“Heritage Oil Block 3A Interest” means an undivided twenty five per cent. (25.000%) legal and beneficial participating interest in Block 3A acquired by Tullow from Heritage Oil prior to the date thereof.” Pre-Existing Interests were defined as: “Pre-Existing Block 1 Interest” means an undivided eight point three three three (8.3333%) legal and beneficial participating interest in Block 1 held by Tullow and not acquired from Heritage Oil; “Pre-Existing Block 3A interest” means an undivided eight point three three three three (8.3333%) legal and beneficial participating interest in Block 3A held by Tullow and not acquired from Heritage Oil;” A close perusal of Clauses 1.1 and 2.1 shows that the applicants purportedly sold all the Heritage Oil interests first and then the pre- existing/original Block 1 and Block 3A interests. According to the SPAs in respect of the sale of interests in Block 1, 2 and 3A all the interests (100%) acquired by Tullow from Heritage were sold to CNOOC and Total. Out of the 66.67% interest sold by Tullow to the CNOOC and Total 50% was Heritage interest and 16.67 % was pre-existing interests.
Taxpayers are allowed to arrange their affairs in such a way that they pay less tax. In Levene V IRC [1928] A.C. 217 it was stated by Viscount Sumner that: “it is trite law that His Majesty’s subjects are free, if they can, to make their own arrangements, so that their cases may fall outside the scope of the taxing Acts. They incur no legal penalties and, strictly speaking, no moral censure if, having considered the lines drawn by the Legislature for the imposition of taxes, they make it their business to walk outside them…” However for one to arrange his affairs in such a way he must comply with the law. Hence the applicant’s interpretation of their sale can be acceptable as long as it is in line with the law.
However, S. 91 of the ITA allows the Commissioner to re-characterise a transaction. S. 91 of the ITA reads: (1) For the purposes of determining liability to tax under this Act, the Commissioner may- (a) re-characterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme: (b) disregard a transaction that does not have a substantial economic effect; or (c) re-characterise a transaction the form of which does not reflect the substance. (2) A “tax avoidance scheme” in subSection (1) includes any transaction, one of the main purposes of which is the avoidance or reduction of liability to tax. Prof. D.J. Bakibinga Revenue Law in Uganda page 165 defines tax avoidance as: “…. some act by which a person arranges his affairs that he is liable to pay less tax than he would have paid but for the arrangement. Consequently the situation which he brings about is one which he is legally in the right, except so far as some rule may be introduced that puts him in the wrong.” According to S. 91(2) if the Commissioner feels the transaction entered into by a taxpayer has been entered into with the intention of reducing tax liability, he or she may exercise his powers under S.91 (a) of the Act and re-characterise it. Under S. 91(1) (b) the Commissioner may re-characterise a transaction where the form does not reflect the substance.
The respondent’s contention can be summarised as twofold. The first argument as stated in the evidence of Mr. Kajubi is that the applicants structured their transaction in a way that they created a ‘fictitious loss’. The second contention is to the effect that what the applicants sold as indicated in the SPA were indivisible. Undivided interest is defined by Black Law Dictionary 8th Edition p. 829 as “an interest held under the same title by two or more persons, whether their rights are equal or unequal in value or quantity.” The applicants sold what were intangible assets, so how could they have determined what was sold. The powers to re-characterise under S. 91 of the Income Tax Act are discretionary. The Tribunal cannot interfere with the Commissioner’s exercise of his powers unless he exercised them illegally, irrationally or without procedural impropriety. In Twinomuhangi Pastoli V Kabale District Local Government Council, Katarishangwa Jack & Beebwajuba Mary [2006] 1 HCB 30 Kasule Ag. J. (by then) held inter alia that; “2.Illegality is when the decision making authority commits an error of law in the process of taking the decision or making the act, the subject of the complaint. Acting without jurisdiction or ultra vires, or contrary to the provisions of a law or it’s principles are instances of illegality. 3. Irrationality is when there is such gross unreasonableness in the decision taken or act done, that no reasonable authority, addressing itself to the facts and the law before it, would have made such a decision. Such a decision is usually in defiance of logic and acceptable moral standards. 4. Procedural impropriety is when there is failure to act fairly on the part of the decision making authority in the process of taking a decision. The unfairness may be in the non- observance of the rules of natural Justice or to act with procedural unfairness towards one to be affected by the decision.
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