The applicant’s third witness was Mr. Richard Inch, the Head of Tax for Tullow. The applicants are subsidiaries of the Tullow. He is a Chartered Accountant and a Chartered Tax Advisor and has held a number of senior tax positions. His duties involved the overall management of the group’s tax affairs.   He stated that following the acquisition of Heritage’s interests in EA1 and EA3A, Tullow agreed to sell a part thereof to Total and CNOOC. Tullow had intended to sell 50% of the interests in EA1, EA2, and EA3A. However before the GOU would grant the necessary consent, it required Tullow to sell a further 16.67% of the remaining interests. He stated that in a meeting of the 2^nd February 2010, with Mr. Lawrence Kiiza the Director of Economic Affairs, he was told that GOU was not going to allow a sale of only 50% of the PSA and wanted a single distinct operator for each PSA, with each taking 33.33% interest. Mr. Inch testified that there were no minutes for the meeting he had with Mr. Kiiza, It was a conversation. There was no official communication.   He deponed that, on the 18^th October 2010, the respondent raised assessments on Tullow. The completion of the disposal took place on the 27^th February 2012. In response to the assessments, Tullow filed an objection on the 1^st December 2010.

Mr. Inch, in his statement, averred that before 2008, there was no specific taxation regime for oil companies in the ITA though the PSAs contained relevant tax provisions. In 2008, the Ministry of Finance introduced a specific code in relation to petroleum operations by the insertion in the Income Tax Act 1997 of a new Part IXA by the Income Tax (Amendment) Act 2008. The 2008 Amendment Act, which was published on the 30^th June 2008 had retrospective effect from 1^st July 1997. Part IXA under S. 89G (a) provides for taxation in cases of transfer of interests. The deponent felt that the said Act did not impact on Tullow, in particular the EA2 PSA, because it had obtained an exemption.

Mr. Inch testified that around the time the 2008 Amendment Act was passed, Tullow was in discussion with its banks regarding funding of its operations. A farmdown was an important part in its financing plans. It assumed that the farmdown proceeds would be received tax-free. In relation to the EA1 and EA3A PSAs, he thought that the new Part IXA in the ITA provided for exemptions in relation to the interests in the said PSAs.   Mr. Inch emphasized that Tullow did not anticipate any taxes. This was because the EA2 PSA was a legal and binding agreement. It had an exemption from capital gains tax in Article 23.5. Mr. Inch stated that: “the obligations under the PSAs were negotiated in good faith on the basis of the stability and certainty of the Uganda fiscal regime…” However, he stated that Mr. Kiiza told Tullow that there were views within the GOU that the EA2 exemption was not valid.

Tullow was informed that the URA had in mind a tax liability of around US$ 470 million which indicated that the GOU did not accept that Article 23.5 of EA2 PSA gave an exemption.   Mr Inch argued that the sovereign state of the Republic of Uganda had the authority to enter such agreement and therefore could not collect tax. According to Mr. Inch, the terms of the PSA prevailed in case there was a conflict with the ITA.  Tullow had the right to expect GOU to keep its words as set out and agreed in Article 23.5 of the PSA. According to Mr. Inch, GOU has given exemptions to other companies, for example Bidco.

Mr. Inch also submitted that Tullow’s cost base was the Heritage gain subject only to any potential deduction in respect of excess costs. He stated in his statement that Tullow has no excess costs. Tullow paid the base price of US$ 1,350 million and a contingent consideration of US$ 100 million. Tullow also paid an additional US$ 13,937,116 in respect of the working capital at completion. Tullow paid a guarantee cost of US$ 46,061,058, stamp duty of US$ 14,500,0000 on acquisition and legal fees of US$ 1,079,077 giving to total incidental costs of US$ 61,140,135.   In cross examination, Mr. Inch testified that the ITA imposed capital gains tax subject to the provisions of the SPA. He also testified that the proceeds from the farmdown would be used for exploration, production and development.   Mr. Inch informed the Tribunal that Heritage and Tullow had indivisible interests. There was no way one could split and say what is for Tullow and what is for Heritage.

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