Museveni locks out oil investors

Big money at stake

A 2017 internal study commissioned by local office of the UK Charity, Oxfam, titled Securing a Fair Share of Ugandan Oil Revenues: A Revenue Risk Assessment Focused on TOTAL SA concluded that while Uganda has already demonstrated a strong commitment to protect its revenue interests during the exploration phase, mega risks lay ahead. Uganda won the Capital Gains Tax dispute with Heritage, the stamp tax dispute with TOTAL. It has also reviewed Double Tax Agreements, and its Office of the Auditor General has done recovery cost audits.

But the money in the next phase, the development phase, the study noted, will dwarf those of the exploration phase.

Oxfam, which is headed by Winnie Byanyima; a Ugandan, did not stop at commissioning this study—it shared findings with Museveni and his army of technocrats at Finance, Energy and even URA, insiders say. A source who attended one such meeting at State House Entebbe said the President couldn’t stop taking notes.

“Many hundreds of millions of dollars are at stake,” an Oxfam study noted, adding that Uganda faces major revenue loss risks through treaty shopping, the mispricing of oil sales, the inflation of project costs and potential profit shifting to the pipeline. And it appears officials are keen to limit these potential leaks.

President Museveni firmly belongs in the camp that plays hardball in negotiations. And the situation is not helped by the lead negotiator for the oil executives, Patrick Pouyanne, the Total SA chief executive. Pouyanne has built his executive management reputation around one issue; cutting costs.

Within Total, Pouyanne has built his career partly by cutting costs.

Since he took over in 2014, Pouyanne has elevated the company’s financial performance, partly through cost cutting. Given this, Pouyanne is not likely to be any softer on any of these issues that rotate around costs of the oil projects.

Total E&P, has already sued over order a government order (statutory instrument) seeking to control key decisions on midstream activities; including over the $ 3.55 billion East African Crude Oil Pipeline (EACOP). Total E&P is the main investor in the pipeline.

Total E&P sees these new rules as regulatory overreach partly because they grant government more control on the costs of midstream infrastructure, specifically, in the case of the French oil giant, the costs of the pipeline.

However, the Midstream Act empowers government to approve the pipeline tariff (now set about $ 12.7 per barrel of oil) and Museveni’s technocrat see this as a basis to have a say on the investment costs of the EACOP. Apart from this, experts say since government will own a stake in the pipeline, it has fair ground to claim a say on the costs as these have a bearing on the commercial viability of the project. That fight is still raging. Insiders say negotiations could soon resolve it.

Fight over taxes

But at another level, government and oil companies are involved in hot exchange over three tax issues.

One, government insists Total E&P cannot deduct tax costs worth over $600 million arising from the Tullow oil farmout deal. The URA and officials at the Energy Ministry cite the tax laws to insist that Tullow Oil had already booked the same as losses and as such these cannot be transferred.

Apparently, according to the law, these losses can only be inherited if the buying company is buying shares. Total and CNOOC are not buying shares—they are buying assets. The companies are also insisting that they are incurring these costs and therefore, they should be treated as tax losses the same way they were treated under Tullow.

Two, government insists the companies should pay income tax on first oil, meaning immediately oil starts flowing. This stems from a 2017 amendment of Income Tax Act. As a result of this amendment, government demands that oil companies pay income tax immediately oil starts flowing. Ordinarily, income taxes are imposed on profits, experts say. According to Production Sharing Agreements (PSAs), oil companies are supposed to start paying such taxes after recovering their costs, which according to some estimates could be in like six years of steady oil production.

Experts say that companies in other sectors are allowed a full deduction of their business costs in determining their income tax liability. They argue that denying oil companies full deduction of their annual business expenses, as government seeks to do, is contrary to normal principles of income taxation.

Three, the government wants the pipeline holding company, the Special Purpose Vehicle (SPV) for the pipeline, which will be registered in the UK to be a tax resident in Uganda, where it will have to pay taxes on its operations.

On top of this, government wants the same company to pay withholding tax (15 %) on dividends before they are paid to the UK Company.  The companies are saying no.

This is all part of on-going negotiations for the Host Government Agreements (HGA). The oil companies have to enter HGAs with both Uganda and Tanzania, where the biggest portion of the pipeline passes all the way to the coast in Tanga. The agreements spell out obligations of the two governments and the oil companies, amongst others.

Insiders tell The independent that the matters before court case could be resolved soon. But the tax issues could drag on because they are many and have long term impact.