Tullow Oil Plc is to appeal against the Wednesday ruling by the Tax Appeal Tribunal that ordered the company to pay $407 million in accumulated capital gains tax resulting from the sale of its oil blocks to China National Offshore Oil Corporation (Cnooc) and Total in 2012.
Following the completion of the farm-down of 66 per cent of its assets in Uganda to Cnooc and Total in 2012, Tullow was issued with a capital gains tax assessment by the Uganda Revenue Authority (URA) of approximately $472m. Tullow paid 30 per cent of the assessment (approximately $142m) as legally required to launch an appeal.
Tullow petitioned the tribunal challenging URA's tax assessment, following the $2.9 billion transaction, arguing that the then Energy minister had exempted the company from the tax. However, the tribunal ruled that the minister did not have the authority to grant such an exemption.
"There was no enabling act that empowered the minister of Energy to grant exemptions or waivers or variations of taxes," reads the ruling. Any such grant offended the tax provisions of the tax law, including the Income Tax Act."
The ruling means that Tullow, which had already paid $142 million (30 per cent of the contested amount), as required by the Tax Appeals Tribunal Act, in order to file the appeal, will now have to pay the balance plus the interest accrued.
But in a statement released on Wednesday soon after the ruling, Tullow said it was very disappointed by the ruling. Aidan Heavey, Tullow's chief executive officer, said he was "extremely disappointed" by the ruling, noting that the tribunal had "erred in law." He said: "We will now carefully consider all our options to robustly challenge this ruling."
The statement adds: "Tullow is very concerned by this ruling which ignores a contractual term signed by a government minister in Uganda."
Tullow is one of Uganda's largest foreign investor and a major taxpayer. Over the last 10 years, Tullow has spent $2.8 billion in Uganda and discovered 1.7 billion barrels of oil, according to the company statement. Tullow said it spent this money on "the understanding that our contracts with the government, which contained important incentives to invest that were vital at a time when no oil had been discovered in Uganda, would be honoured."
The statement further reads that the ruling from the tribunal is lengthy and deals with a number of different issues and will therefore require significant further legal evaluation.
"However, Tullow can confirm that the tribunal has ruled against Tullow on the key issue of the express tax exemption contained in the Production Sharing Agreement for Exploration Area 2," the statement reads in part.
"A specific Capital Gains Tax exemption was included in the EA2 PSA. Tullow is extremely disappointed that the Tax Appeals tribunal ruled that the then minister of Energy did not have the legal authority to grant such an exemption."
Tullow believes that the Tax Appeals tribunal has erred in law and Tullow said it will challenge the EA2 assessment through the Ugandan courts and international arbitration but "hopes that further direct negotiation with the government can resolve this matter."