Tax waivers not a solution to endless and costly tax related litigation in Uganda's oil sector

By Resty Namuli

Amid criticism for a lack of actual progress, Uganda’s oil sector is still clogged in endless tax related battles with key players in its young oil and gas sector with Reuters recently reporting that French energy company, Total, is seeking international arbitration over a tax disagreement with Uganda regarding the imposition of stamp duty by the Uganda Revenue Authority, on its acquisition of interest in exploration area 2 which could further delay crude oil production in the country.

Uganda’s crude reserves are estimated at 6.5 billion barrels though commercial production has been repeatedly delayed by endless disputes with the oil and gas companies over taxes and development plans in the sector.

These tax disputes are not new to Uganda, in 2012, Total and China Offshore Oil Corporation (CNOOC) bought stakes from London-listed Tullow Oil in a $2.9 billion deal which allowed Total and CNOOC to take up a third each in three exploration blocks.

The Uganda Revenue Authority charged tax on these transactions yet the companies thought that there would be not tax arising from these transactions.

The government of Uganda has also battled with British explorer Heritage Oil which has since sold its exploration property in the country with judgment going in Uganda's favour. Tullow Oil, another player in Uganda’s oil and gas sector also lost to Uganda with Uganda winning in the region of ($434.9m).

Total is yet to disclose the exact nature of the dispute or how much tax is at the heart of the dispute,  it may stem from Total’s argument that the production sharing agreement which they signed with the Government of Uganda includes a tax waiver.

One of the challenges being cited by many civil society organizations is that the GoU has so far steadfastly refused to make the PSAs public.

This is challenging interested parties who would like to advise government as they are unable to do so without the relevant facts about the PSAs.

It’s fronted by some parties that Uganda is still consulting on the best tax regime to adopt as the nascent oil sector transitions from exploration to production, which means that Uganda’s legal and regulatory framework for the oil sector is still evolving. The transitional state also means that Uganda’s institutional capacity to manage the oil sector is still developing.

 In its 2014 Pricewaterhouse Coopers (Pwc) report titled On The Brink of a Boom: Africa Oil & Gas Review, which highlighted the key challenges hindering the current developments in Africa’s oil and gas industry, singled out corruption, poor physical infrastructure/supply chain, access to funding, lack of skilled resources and taxation requirements as key constraints.

Due to the fact that Uganda is also constrained by almost all cited constraints above, it cannot solely finance the development phase of oil without partnering with international oil companies who have both the requisite expertise and the much needed funds.

It is clear that the oil companies would like to as much as possible reduce their cost of doing business and see taxation as a cost and will try as much as possible to reduce the tax liabilities, especially those that they feel are against the signed PSAs and will not hesitate to drag Uganda to court if there’s a chance of reversal of the tax liability and reduction in their costs.

The success of Uganda in the past tax disputes should not give us a false belief that Uganda will continue to win other cases, it must be considered that Uganda is spending a lot of taxpayers’ money in avoidable cases.

In a move that has surprised many, Uganda has exempted operators in its oil and gas sector from paying value added tax on upstream investments.

There has been mumbling by various players regarding the 18% VAT on capital equipment used in prospecting and production of oil and minerals. Through the VAT Amendment Bill, 2015 that has been approved by parliament the tax will not be paid by the companies and this has been a welcome move by the players in the oil and gas sector that they have long claimed was a bottleneck in their work.

The exemption of VAT on capital equipment used in production of oil and minerals brings the East Africa region closer to a common regime on taxation of oil and gas. Although Kenya does not charge VAT on upstream activities, it revised its Taxation of the Extractive Industry last year to specify the withholding tax applicable when oil companies conduct business with resident and overseas companies.

It should however be noted that tax exemption is neither the only nor the immediate solution to curb this costly litigation battles with players in the oil and gas sector, the government of Uganda has to ensure open bidding when companies wishing to invest in the oil sector are bidding as this would allow a healthy and much needed competition among companies which inevitably enables a country to get the best possible companies that will respect sovereignty of Uganda’s tax regimes.

Secondly, the government should ensure that PSAs processes are clear to the public right from negotiations to signing of the agreements this allows public scrutiny that would ensure that valuable input from people is obtained thereby reducing the influence of big multi-national companies with bargaining power and superior negotiation skills  can overpower or connive with the few government officials.

Thirdly government should sponsor people in the specialized fields related to the oil and gas sector so as to grow our local talent to be able to address any challenges that have affected the oil and gas value chain.

 Most importantly government should urgently constitute the National Oil Authority established under the new oil laws of 2013 to ensure effective regulation and supervision of the sector while training and empowering its officers ahead of the commencement of oil production.

Any delays in the institutionalizing of the National oil authority will see the sector continue to function in a not so effective manner. Unlike other sectors like financial services, manufacturing, retail and telecommunications, oil is so much intertwined with politics and is seen by many as a quick way to middle income country status by many in government.

Those high stakes can compromise even the strongest of entities. But if the institution is given time and supported by the leaders, it can manage such challenges.

It is critical that Investments in other sectors like agriculture that support the majority citizens and can outlive the oil are maintained and are continuously grown so as to avoid what is commonly referred to as the Dutch disease.

This focus by government will also help enhance social cohesion and popular support for the government which makes it difficult for any company to take on the government without permanently damaging their reputation and brand in the country.

If the company knows that the government is not supported by her people, they may bring litigation to delay payment of some monies the government or work together with the people to frustrate government. Even if they finally pay, the government and especially the citizens will have lost in terms of those delayed service delivery due to a delay in payments by these companies.

Finally, Parliament should effectively legislate and enact sector specific tax provisions that provide for a progressive, stable and neutral tax regimes.

Certainly the oil and gas sector of Uganda is still a work in progress and the money so far realied is  ought to be spent on building infrastructure and reducing the bottlenecks to the oil and gas sector other than in tax  litigation which may at times and yield the desired results.

With the government still finding ways to balance its interests and those of the investors, tax waivers despite their ability to attract investors are not a solution because Uganda as a growing economy needs this money to build infrastructures that will foster further growth.

Ensuring strong institutional setup, transparency and public participation in the sector could also be an option to consider for government.

The writter is a lawyer at Africa Institute for Energy Governance