The applicants also relied on the doctrine of pacta sunt servanda, which requires those entering into contracts to honour their obligations. The applicant contended that respondent as agent of the GOU is not entitled to collect tax from the applicants in contravention of Article 23.5 of the EA2 PSA. On issue 2, the applicants contended that they sold 66.67% of the interests they held in the blocks. Of the 66.67% interest, 50% interest was what they acquired from Heritage, 16.67% was their original interest. The applicants contended that they purchased the Heritage interests exercising their pre-emption rights for the purpose of selling them and to facilitate the development of the areas. The applicants objected to the respondent’s argument that the interests they sold were indivisible. The applicants argued that there were no accounting principles which discourage transactions carried out in the way the applicants sold their interests to CNOOC and Total i.e. by selling all of the Heritage interests first and a small proportion of the original interests.
The applicants argued that the respondent’s alternative proposal of ‘first in first out’ (FIFO) model was aimed at yielding the greatest amount of tax which overrides the clear provisions of the SPAs. The applicants cited the case of Stanton v Drayton [1983] 1 AC 501 where the court noted that the consideration in any particular case must be determined by reference to the contract which the parties concerned concluded. In respect of computation of capital gains, the applicants contended that this is determined by the rules set out in Part IXA of the ITA.
The applicants submitted that S. 89B provided for inconsistencies. Where there is an inconsistency between Part IXA and other parts of the ITA, the former prevails. The applicants argued that S. 22 of the ITA is not applicable by virtue of S. 89B (2). S. 89C – 89F sets out the rules dealing with allowable deductions against the income, which is relevant when commercial production starts.
The applicants objected to the application of S. 22(c) of the ITA which provides for “recoverable costs”. They argued that this prevents the applicants being allowed the costs of expenditure as their cost base in the computation of a chargeable gain. The applicant argued that the respondent’s claim that the contractors obtained recovery of costs under an indemnity or agreement is unfounded. There is no such indemnity or agreement, it is merely to apportion turnover in accordance with what each partner has spend.
The applicants argued that S. 22 does not apply to a first disposal. They contended that S. 22 is not incorporated into Part IXA, in particular in S. 89(c) or Part VI. S. 22 is within Part IV, ‘Chargeable Income’. S. 22 is only concerned with income, not gains. The applicants contended that there is nothing that stops allowable expenditure forming part of the cost base on the original interest. The applicants submitted that Sections 89C, 89G(c), 89F, the 8th Schedule and S. 52 contain the provisions of the taxation of disposals of interests in a petroleum agreement. S. 22 is not applicable as it is inconsistent with Part IXA. The applicants see no tenable reason why incidental expenditure incurred in improving or altering the assets under the PSA should not be deducted under S. 52(6). In reference to the double dip point raised in the objection decision by the respondent, the applicants argued it can only have effect in two circumstances. The first in respect of the possible future use of the carried forward potential deductions against cost oil.
The second in respect of the potential use by a transferee of the deduction against cost oil. The applicants submitted that S. 89G, which is headed “Transfer of interests in a Petroleum Agreement”, sets out the rules for dealing with the allowable deductions upon the transfer of an interest. The applicants contended that there are separate charging codes for the original interests (First disposals) and subsequent disposals. The applicants submitted that S. 89G(c) is used for determining the cost base where there is an original transfer of interest. The cost base will be determined in accordance with Part VI of the Act. Part VI comprises Section 49 – 54 of the ITA. In Part VI, the principal rules for the computation of the tax base are set out in S. 52 of the ITA.
Pages: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57