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THE REPUBLIC OF UGANDA IN THE MATTER OF THE TAX APPEALS TRIBUNAL TAT APPLICATION NO. 4 OF 2011  

1. TULLOW UGANDA LIMITED
2. TULOW OPERATIONAL PTY LTD    ………………………………… APPLICANTS

VERSUS UGANDA REVENUE AUTHORITY ………………………….……..……  RESPONDENT   RULING   This ruling is in respect of an application brought by the applicants challenging initial assessments of income tax of US$ 472,748,128 by the respondent in respect of a transfer of their interests in Exploration Areas EA1, EA2 and EA3 to CNOOC and Total for the consideration of US$ 2,933,330,400. The said assessments were eventually revised by the respondent to US$ 467,271,971 being capital gains tax. The applicants being aggrieved by the said assessments appealed to the Tribunal.   This ruling is brought after the Tribunal has complied with S. 13 of the Tax Appeals Tribunal (TAT) Act. Mr. Martin Feeta, one of the members of the panel listening to the dispute passed away on the 20^th May 2014. At the time of his passing away, all the parties had presented their evidence, closed their cases and made their submissions. Delivery of the ruling was pending. At the time of his passing away the then Tribunal had reached a decision. On the 16^th June 2014, when the matter came up for ruling, the parties were informed that the Tribunal did not have the legally required Coram to deliver a ruling. Counsel for the parties agreed that a new member should be assigned to the panel to replace Mr. Martin Fetaa. It was also agreed that matter be reheard by the record of evidence being availed to a new member under S. 13(5) of the Tax Appeals Tribunal Act without the need of recalling witnesses. Mr. Pius Bahemuka was appointed to replace the deceased. The record of the evidence and the submissions of the parties have been handed to him. Though the Tribunal cannot say that this is a ruling of four members as the Coram is three, it can say that this is a unanimous decision.

1. SUMMARY OF CASE

The facts agreed upon by both parties are:

1. The first applicant, Tullow Uganda Limited (hereinafter called “TUL”), is registered under the laws of the Isle of Man and was formerly Energy Africa Uganda Limited (“Energy Africa”). The second applicant, Tullow Uganda Operations Pty Limited (hereinafter called “TUOP”) is registered under the Corporations Act 2001 in Western Australia and was formerly Hardman Africa Pty Ltd (“Hardman”). The applicants are residents for tax purposes in Uganda.
2. On the 8^th October 2001, both the applicants and the Government of Uganda (“GOU”) executed a Production Sharing Agreement (PSA) under which they were granted exploration, development and production rights in Exploration Area EA2 (the “EA2 PSA”). It was signed by Hon. Syda N. M. Bbumba, Minister of Mineral and Energy Development for and on behalf of the Government, by Mr. Edward John Ellyard (Managing Director) on behalf of Hardman and by Mr. W.A Nel (Chief Operating Officer) on behalf of Energy Africa.
3. Another PSA, in relation to EA1, was entered into on the 1^st July 2004 (the “EA1 PSA”) between Energy Africa, Heritage Oil and Gas Limited (“Heritage”) and the GOU. The EA1 PSA was signed for and on behalf of the GOU by Hon. Daudi Migereko, Minister of State for Energy, also holding the portfolio of the Minster of Mineral and Energy Development, by Mr. Brian Smith on behalf of Heritage and by Mr. Rhimwaan Gasaut on behalf of Energy Africa.
4. Another PSA, in relation to EA3A, was entered into on the 8^th September 2004, between Energy Africa, Heritage and the GOU (“the EA3A PSA”). The EA3A PSA was signed for an behalf of the GOU by Hon. Syda N. M. Bbumba, Minster of Mineral and Energy Development, by Mr. Brian Smith on behalf of Heritage and by Mr. Andrew Wyndham on behalf of Energy Africa.
5. Heritage and Energy Africa agreed to continue with the Joint Operating Agreement (“JOA”) between Heritage and Energy Africa entered into on the 29^th August 2002 for EA3, under which the first applicant’s participating interest was 50%.
6. Prior to 2009, Tullow Oil Plc, the parent company of both applicants, acquired the Energy Africa Group, which had a subsidiary, which later became TUL. Tullow Oil Plc later acquired the Hardman Group, including Hardman Africa Pty Limited, which later became TUOP. Tullow Oil Plc acquired the relevant subsidiaries’ rights and interests in the PSAs in Uganda.
7.  At this stage the interests in the PSAs were as follows:

a. TUL held 50% of EA1, EA2 and EA3A; b. TUOP held 50% of EA2; and c. 50% of each of EA1 and EA3A was held by Heritage and the interests then held by TUL in EA1 and EA3A are hereinafter referred to as “the Other Original Interests”.

8. The applicants through their exploration activities discovered hydrocarbons in the respective exploration areas.
9. On or about the 17^th January 2010,  TUL invoked its pre-emptive rights under the JOA for the purchase of 50% participating interests of Heritage in Exploration Areas EA1 and EA3A (the Heritage interests”) at a consideration of US$ 1,450,000,000 (United States Dollars one billion four hundred and fifty million), subject to approval from the GOU.
10. On about the 26^th January 2010, TUL and Heritage signed a Sale and Purchase Agreement (the “SPA”) under which TUL would acquire Heritage’s 50% participation rights in Exploration Areas EA1 and EA3A.
11. On the 6^th July 2010, the GOU granted a conditional approval to the transaction between Heritage and TUL.
12. On the 18^th October 2010, the respondent raised assessment number SA/LTO/2569 of US$ 390,924,460 and assessment number SA/LTO/2570 of US$ 84,999,660 on TUL and TUOP respectively being income tax (Capital Gains Tax).
13. On the 1^st December 2010, the applicants objected to the assessments.
14. On the 24^th February 2011, the respondent made an objection decision that adjusted the assessment on the TUL. The assessment No. SA/LTO/2569 of US$ 390,924,460 was amended to US$ 387,748,469, while assessment No. SA/LTO/2570 of US$ 84,999,660 was unaffected, resulting in a total of US$ 472,748,128.
15. On the 15^th March 2011, the applicant, the GOU and the respondent executed a memorandum of understanding (“MOU”).
16. On the 25^th March 2011, the applicants filed an application for review before the Tax Appeals Tribunal (TAT) contesting the assessments and the objection decision by the Commissioner of the respondent.
17. TUL acquired the Heritage Interests pursuant to the SPA and upon fulfilment of conditions in the MOU of 15^th March 2011. Following the acquisition the holdings in the Exploration Areas were:

a. TUL held 50% of EA2 and 100% of EA 1 and EA 3A; and b. TUOP held 50% of EA2.

8. The applicants disposed of 66.67% of their interests in EAs 1, 2, and 3A to CNOOC and Total at US$ 2,933,330,400 (United States Dollars two billion nine hundred thirty three million three hundred thirty thousand four hundred).
9. Following the disposal the holdings are:

a. TUL holds 33.33% of the interests under the EA 1, and EA 3A PSAs. b. TUOP holds 33.33% of the interests under the EA2 PSA. c. CNOOC holds 33.33% of each of the interests under the EA1, EA2 and EA3A PSAs; and d. Total holds 33.33% of each of the interests under the EA1, EA2 and EA3A PSAs.

1. On or about the 22^nd February 2012, the applicants paid US$ 141,824,438 (United States Dollars one hundred forty two million eight hundred twenty four thousand four hundred thirty eight) being 30% of the tax assessed.

2. ISSUES

The issues agreed upon by both parties are:   1. In respect of EA2   1.1  Whether Article 23.5 of the PSA for area EA2 covers capital gains/income tax arising from gains derived out of disposal of interests in the PSA?   1.2  Whether Article 23.5 of the PSA for EA2 entered into by and between the Government of Uganda acting through the Minister of Energy and Mineral Development is valid/lawful under Uganda Law?   1.3  Whether Article 23.5 is valid/lawful under international law?   1.4  If the answer of either issue 1.2 or 1.3 is in the affirmative, should Article 23.5 be enforced by the TAT, and if yes do the assessments fall to be discharged or not?   1.5  Whether the respondent is estopped by Article 23.5 from raising an assessment in respect of the gains made on the disposal of the applicants’ interest in EA2, and if yes, do the assessments fall to be discharged or not?   1.6  Whether the reference to the respondent being estopped includes references to principles rooted in fairness including legitimate expectation?          2. In respect of the other PSAs   What is the gain, and how is that gain computed, on the disposal of the interests in the PSAs (a) purchased by TUL from Heritage; and (b) otherwise?   3. Reinvestment relief   3.1 Whether the applicants are entitled to reinvestment relief under S. 54(1) (c) of the Income Tax Act Cap 340?   3.2 If so what is the quantum of the disposal consideration in respect of which reinvestment relief can apply?

3. REPRESENTATION OF THE PARTIES      see more on pages 1,2,3,4,5,…below or 
   

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