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Government response on oil cash bonus

STATEMENT ON THE PRESIDENTIAL EX-GRATIA PAYMENT TO PUBLIC OFFICERS WHO PARTICIPATED IN THE HERITAGE OIL AND GAS CASES BROUGHT AGAINST THE GOVERNMENT OF UGANDA.

Rt. Honourable Speaker,
Honourable Members of Parliament

Introduction

As you are fully aware the ongoing concern about the Ex-Gratia (now referred to in the public as handshake) that H.E the President extended to the 42 Public Officers that were involved in the arbitration cases that led to defending the collected Capital Gains Tax on the Heritage Oil and Gas Limited (HOGL) transactions when it sold its interests to Tullow Uganda Limited (Tullow). In my Statement, I will specifically address the following:

a. Background and the transfer of interest by HOGL to Tullow that resulted in Capital Gains Tax;

b. The challenges that Government faced in collecting the Capital Gains Tax that accrued therefrom;

c. Why H.E The President gave the Ex-Gratia to the 42 Public Officers who were involved in securing the mentioned taxes; and

d. The precedents in payment of ex-gratia both in Uganda and elsewhere in the world.

Background

2. Rt. Honourable Speaker, Heritage Oil and Gas Limited (HOGL), Energy Africa Uganda Limited (“Energy Africa”)1 and the Republic of Uganda, acting through its Ministry of Energy and Mineral Development (the “Ministry”), entered into production sharing agreements for the exploration and exploitation of oil in Uganda in respect to: (a) Exploration Area 1 on 1 July 2004 (the “Exploration Area 1 PSA”) and (b) Exploration Area 3A on 8 September 2004 (the “Exploration Area 3A PSA”).

3. Having pursued a fairly successful exploration campaign as operator and 50% interest holder in two the licenses, Heritage Oil and Gas Limited together with Heritage Oil Plc. and Tullow Uganda Limited (“Tullow”) on 26 January 2010, entered into the Sale and Purchase Agreement (the “SPA”) for the transfer of HOGL’s undivided fifty percent participating interest in each of the PSAs, together with all associated rights and interests, to Tullow (the “Transfer”) for a sum of USD 1,35 Billion (the “Purchase Price”), plus a contingent amount of up to USD 150 Million (the “Additional Purchase Price”) (collectively, the “Sum”). The company had invested only USD 150 million and was making a profit of up to USD 1.35 billion from the Transfer. A dispute arose between the Parties when on 9 April 2010, the Uganda Revenue Authority (the “URA”) sought to impose capital gains tax on the Sum totaling USD 434 million (1.5 Trillion shillings) arising out of the Transfer and to condition its consent to the Transfer upon payment of the tax by HOGL.

4. On 16 May 2011, the Claimant initiated arbitration proceedings in these two matters by filing two notices of arbitration against the Respondent (the “Notices of Arbitration”) in accordance with Article 3 of the United Nations Commission for International Trade Law Arbitration Rules, 1976 (the “UNCITRAL Arbitration Rules”).

The Dispute and Government Efforts

5. Rt. Honourable Speaker, the assessment was disputed by HOGL on several grounds one of which being that similar transactions had taken place elsewhere in Africa and no such tax had been assessed or collected by the respective authorities in those countries. Indeed, around the same time, the oil company Kosmos was finalizing transfer of its interests in a license in Ghana and making capital gains of up to USD 3.5 Billion and no tax had been paid on the transaction. Similar transactions had taken place in Tunisia and Algeria with no tax imposed on capital gains.

6. Many countries in sub-saharan Africa have lost cases in different arbitral tribunal and the same have been a subject of enforcement. Cases and awards against African countries and sub-Saharan Africa in particular continue to increase in all arbitral tribunals. Equally several mineral rights had been transferred in Tanzania and Kenya, but no tax has been paid. Also Heritage Oil and Gas Limited informed government that based on comprehensive advise from leading tax experts within Uganda, the United Kingdom and North America that the disposal of their interests in Blocks 1 and 3A was not taxable.

7. Due to the highly technical nature of the dispute, being the first of its kind in Uganda and in Africa, and the value of taxes in issue (USD 434 million), Government set up a multi- institutional team to defend Uganda’s interests with regard to the assessed Capital Gains Tax. The team which was headed by the Attorney General included representatives from the Ministries of Justice and Constitutional Affairs; Finance, Planning and Economic Development, Energy and Mineral Development as well as Uganda Revenue Authority. The team constituted the experts in the different areas of both tax policy, tax law, oil policy, oil law, Ugandan law and the general history of the oil industry in Uganda.

8. Against this background, it should be noted that besides the interests that HOGL had in the two Production Sharing Agreements (PSAs), the company did not have any other assets in Uganda. This therefore meant that once the company sold the interests and left the country, Uganda would not be able to collect a single dollar in Capital Gains Tax from this transaction.

9. Having realized that Government was serious about the tax, Heritage’s conduct was to ensure their exit before tax was paid. The Government team’s first priority battle was to ensure that Government receives the tax before Heritage exits Uganda. This was achieved successfully and by the time HOGL exited Uganda, Government had collected all the taxes due.

10. HOGL appealed the taxation in the Tax Appeals Tribunal (TAT) in accordance with the laws of Uganda in 2010. The TAT proceedings involved vigorous processes but Government, with URA in the lead, successfully defended its position in the TAT.

11. After initiating tax appeals in the TAT and while these appeals were ongoing, in May 2011, HOGL initiated arbitration proceedings in London against government by filing two notices of arbitration (the “Notices of Arbitration”). HOGL initiated the arbitration on the basis of the arbitrations agreements contained in the two Production Sharing Agreements.

12. The arbitration process involved preparation of and submission to the Arbitral Tribunal of Government defense documents, rejoinders and memorials, witness statements as well as expert reports and attending hearings. The arbitration process also included identification and preparation of witnesses, cross examination of witnesses as well as experts. This involved combing the entire history of the oil industry in Uganda and all material documents including parliamentary Hansards, public records, all laws and regulations, all correspondences that span over a period of 30 years.

13. On 24th February 2015, the entire panel of three arbitrators unanimously issued their final award of the entire USD 434 million (UShs. 1.5 Trillion) in favor of Government and awarded Government an extra USD 4,083 Million (UShs 17 Billion) in costs.

14. The Government relied entirely on the services of one international arbitration law firm, supported by the Ugandan team. No local law firm was engaged as the situation would have demanded because the Government team played that role effectively, which in itself saved Government extra costs.

15. The process of winning this landmark case did not only involve technical work but Government had to resist immense pressure against taxing the transaction from all corners of the world. Some of these included pressure from some of Uganda’s development partners who argued that taxing the transaction would discourage further oil company investment in the petroleum sector in Uganda. Others that advised government against this tax included some international civil society organizations as well as international media houses that reported negatively about the taxation.

The Ex-Gratia

16. Rt. Honourable Speaker, having successfully defended Government in the collection of the tax above which amounted to USD434,000,000 (1.5 Trillion shillings) and an extra USD4,083,840 (17 Billion shillings) in costs, H.E. the President of the Republic of Uganda extended ex-gratia to the Government team. This was meant not only to appreciate the professionalism and patriotism exhibited by the team members, but also to encourage other public officers who may be faced with similar assignments and challenges in future.

17. Under Article 98 and Article 99 of the Constitution of the Republic of Uganda the President is the fountain of honor and head of the Executive. In accordance with the prerogative of the crown as enshrined in the Constitution, the President is empowered to reward exemplary and ethical performance. Equally this principle is entrenched in the Uganda Public Service Standing Orders

Arbitral Award

18. Rt. Honourable Speaker, following the Arbitral Award issued on 24th February, 2015, H.E. the President of the Republic of Uganda rewarded the team of 42 officers with UGX 6 Billion subject to taxation and statutory deduction, in appreciation of their tireless effort and exemplary service to the Country.

The money was distributed to the officers in three categories as follows:

The above amounts were subjected to tax and statutory deductions (totaling to UGX 2.3 Billion) as follows:
- Pay As You Earn of 40%
- 15% being NSSF as applicable
- Resulting in a net pay of UGX 3.58 Billion

19. The case was the first of its kind in Uganda and the biggest case in the history of the country in terms of amount and precedent. It was tried in the Ugandan Tax Appeals Tribunal, Uganda High Court, the London High Court, London Court of Appeal (Tullow – Heritage Oil and Gas) and eventually in the International Tribunal for Arbitration. It was the first of its kind in Africa and has set a precedent all over the world on transfer of exploration licenses and changing of law and stabilization clauses.

20. Collection of Capital Gains Tax on the Transfer has been the largest single tax collection from a single transaction since the inception of the Uganda Revenue Authority. In addition, successful taxation of this transaction was critical for Uganda as it would form an important precedent for future such transactions in the country.

Procedure

21. Rt. Honourable Speaker, in accordance with the Public Finance Management Act, 2015, the Commissioner General was designated on 2nd May, 2016 as the responsible Accounting Officer to effect the payment. The Commissioner General followed the approval procedure stipulated in the said Act and deducted the applicable taxes. The payments were effected in July, 2016.

All the necessary procedures and approvals were obtained and therefore the payment was in accordance with the Law.

Precedence

22. Rt. Hon. Speaker, the reward was granted to the team in recognition of its stellar performance by the Executive. The team was also recognized and commended by both the 9th Parliament and Cabinet. The rewards and recognitions are not only part of modern governance, but are entrenched in the fiber of Uganda Public Service rules.

23. It is worth noting that Government has given similar rewards before; Ugandans who excelled in different fields including, but not limited to the thirty (30) Public Officers who were part of the team that discovered oil in Uganda in 2006 were rewarded with presidential Ex-Gratia. The Ex-Gratia to the scientists was rewarded to the individuals who played a key role in helping Uganda discover the first commercial deposits of oil in the Albertine Graben. This has proved to be a good catalyst as the country now has over 6 billion barrels of oil in place as compared to the 300 million barrels in 2006. In addition, the country has well laid out commercialization plans for the discovered oil fields whose implementation has already commenced. Whereas all this progress cannot be only attributed to the 2006 ex-gratia, the fact that appreciation of our scientists has been a major contributing factor cannot be dismissed.

24. Rewarding individuals whole have excelled in their roles is common practice not only in the public sector but also in the private sector worldwide

Comparison of the Reward to the value of the Team’s success to the country

25. In conclusion Rt. Honourable Speaker, the net take home for the over 42 individuals amounted to 3.58 billion shillings compared to the 1.5 trillion shillings that the team won for the country. The reward for the team was therefore less than 0.5% of the total value of the work that the team put in. suffice to point out that in addition to the main tax collected, Government was awarded an extra 17 billion shillings in costs.

26. Clarification should also be made here that whereas there has been other similar transactions that followed that of HOGL as explained before, Ex-gratia was only paid on the HOGL transaction. No such reward was paid for the subsequent transactions which included the firm-down of Tullow to Total and CNOOC and from which Government collected 800 billion shillings in taxes. The collections from these subsequent transactions have been made possible by the precedent set on the HOGL transaction.

I beg to submit and pray that the Statement be found adequately addressing the issue of the handshake that has been topical in the last one – two weeks.

William Byaruhanga

ATTORNEY GENERAL

Source: newvision.co.ug

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