case in monetary terms in the legal history of Uganda, centred on the $2.9bn (£1.7bn) sale of Tullow's 66% stake in three oil blocks in Uganda to Total, of France and the China National Offshore Oil Corporation (CNOOC), in 2012.
At the time, the Uganda Revenue Authority (URA) assessed the multinational as owing approximately $472m (£275m) in CGT.
Tullow paid 30% of the assessment (around $142m/£82m) as legally required to launch an appeal. The appeal was based largely on the claim that the company had been given a specific CGT tax exemption by the former minister of energy as part of its original contract to undertake exploration work in Uganda.
The TAT said it had examined the details of Tullow’s original agreement relating to the development of the oil fields in question, and concluded that this was ‘invalid under the tax laws of Uganda’ and so Tullow was not entitled to an exemption from CGT.
The tribunal also stated that Tullow could not rely on the principle of legitimate expectation relating to the CGT claim as ‘their expectation was not legitimate.’
In its judgment, the TAT identified a number of areas of concern, including the way in which gains and losses on the sales on the deals had been calculated.
The ruling stated that: ‘The Tribunal finds that the “last in first out” (LIFO) and “first in first out” (FIFO) accounting methods proposed by the parties have no legal basis. The Tribunal applied the averaging method or equitable proportions in apportioning the different interests that were transferred by the applicants.’
The TAT also challenged Tullow’s presentation of the costs incurred during the sale, describing the figures as ‘hypothetical’, and said it was not clear that the company had re-invested the amount raised from the sale into assets of a like kind, as claimed.
The tribunal ruled that Tullow was liable for $407m (£237m) in CGT, of which $142m (£82m) has already been paid. The amount is lower than the original URA assessment because the TAT allowed Tullow some investment relief relating to the costs of carrying out exploration.
Tullow chief executive Aidan Heavey, said that Tullow is very concerned by the ruling which ignores a contractual term signed by a government minister in Uganda.
'Tullow is Uganda's largest foreign investor and a major taxpayer. Over the last 10 years, Tullow has spent $2.8bn (£1.6bn) in Uganda and discovered 1.7bn 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,' Heavey said.
Tullow indicated it believes the amount it has already paid in CGT exceeds its liabilities and plans to mount a legal challenge through the Ugandan courts and via international arbitration, as well as seeking direct negotiation with the Ugandan government on the issue.
Anders Dahlbeck, tax policy adviser with the charity Action Aid, described the TAT ruling as ‘highly significant’.