Ensure transparency while signing production sharing agreements

By Admin

Such disputes in the oil sector are caused by secrecy while signing Production Sharing Agreement ( PSA) because the government officials who sign these PSG lack capacity to negotiate and sign good PSG that favour the citizens.

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Due to tax disagreement between the government Uganda and Tullow Oil (U) PTY Ltd, Total E&P (U) B.V. suspended all operations on the East African Crude Oil Pipeline (EACOP) project.

The disagreement on tax resulted from Tullow’s intention to sale its stake to French Total E&P (U) B.V. and China National offshore oil Corporation (CNOOC) where the Ugandan government insists that Tullow must pay the Capital Gains Tax in accordance with Part VI of the Income Tax Act. Capital Gains Tax is computed on the net gain from disposal of a business asset which in this case Uganda expects 30 percent from Tullow Oil (U) PTY Ltd from the transaction.

 Tullow is expecting $900 million from the intended transaction and the Ugandan government expects $300 million which is a third of the amount however Tullow is  disagreeing to that because it thinks the transaction is not taxable because the same money is going to be re invested with in the country.

Uganda was faced with the same dispute in 2010 when Heritage Oil which was one of the major players in Uganda’s petroleum sector Oil sold its exploration licenses in the Albertine Rift to Tullow Oil. Heritage and Tullow jointly owned a 50 percent stake in two lucrative exploration blocks: 1 and 3A.) but when Heritage sold its stake Tullow became the sole company licensed to operate in those areas.

Tullow purchased Heritage’s stake for US $1.45 billion and the dispute arose when, Uganda Revenue Authority (URA), which was acting on behalf of the Government of Uganda, requested $434 million or 30 percent of the sale in capital gains taxes. Heritage disputed the tax, saying that its lawyers believed that the sale was not taxable, given that the Production Sharing Agreements (PSAs) which the company signed with the government failed to mention such a payment.

 Such disputes in the oil sector are caused by secrecy while signing Production Sharing Agreement ( PSA) because the government officials who sign these PSG lack capacity to negotiate and sign good PSG that favour the citizens.

Such tax disputes in the oil sector which is a young developing sector in the country cause immense implications to our revenue and the investment climate by:

Scaring away potential investors, such disputes scare away other investors that would be willing to invest in Uganda even though Uganda is endowed with different resources.

Such disputes delay projects, for example this negation have been on-going for two years but now that the negotiations failed Tullow has to again start from scratch delaying the oil production and wasting time.

Wastage of tax payers’ money, we remember after the tax dispute between the government Uganda and Heritage oil emerged in May 2011, arbitration commenced in London to resolve the dispute because the Production Sharing Agreement that Uganda signed with Heritage designated the United Kingdom as the jurisdiction for the resolution of disputes. Ugandans questioned why the government failed to go Ugandan courts to arbitrate issues related to the country’s because this would be costly in terms of legal fees and other expenses.

Abuse of public funds, such disputes have accelerated the misuse of the public fund, on November 23, 2011 when the court in London ruled against Heritage Oil and in favor of the Ugandan Revenue Authority president Museveni awarded 6 billion 42 government officials who handled the Heritage oil case. This was an abuse of the public funds and even the president admitted that it was wrong that the “Presidential Handshake” money was deducted from the Uganda Revenue Authority (URA) accounts without the knowledge of its board.

That being said we call upon the government of Uganda to make sure the oil companies pay taxes. Uganda should not scum to Oil Company’s pressure maybe because we are so desperate for oil to be produced by 2022 the Ugandan government is acting well within the law to demand that Tullow Oil (U) PTY Ltd pays the Capital Gains Tax (CGT) of $167 million due to government.

To make sure that the oil companies respect the national laws on taxation. Part VI of the Income Tax Act is very clear and Capital Gains Tax is computed on the net gain from disposal a business asset and where a company earns a profit from the sale of its assets, the company must pay a 30% CGT. Therefore Tullow Oil must pay the $167 million (UGX 609 billion) being demanded by government.

Taxes needed to offset oil impacts: The fact that the oil activities affect the environment and livelihoods, this tax is needed to offset the side effects that will be caused. The companies’ activities are going to degrade the environment and will negatively impact Ugandans’ incomes, water access, food security, cultures and good health. 

Transparency while signing the PSAs: such persistent disputes point out Ugandan government does not sign good Production Sharing Agreements (PSAs) as it also stated that there is inconsistence between the Production Sharing Agreements signed between Tullow and the Ugandan Government and what the Income Tax Act provides.

To ensure that the public funds are not abused, citizens must demand that government recovers the UGX 6 billion that the president awarded to 42 government officials.

The government of Uganda should fast-track the process of joining Extractive industry Transparency Initiative (EITI). Government should also ensure that after joining EITI, an EITI bill should be tabled before parliament to create an EITI law in Uganda. This law will be an important instrument in entrenching transparency, accountability and good governance in the extractive industry.

The country will be required to publish an annual EITI report disclosing information on contracts , licenses, volumes of oil, how much is produced, how is paid and how much is received.

In line with Access to Information Act the government should be transparent and share  the PSAs it signed with oil companies rather than to wait when its goes bad. Transparency enable citizens understand the benefits and shortcomings of the agreements as a precursor of finding solutions to address the shortcomings. Secrecy must be avoided in the signing of future PSAs.

Finally the government should get competent people to negotiate and sign the PSA which can benefit Ugandans and those officials that sign the agreements to their selfish gains and corruption should be personally held responsible.

Doreen Namara

Legal Assistant AFIEGO