Uganda wins case against Heritage Oil

Uganda has won a landmark $434m (over sh1.1 trillion) oil tax case in London against Heritage Oil and Gas Ltd.

A three-member arbitration team ruled against the three core tax claims by Heritage, which was contesting the decision by the Uganda Revenue Authority (URA) to tax their $1.45b transaction with Tullow Oil, according to Ali Ssekatawa, URA assistant commissioner for litigation.

This is the second time that Heritage Oil has lost in the case.

The company first lost in the Uganda’s Tax Appeals Tribunal, which upheld that the transaction was taxable. After losing the case in Uganda, Heritage took the matter to London.

The arbitrators included Prof. Campbell Maclachlan, the chairperson, Julian Lew for Heritage and Ahmed Kosheri for Uganda.

Heritage argued that its transaction with Tullow did not attract capital- gains tax.

But Uganda argued that the transaction attracted a tax; that the tax dispute with Heritage could not be handled in London exclusively; that Heritage Oil had forfeited its right to have the matter handled in London when it subjected itself before the Uganda Tax Appeals Tribunal; and lastly that the tax could not be determined in London. The arbitrators agreed with the Government on all these core issues.

Ssekatawa, who was URA’s lead counsel during the hearing in Kampala, said there was only one non-core issue yet to be determined by the arbitrators where Heritage argues that Uganda delayed to clear the transaction. Herigate was given 28 days to present its arguments.

He said the Government had already recovered the money ($434m) from Tullow. This is the reason Tullow has sued Heritage in London to recover its money.

Ssekatawa, however, declined to comment on the impact the ruling could have on Tullow’s case against Heritage.

The tax dispute started when Heritage Oil and Gas Ltd announced its intention to transfer its Ugandan petroleum assets to Italian giant ENI in December, 2010.

But Tullow Oil Uganda, which had 50% stakes in the assets, exercised its first right of option under the same terms. But URA demanded 30% of the $1.45m deal in capital-gains tax before the transaction was approved.

Heritage was against paying the tax, claiming that the transaction was not taxable in Uganda. The firm demanded to settle the tax dispute via the International Court of Arbitration in London.

Heritage deposited only $121m into the treasury. The balance of $283.5m was deposited in an escrow account held by Standard Chartered Bank in the UK. Tullow is now seeking to access the money.

The London ruling has conclusively affirmed that oil transactions will be taxable. It means that such deals will be subject to a 30% capital-gains tax for Uganda.