The applicants were represented by Mr. Stephen Brandon QC, Mr. Oscar Kambona, Ms. Amanda Hardy, Ms. Reshma Shah, Mr. David Mpanga and Mr. Bruce Musinguzi.   The respondent was represented by Mr. Ali Ssekatawa, Mr. Peter Mulisa, Mr. Matthew Mugabi, Mr. Martin Muhanji, Ms. Syson Ainebabazi and Mr. Geoffrey Mucurezi.

4. SUMMARY OF EVIDENCE ADDUCED AT TRIAL

All the parties agreed that the applicants shall be allowed to file witness statements. Their witnesses would then be cross-examined by the respondent. The respondent opted to call its witnesses for examination in chief instead of filing witness statements.   The applicants’ first witness was Mr. Martin Graham, the General Counsel, of the Tullow Group (hereinafter called ‘Tullow’) which includes both applicants. In his statement, he stated that he dealt with the acquisition of Energy Africa Uganda Limited and Hardman Resources Limited by Tullow. He deponed that on their acquisition, Energy Africa Uganda Limited changed its name to TUL while Hardman changed to TUOP.   He further deponed about the signing of the PSAs between the GOU and the applicants. The PSAs gave exclusive rights to a party to explore for hydrocarbons in certain areas known as Exploration Areas (EAs). These areas included EA1, EA2 and EA3A. At the beginning of January 2010, TUL held 50% of the interests in EA1, EA2 and EA3A and TUOP held 50% of the interest in EA2. The other 50% interests in EA1 and EA3A were held by Heritage. On the 17^th January 2010, TUL exercised its pre-emption rights and acquired Heritage’s interests in EA1 and EA3A.   In February 2010, Heritage asked the GOU for consent to the transaction. The GOU gave consent subject to payment of tax. Heritage objected to the payment of tax. Later an arrangement was agreed upon where Heritage deposited the tax payable on an escrow account. The GOU and the applicant entered into a memorandum of understanding on the 15^th March 2011 where TUL paid US$ 313 million tax as agent for Heritage.   According to Mr. Graham, Tullow acquired Heritage’s interests in EA1 and EA3A with the express intention of selling them to third parties. It had intended to sell 50% of the interests in each of the PSA.  However the GOU would not give its consent to a sale to only one party. It eventually sold 66.67% of its interests in each of the PSAs to CNOOC and Total on 21^st February 2012, each purchaser taking 33.33% of the interests. He gave a background and history and the nature of oil exploration in Uganda in his statement, which we shall not repeat. He stated that the exploration areas had not yielded any income as yet.   Mr. Graham, in his statement, noted that under the PSAs the GOU gets its stake on oil in a number of ways which includes royalties, profit oil and 15% of the contractors’ share of profit oil under the state participation provisions.  If a project fails the GOU does not suffer any loss.  The costs recoverable are pooled together each year, and the balance is reduced by the value of cost oil received. Unrecovered costs are carried forward to subsequent years until full recovery is completed. He argued that this is not a tax relief or any kind of relief like indemnity. It is simply the recovery of expenditure incurred by one party. Such recovery does not prevent the oil company from deducting what it expended in tax computation.   Mr. Graham discussed the protection of the oil companies in the PSAs. He stated that “it is common for governments to provide certain incentives to encourage oil exploration. These incentives take the form of exemption or reliefs that reduce the company’s costs.” According to him, the EA2 PSA contained a clause providing that no tax would be payable in respect of a farm down of TUL’s interests in Article 23.5. Mr. Graham testified that Article 23.5 of the EA2 PSA provided that the assignment or transfer of an interest under the agreement would not be subject to any tax, fee or other impost or fee levied either on the assignor or the assignee. To him he was not sure whether Capital Gains Tax and transfer tax are the same. He stated that at the time the EA2 PSA was entered into, it was not certain that there were any hydrocarbon deposits in Uganda and so potential investor’s interest in the EA2 PSA was very low. He argued that Article 23.5 was advantageous to the GOU because it significantly increased the possibility of investment in Uganda. He argued that without any tax breaks it was unlikely that any companies would have invested in Uganda, especially where exploration involved a lot of monies. According to him, Article 23.5 of the EA2 PSA was certainly important to Tullow. It had incurred considerable expenditure. Tullow could not keep the whole of its interests in EA2, so a farmdown was inevitable. Mr. Graham testified that the applicants relied on Article 23.5 of the EA2 PSA when selling their interest as they wanted to benefit from the no tax on the farmdown of their interests.   Mr. Graham said that US$ 1.45 billion was paid by TUL for the acquisition of Heritage’s interests. The money was raised from shareholders. He said farming down was a way of the applicants financing exploration activities and development. He referred to exhibit A46, a letter to the Minster of Energy, where the applicant expressly stated that upon acquisition of the interest in Blocks 1 and 3A, the applicants would farm down at least 50% of the interests in all the Blocks to one or more partners acceptable to GOU. He stated that the applicants were forced to sell an extra 16.67% of their interests. There was pressure from the GOU for the applicants to break the monopoly in oil exploration. There was no official communication that the applicants should sell 66.67% of their interests. However there were several meetings with GOU officials at different levels where it was indicated that the applicants should retain a third of their interests.     Mr. Graham said he did not engage in drafting the PSA for the farmdown. The legal team did it. However as head of the legal team he took responsibility.  The tax department was working with him. Mr. Graham stated that he is not a tax expert.

The applicants did not do a due diligence before they transacted with Hardman and others.   Mr. Graham said that the applicants sold first what was purchased from Heritage. The Heritage interest was the whole of the value that was presented in the PSA. They took over the costs incurred by Heritage. The monies the applicant used to pay the tax for Heritage came from Total and CNOOC.   The applicant’s second witness was Mr. Paul McDade, the Chief Operating Officer of the Tullow. He noted that the respondent raised assessments on the 18^th October 2010 in respect of the three blocks. However the farmdown had not taken place. It took place on the 27^th February 2012. At the beginning of January 2010 TUL held 50% interests in EA1, EA2 and EA3A and TUOP held the other 50% of EA2. The other 50% of EA1 and EA3A was held by Heritage.   Mr. McDade gave a background to the farmdown in his witness statement, which is as stated in the agreed facts. He added that since the discoveries in 2006 and 2007, the applicants planned to farmdown in order to meet the substantial costs needed for exploration. One of the functions of the farmdown was to assist financing their projected investments.

Mr. McDade further testified that the GOU indicated to the senior Tullow executives that a 50% farmdown would not be acceptable to it. It was GOU policy to avoid a monopoly situation in the Albertine Graben. Mr. Richard Inch emailed to him about a conversation he had with Mr. Kiiza, the Director of Economic Affairs, Ministry of Finance, Planning and Economic Development that the GOU would not allow a 50% split. The applicants changed their position of a 50:50 split to a 33:33:33 split as the former proposal would not be allowed. Mr. McDade argued that the disposal of 16.67% was therefore an involuntary disposal. He further testified that at the time of disposal Tullow was planning to reinvest considerable sums from the farmdown proceeds in assets of a like kind within one year from the farmdown.   In cross-examination, Mr. McDade said that the intention to sell 50% of its interest was not expressed in any form of board resolution. Mr. McDade reiterated his earlier position that Tullow wanted to sell at least 50% of its interests. There was no correspondence between GOU and Tullow that indicated that the latter wanted to sell 50% of its interest. He stated that there was a draft SPA which was on a basis of 50:50 made in February 2010. He did not clearly understand what a re-investment relief was.   In re-examination, Mr. McDade stated that the monies obtained from the sale were to be spent on the exploration activities, drilling, appraisal activities, testing of oils and associated activities or development studies. All the expenditures met prior to the farmdown were exploration and appraisals expenditures, drilling of wells, bridges, procuring of service studies, geological, etc.

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