Uganda's cabinet last week passed the East Africa Crude Oil Pipeline (EACOP) Bill 2021, putting in place a supreme legal framework that defines key sections of the tax regime for the project, and the rules around how locals will participate in offering goods and services.
The bill is one of the last crucial documents needed to formalize the start of the construction of the pipeline. Uganda has set a target of April 2025 to produce its first commercial barrel of oil. The bill still needs to go to parliament for debate, although there is no official declaration over exactly when that will happen.
While Uganda has signed a number of agreements for the East Africa Crude Oil Pipeline project, such as the Host Government Agreement, this bill is meant to offer clarity and avoid any clashes in the interpretation of the law.
The new EACOP bill also offers the joint venture partners of the project - France's TotalEnergies and China's Cnooc - confidence that their investment is protected from any change in law through the insertion of a stabilization clause. The EACOP bill overrides any other act when it comes to the pipeline project.
"This Act takes precedence over all existing laws relating to any matter under this Act, and where there is a conflict between this Act and any other written law, other than the Constitution, this Act shall prevail," the bill reads in part.
Nothing has created debate over the last decade among the joint venture companies and the government of Uganda more than the tax regime in the country's oil industry.
The disagreements between the two sides have seen amendments to the Income Tax Act as Uganda rushed to seal any loopholes from its oil tax basket.
The oil companies have also in the past complained of Uganda's flip-flopping amendments around the Income Tax Act as moves meant to target them.
The new EACOP bill defines what taxes the pipeline company will pay. But it is government's fears over the negative impact of double taxation treaties that the bill lays bare.
Uganda has missed out on billions of shillings as international companies have engaged in aggressive tax planning in order to shift profit out of resource countries such as Uganda to low- tax jurisdictions. The companies exploit the double taxation treaty to achieve their goal of paying lower rates.
The rule dictates that double taxation treaties reign supreme over local legislation.
"In many respects, DTAs encourage financial transparency. The flipside, however, is that the tax rates for the nonresident investors deriving passive income from Uganda (such as dividends, interests, royalties, and technical fees) are far too low, most of them having been negotiated over 10 years ago without being adjusted for economic changes over time," a 2018 report, titled, A Scoping Study of Illicit Financial Flows Impacting Uganda, by the Washington-based think tank, Global Financial Integrity, notes. It adds: "Whereas the low rates may attract investors, they could also enable illicit financial flows."
However, the new bill tries to minimize these flows. According to the new bill, the pipeline company, which will be incorporated in the United Kingdom, will be treated as a resident in Uganda for tax purposes.
"The Project Company shall be a company incorporated in England and Wales and with its management; control and place of effective management shall be in Uganda," the bill points out.
The project company will enjoy some tax benefits. For example, the tariff income from operating the EACOP system will not be subjected to corporate income tax for a specified period. Also, the importation of goods for the EACOP will not be subjected to withholding tax.
For a long time, experts have advised that tax might not be the cash cow from Uganda's oil industry; rather, the jobs created in the industry. It is a sentiment that Uganda's government appears to share now.
The bill is quite heavy on the local content rules that the industry will have to abide with. The bill calls for Ugandans to be given first priority during the procurement process provided they meet the criteria the project company is looking for.
Where Ugandans do not meet the standards, foreign companies are called to partner with the local suppliers. Also, the bill says that a foreign company that has a stronger local content within its proposal should win a tender if the bid price difference is less than five per cent.
Other than that, there are other contracts that have been ring-fenced purely for Ugandans. The bill encourages foreign companies to have training and succession plans for Ugandans.
The Petroleum Authority of Uganda has been given powers to monitor and ensure that companies abide by the local content rules. Companies will have to submit periodic local content plans to PAU as part of the supervision process.