Uganda: Setback for Heritage Oil in Arbitration on Capital Gains Tax
Friday, 05 April 2013
London-listed Heritage Oil has refuted claims by Ugandan government officials that it has lost in an arbitration case in London, calling the ruling issued as preliminary. According to New Vision, the three-member arbitration team ruled against the three core tax claims by Heritage. The ruling, according to the news coverage, directed that the transaction was taxable; that the tax dispute could not be exclusively handled in London as Heritage had forfeited that right when it subjected itself to the Uganda Tax Appeals Tribunal; and that the tax could not be determined in London.

Heritage Oil had contested the USD404.9mn capital gains tax payment that the Ugandan government tried to levy on its 2012 sale of its Uganda assets, 50% of blocks 1 and 3A, to its exploration partners Tullow Oil for USD1.45bn. Heritage argued that the 30% tax was being levied retroactively as the law had been enacted just before the deal, while its 2004 production sharing agreement stated that any subsequent changes to Uganda’s tax laws would not affect its tax liabilities.

In a statement, Heritage have objected to these conclusions, arguing that the central question of whether the company ought to pay the tax remains to be determined in the next stage of the process: ‘The determination by the arbitral tribunal is supposed to be confidential and marks the end to the Preliminary phase of the international arbitration proceedings. The international arbitration will now continue and move to deal with the merits phase of Heritage’s contractual claims against the Ugandan Government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts.’

Heritage had deposited USD121.5m, or a third of the tax demanded by the Uganda Revenue Authority (URA), as a precondition to initiating proceedings at the Uganda’s Tax Appeals Tribunal while the rest (USD283.4mn) was deposited in an escrow account with Standard Chartered Bank in the UK. The company lost the case against URA, prompting it to start fresh arbitration proceedings in London. The company pointed out that this money was still being held by the bank.


These developments might impact on another dispute between Heritage and Tullow as the latter demanded a refund of money used to pay off the remainder of the tax. In 2011, Tullow’s farm down of its assets in Uganda to Total and Chinese national oil group CNOOC had only been given the go-ahead by the Ugandan government after Tullow paid USD313.5m, i.e. the remainder of the tax on the transaction not yet received by Ugandan authorities plus an extra USD30m: Tullow’s proress had effectively been held hostage by the government’s dispute with Heritage. This had caused repeat delays for the companies involved and, therefore, also for the beginning of Uganda’s oil production. An arbitration case on the matter started in London last month.

As commercial interest in East Africa’s oil, gas and other extractive industries grows, the governments in the region try to raise their share of the revenues. This is not always unproblematic: In Kenya, for example, Base Resources were able to fight off an attempt by the government to retroactively impose an obligation to cede 35% of their venture’s equity to local owners (see our analysis here).

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written by James, June 09, 2013
I really understand that East Africa wants to raise their share of the revenues, but where does it stops? white
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