Tullow Oils stall at a trade exhibition in Kampala. The basis for computation of the firms capital gains tax has been the subject of protracted negotiations. Monday, March 28 2011 at 00:00 With Uganda still reeling from a public purse emptied after spending 85 per cent of the 2010-2011 budget in the first six months to December, it is emerging that the country may have entered into a window-dressing deal in which it could surrender its claim to the $283 million in taxes owed by Heritage Oil, further hurting the states revenues. Uganda and Irish oil prospector Tullow are headed for arbitration over a new tax dispute, just a week after they signed a memorandum of understanding that potentially unlocks the long delayed commercial development of Ugandas oilfields. The EastAfrican has learnt that despite signing an MoU in which it committed to paying some $590 million in taxes, Tullow feels it has been over-assessed. Although the MoU was scanty on detail, information available indicates that the figure includes what Tullow will pay Uganda in settlement of $283 million owed by its erstwhile partner Heritage Oil as well as its own capital gains tax on the farm-down to Total and the China National Offshore Oil Company (CNOOC). When we signed the MoU, but made it clear that we were not satisfied with the tax assessment. We all agreed to take our grievances to the Uganda Tax Tribunal and we shall respect the outcome, said a highly placed Tullow source. However, officials at both the Ministry of Energy and the Uganda Revenue Authority have not been forthcoming on the exact breakdown of what Tullow is paying. According to independent sources, the $590 million announced by Energy Minister Hillary Onek is a compound figure that includes the $283 million outstanding from Heritages capital gains tax and the $307 million due on Tullows own sale of a 60 per cent interest to CNOOC and Total. However, Tullow disputes this valuation and is only willing to pay $469 million. Apparently, the dispute stems from Tullows desire to have the 30 per cent advance that Heritage paid Uganda last year to unlock its sale to Tullow credited as part of its overall tax obligation. The basis for computation of Tullows capital gains tax has been the subject of protracted negotiations, with the prospector trying to drag the baseline north by including what it has spent on the Ugandan programme while government negotiators felt that the tax should be based on the difference between what Tullow paid Heritage and what it is getting from CNOOC and Total. Based on earlier reports attributed to Tullow in the Irish press that suggested the company would earn $2.9 billion from the farm-down, Uganda should have expected at least $465 million in capital gains tax from Tullow or a total of $748 million if Tullow were to inherit the $283 million owed by Heritage. It is, however, understood that Tullow could have earned much less than the reported figure because Total and CNOOC have raised questions over the actual value of oil reserves claimed by Tullow and the security of its rights given pending deadlines that it is not in position to meet. While a figure of one billion barrels in confirmed reserves and a prospective 1.5 billion in undiscovered reserves has been thrown about, in reality, well appraisals suggest only about 870 million barrels of oil on the upper side and 720 million on the lower end. Well appraisal information that this paper has seen shows the Buffalo and Giraffe prospects contain 430 million barrels on the upper side and 380 million on the lower while the other large prospect, Kingfisher, can yield 200 million barrels at the maximum and 189 million on the lower estimate. The Warthorg, Kasamene and Maputo wells are estimated to respectively contain 120 million, 100 million and 20 million barrels of oil at most. As Tullows Uganda woes appear to be finally on the path to resolution, the question that remains is the status of the $283 million in escrow and how Tullow will recover that money.