The respondent argued that the applicants’ invocation of the international law principle of pacta sunt servanda (sanctity of contract) provides no support that the principle overrides the ultra vires principle. The respondent contends that the applicants abandoned their arguments based on international law. On issue 2, the respondent submitted that TUL purchased a 50% undivided interest in the licences and agreements in relation to EA1 and EA3A from Heritage. It therefore obtained 100% ownership interests in EA1 and EA 3A. TUL and TUOP owned 50% undivided interests in EA2. After a sale to CNOOC and Total the holdings were as follows: In EA1 TUL, Total and CNOOC had 33.33% interests each; in EA2 TUOP, Total and CNOOC had 33.33% interests each and In EA3A TUL, Total and CNOOC had 33.33% interests each.
After receiving the SPAs, the respondent raised assessments in October 2010. The applicants objected to the assessments on various grounds. In particular that they had incurred more incidental costs. Following a review of the applicants’ objections, the respondent issued another objection decision and increased the incidental costs and disallowed other items. The respondent received further information from the applicants and increased the allowed incidental costs to US$ 61,903,387 which resulted in a tax liability of US$ 467,271,974. The respondent communicated the current assessments to the applicants on 2nd November 2012.
The applicants paid the 30% deposit of the tax before filing the application leaving a balance of US$ 325,447,536/=. The respondent determined that the applicants had a taxable gain of US$ 1,113,332,200 from the sale of the EA2 interests, a taxable gain of US$ 449,831,550 for their sale of the 50% undivided interests in EA1 and EA3A (the “original interests”) and a loss of US$ 25,590,503 from the sale of a portion of their 50% undivided interests in EA1 and EA3A (the “Heritage Interests) for a total taxable gain of US$ 1, 557,573,247.
In calculating the applicants’ gains, the respondent disallowed pre-existing petroleum operations costs of US$ 320,545,819 from being included in the applicants’ cost base because such expenses were deductible against cost oil pursuant to S. 89C of the ITA. The respondent also disallowed a deduction for interest expense of US$ 113, 429,096 under the thin capitalisation rules under S. 89 of the ITA, which it contended was not in dispute. The respondent also disallowed the applicants from using a loss of US$ 20,987,930 on EA3A to reduce their gain on the sale of their EA3A interests because such loss related to a separate contract area, EA3, and was only available to offset cost oil from the area under S. 89C of the ITA, which is not in dispute. The respondent also disallowed the applicants’ claim that they are entitled to US$ 164,721,000 as reinvestment relief under S. 54(1) (c) of the ITA.
The respondent submitted that where a contractor as an original owner of interests disposes of them, S. 89G(c) is applicable. It provides that the cost base for calculating any capital gain or loss is determined under Part VI of the ITA. The general rules for the calculation of capital gains under Part VI are contained in S. 52 of the ITA. More specific rules for the treatment of expenditures incurred in relation to petroleum operations are set forth in S. 89C of the ITA. S. 89C (1) provides that the amounts deductible in relation to petroleum operations are allowed only as a deduction against cost oil. The respondent submitted that under S. 89C of the ITA a contractor’s petroleum operations expenditures are allowed deductions, which when they exceed the cost oil for a given year, the contractor carries them forward into subsequent years. The respondent submitted that the specification that deductions may be taken “only against cost oil” precludes them from being included in an assets’ cost base pursuant to S. 52(6) of the ITA.
Pages: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57