The applicants submitted where there is a first disposal the rules fix the cost base by taking into consideration what the taxpayer expended on the interest. The applicants contended that the transfer of the original interests and the EA2 interests were subject to the regime in S. 89G(c) of the ITA. The applicants contended that the cost base of the original EA1 and EA3A interests and the EA2 interests included incidental expenditure incurred to purchase, produce, construct or improve these interests. The incidental expenses that were communicated by the applicants to the respondent were 47 million   Part IXA contains separate charging rules for subsequent transfers of interests in petroleum agreements in S. 89G(d). Where there is a subsequent disposal the rules allow a deemed cost base, which is the gains made by the person the taxpayer bought from, then it is reduced by excess costs. The disposal of the Heritage interests to CNOOC and Total was a “subsequent disposal.”

The transfer of Heritage interests was subject to the regime in S. 89G(d) for subsequent disposals. The applicants are the “transferee contractors” and Heritage is the “Transferor Contractor”. In determining the applicant’s cost base for the gain in the disposal to Total and CNOOC it is Heritage’s gain which was computed at US$ 1,450,000,000 as held in Heritage Oil and Gas Limited v URA Applications 26 and 28 of 2010. The transferor contractor’s gain is deemed to be the transferee contractor’s cost base.   The applicants submitted that deductions in income computation is dealt with by S. 89C of the ITA. The applicants further submitted that S. 89C allows expenditure on petroleum operations as a deduction in respect of income only against cost oil, if there is none, the expenditure is carried forward. Cost oil is defined in S. 89A. S. 89C(1) provides the rules for deductions allowable against income by allowing them only against cost oil.

Thus the income deductions are given against cost oil only from the year in which commercial production commences, which has not started. As the applicants have no cost oil, the applicants have not deducted anything. Therefore in respect of the original interests and EA2 interests there was no deduction allowed.   The applicants contended that excess costs are not defined. However reference to the term may be obtained from S. 89C(2) of the ITA. Excess costs under S. 89G(d)(i) are the excess of the total deductions given in relation to petroleum operations less the cost oil for the year of income. The applicants contended that excess costs cannot arise as commercial production has not started. There are no excess costs to be taken into account and none to deduct from the cost base under S. 89G(d)(i).   The third issue was in respect to the applicants’ entitlement to reinvestment relief. S. 54 of the ITA provides for involuntary disposals and the entitlement to reinvestment relief. The applicants had to show that the disposal was involuntary and the proceeds are to be reinvested in assets of a like kind within the specified period.   The applicants farmed down an aggregate of 66.67% of their interests. The applicants argued that they intended to dispose of 50% of their interests.

They needed GOU’s approval for the sale. The GOU wanted three equal partners to invest in the Lake Albert Basin. Since the applicants needed that GOU’s consent to proceed with the sale, they had no choice but to dispose 66.67% of their interests. The disposal of the extra 16.67% of the interests was not made voluntarily.   The applicants cited the authorities of Building Society v Commissioners of Inland Revenue 65 TC 265 and URA V Bank of Baroda HCT-00-CC-CA-05-2005, which broadly interpreted and discussed “involuntary” disposal. The applicants referred to the evidence of AW2, Mr. Paul McDade, who submitted at length the applicants’ desire to dispose of 50% of their interest. The applicants submitted that investment in assets/rights which are dealt with under the PSAs constitutes an investment in assets of a like kind. The applicants also submitted that they had incurred US$ 164,721 as reinvestment relief for the period of March 2012 to February 2013. However, the applicants also contended that, since the hearing before the Tribunal occurred before the one year period expired evidence of their expenditure on assets of a like kind would not be given.

Having discussed the powers and jurisdiction of the Tribunal, the applicants prayed that the assessments and the objection decision of the respondent be set aside. They also prayed that the Tribunal finds that Article 23.5 of the PSA is valid under the laws of Uganda and therefore they are entitled to exemption from payment of capital gains tax. They also prayed that all the costs incurred by the applicants, including exploration costs be allowable under S. 52 of the ITA. They prayed that the Tribunal finds that there is no restriction to be made for excess costs for purposes of S. 89(G)(d) of the ITA.

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