$900m at stake as Uganda battles oil companies By EAST ARICAN Team Posted Sunday, October 30 2011 at 18:45 Uganda faces the prospect of losing $900 million in hard currency, a huge embarrassment for the counry's bureaucrats should the ongoing tax dispute before the International Court of Arbitration in London be ruled in favour of oil prospectors Tullow and Heritage Oil. The companies stand to make the huge gain while keeping their rights to oil wells in western Uganda. The three parties - the government, Tullow Oil and Heritage Oil and Gas - are before arbitrators, where Heritage is contesting the government's claims to taxes on $1.45 billion, being the proceeds of the transfer of its interests in Ugandan oil fields to Tullow. At stake for Uganda is some $900 million it would have earned from the Heritage-Tullow transaction, and dues from Tullow's subsequent farm-down to partners Total and the China National oil Company CNOOC. According to sources familiar with the intricacies of the case, a victory by Heritage Oil in London would be bad news for Uganda as it would have set a precedent that could apply to any other Production Sharing Agreement without a specific provision for tax on transfer of interests entered into with other oil prospectors. It could see collateral losses from controversial oil agreements spin into billions if other oil companies use the precedent to avoid tax payments when they farm down their interests in the future. Citing provisions in Uganda's income tax law, the Uganda Revenue Authority last July slapped an Agency Notice on Tullow, compelling it to collect $404 million in capital gains tax it said was due on the deal between Heritage and Tullow. Heritage refused to budge well aware that a desperate Tullow was looking at the diminishing window of time within which it could exercise its pre-emptive rights. In an effort to unlock the stalemate, Heritage offered to pay 30 per cent of the disputed amount to the URA, while waiting for the matter to be concluded through arbitration. But the government raised the stakes with then Energy Minister Hillary Onek announcing the termination of Tullow's rights in a number of exploration areas whose licences had expired. Making what it described as a "commercial decision, Tullow offered to pay whatever Heritage owed ($313million), claiming it would seek recovery from Heritage. It has now emerged, however, that while Tullow was doing all this, it had an MoU with Heritage under which it would not involve itself in the tax dispute between the latter and the government of Uganda. In retrospect, Tullow's actions - paying Heritage the lumpsum and offering to compensate Uganda - are now being interpreted as connivance in a wider scheme to deny Uganda money it was losing because of negligence on the part of its negotiators. Information from London suggests that despite allocating $4.2 million to facilitate the defence of the case (parliament has refused to approve the spending) Uganda is not putting up much of a defence. Its primary argument revolves around the fact that the agreements are unenforceable since they were signed by a Cabinet minister who under Ugandan law is not supposed to enter into contracts on behalf of the republic. Heritage's legal team is reported to have punched holes in this argument, citing several concessions where Cabinet ministers signed contracts that are running smoothly and the fact that the Solicitor General approved this particular deal Even more specific to oil exploration, Australian firm Hardman Resources, exited Uganda without paying a penny on the $1.1 billion it received when it sold its interests to Tullow early in the past decade. By doing this, the Ugandan government created precedents for oil prospecting companies to pay only sign-on fees without incurring any taxes. Officials in the Ministry of Energy and Mineral Development see it otherwise. Permanent Secretary Fred Kabagambe Kaliisa said each transaction is treated differently and thus no single sale can be used as a model for tax obligations of all oil prospecting firms that have operated in Uganda. "The tax regime looks at these cases differently, because the nature of transactions differ. It depends on whether some of these were corporate takeovers or transactions in which the only thing acquired was the business," says Mr Kaliisa. But even as officials believe that Uganda has a strong case for its claim to capital gains tax, there are other indications that the country's policy reactions to this saga may throw back the programme by several years by undermining investor confidence. Kampala is being advised to cut its losses and seek an out-of-court settlement. Among options open to Uganda under this arrangement would be to bargain for a stake in the Tullow-Total-CNOOC consortium that would allow the country to recoup some of the losses incurred through earnings from the profits made by the consortium.