It does not seem to be in dispute, that the effect of Article 23.5 was to carve out from the main Article of tax liability, (i.e. Article 11), an exemption or a waiver of tax to the licensee or its assignee in respect of an assignment or transfer of an interest. What is in dispute is the interpretation of Article 23.5 of the EA2 PSA in light of the ITA. The applicants argued that Article 23.5 of the EA2 PSA offered an exemption to capital gains tax which is disputed by the respondent.   The applicants sold a portion of their interests in, inter alia, EA2 to CNOOC and Total. The respondent assessed the applicants, capital gains tax on the gain they purportedly received. The applicants objected to the assessment of capital gains tax in Block EA2 and claimed an exemption. The applicants called two witnesses who testified that because of Article 23.5 of the EA2 PSA they were not liable to pay capital gains tax in respect of the transfer of interests in EA2. According to Mr. Graham, the applicants relied on Article 23.5 of the EA2 PSA in their decision to farmdown.

The applicants had incurred enormous expenditures and expected to recoup them when they sold a portion of their interests. Though Mr. Graham was not part of the legal team that drafted the PSA, he was its head. According to him, Article 23.5 exempted capital gains tax. The second witness, Mr. Richard Inch, the Head of Tax, stated that the applicants assumed that in the event of a farmdown the proceeds would be received tax-free because of Article 23.5. He was of the view that the exemption under Article 23.5 was valid.   The respondent’s witnesses gave evidence to the contrary. According to Mr. Rubondo, Article 23.5 was not negotiated by the parties. He testified that the GOU did not want licensees to be encumbered with fees, imposts and taxes.

The intention of Article 23.5 was to facilitate the licensees to bring on board partners to share risk without the need to pay fees and imposts like stamp duties and signature bonuses. He said the clause was not meant to cover taxes on gains. Its purpose was to facilitate the sharing of risk and not to guide the taxation of a gain. According to Mr. Kajubi, the Commissioner Domestic Taxes, Article 23.5 was not part of the ITA. Capital gains tax is not a transfer tax. Hence it was not catered for under Article 23.5.   The Tribunal notes that while Mr. Rubondo and Mr. Kajubi were competent witnesses, the Tribunal does not think that they are the most appropriate persons to testify on the intention of the GOU in respect of Article 23.5. Firstly, there is no evidence that both were part of the negotiating or drafting team of the EA2 PSA.

Secondly, the most appropriate person to testify on the intention of the GOU should have been the Attorney General or an official from his/her chambers. Under Article 119(3) of the Constitution, the Attorney General is the principal legal advisor of GOU. Article 119(4) (b) of the Constitution reads that the functions of the Attorney General include: “to draw and peruse agreements, contracts, treaties, conventions and documents by whatever name called, to which the Government is a party or in respect of which the Government has an interest.” The Tribunal cannot say that Mr. Rubondo and Mr. Kajubi are officials of the Attorney General’s chambers. Mr. Kajubi’s interpretation might have carried some weight; however the Tribunal has to caution itself against such testimony, as it is likely to be skewed in favour of revenue collection which is entrusted to his employer, Uganda Revenue Authority.   Intention can still be ascertained from the use of the words in an agreement. In Nile Bank (U) Limited v Translink (U) Limited [2001 – 2005] 2 HCB 53 it was noted that court must discern intention from words in a document. Both parties gave lengthy submissions on the interpretation of Article 23.5 of the EA2 PSA.

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