If the Uganda Revenue Authority did so, the Tribunal will not fetter its discretion. In the US authority of John K. McNulty and another v Commissioner of Internal Revenue, T.C. Memo., 1988 – 274, the 2nd petitioner sold an undivided interest acquired from her ex-husband, Robert, to the 1st petitioner, John, the current husband. The 2nd petitioner, Babette, acquired the ex-husband’s interest in the house for the purpose of selling it to the 1st petitioner, and was merely a conduit or agent for the ex-husband. The court noted that she took the title in her own name, and then waited for 6 months before deeding the one-half interest to the 1st petitioner. During that time, she was the owner, and could have disposed of the residence as she pleased. The court stated that “In appropriate circumstances a court will ignore the form of the transaction according to its substance.” The court noted that “where we find the parties clearly intended the form they chose, and where that form had an obvious tax purpose”.
The court further noted that: “Moreover, Babette’s and John’s reporting of the sale does not comport with their ‘conduit or agent’ theory. Had Babette been a true conduit or agent, she would not have been considered the owner of Robert’s interest at all, and would have had no gain, or even any sale, to report. Robert would be deemed to have sold the half interest to John.” The court held that: “A taxpayer who owns two undivided one half interests in property, received at different times, and disposes of an undivided one-half interest is deemed to have disposed of 50 percent of each of the halves he owned.” The Tribunal is mindful of the fact that the above case is an authority from the US. The Tribunal finds the said authority persuasive. The above authority dealt with undivided interests in immoveable property like the matter before the Tribunal. Like in the above authority, Tullow owned the purportedly interest of Heritage for a period of two years. During that time it could have disposed of the interest as it wished. Tullow chose the form it wished, which had an obvious tax purpose. If the Tribunal were to consider that Tullow was an agent for Heritage, Tullow would have no gain or loss to report of. The court would find it appropriate to ignore the form of the transaction and look at the substance. The acquisition of Tullow of different interests at different times shall be deemed to have been disposed proportionally to the number of blocks it owned.
S. 40 (1) of the ITA requires that a tax payer’s method of accounting to conform to generally accepted accounting principles. Uganda already adopted International Accounting Standards. International Accounting Standard 2, inventories, IN13 is titled “Prohibition of LIFO as a cost formula”. It reads: “The Standard does not permit the use of the last-in, first-out (LIFO) formula to measure the cost of inventories.” Hennie Van Greuning, Darrel Scot and Simon Terbanche in International Financial Reporting Standards notes that: “IAS 2 does not allow the use of last-in, first-out (LIFO) because it does not faithfully represent inventory flows. The IASB has noted that the use of LIFO is often tax driven and concluded that tax considerations do not provide a conceptual basis for selecting an accounting treatment. The IASB does not permit the use of an inferior accounting treatment purely because of tax considerations.” In the circumstances, the Tribunal shall not use the LIFO method as a cost formula.
This means that the Tribunal shall not accept the notion that the interests Tullow sold first were those of Heritage. The Tribunal also finds that the respondent’s use of the ‘first in, first out’ (FIFO) is irrational like in the ‘last in last out’ (LIFO) method. If the interests were indivisible then how could the respondent determine which interests were purchased first and which interests were sold first. There is no reasonable justification as to why the respondent applied the FIFO method. (ii) COMPUTATION OF CAPITAL GAIN ON TRANSFER OF INTEREST In order to apply the provisions of the ITA, one needs to understand how the oil and gas sector works and the stage at which the oil operation in Uganda had reached at the time of the transfer of interests.
It was an agreed fact that oil had been discovered in Uganda. However, there is no evidence that oil production had started. Oil exploration and production are upstream activities. Once oil is discovered, the considerable risk involved in oil exploration is removed. The costs involved in exploration are carried forward in the future where they can be recovered from revenue derived from production from the reserves. Hence the income tax provisions have to take into account the costs carried forward and to avoid a situation where there may be double deductions, losses incurred and excess costs. The ITA provides for special provisions for the taxation of petroleum operations in Part IXA of the Act. Part IXA inter alia, deals with the transfer of an interest in a petroleum agreement.
The relevant Section dealing with capital gain or loss in a transfer of interests in a Petroleum Agreement is S. 89G of the ITA which reads: “Where a contractor, in this Part referred to as the “transferor contractor” disposes of an interest in a petroleum agreement to another contractor or a person that as a result of the disposal will become a contractor in relation to those operations, in this Part referred to as the “transferee contractor (a) any excess costs under S. 89(2) attributable to the interest at the date of disposal, are deductible by the transferee contractor, subject to the conditions prescribed in that section; (b) the transferee contractor continues to depreciate any allowable contract expenditure attributable to the interest at the date of disposal in the same manner and on the same basis as the transferor contractor would if the disposal had not occurred; (c) the cost base for the purposes of calculating any capital gain or loss on disposal of an interest in a petroleum agreement will be determined in accordance with Part VI of this Act; (d) In a subsequent disposal of the whole or part of the interest disposed of under paragraph (c), the cost base for purposes of calculating any capital gain or loss on disposal is the amount of the transferor contractor’s capital gain or loss on the prior disposal of the interest if any, less the sum of- (i) the excess costs up to the date of disposal that are deductible by the transferee contractor under paragraph (a); (ii) the depreciation of capital expenditure incurred up to the date of disposal that is deductible by the transferee contractor under paragraph (b); and (e) the amount of the transferor capital loss on the disposal of the interest, if any, is treated as income of the transferee contractor on the date of the transfer of the interest.” S.89A (1) of the ITA defines petroleum operations to mean “exploration operations, development operations and production operations authorised under a petroleum agreement.”
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