Exploration expenditures are by their very nature incurred prior to the commencement of commercial production The Act is silent as to when the entitlement arises. Is it when oil is discovered or when oil production starts or when costs are deducted and the excess is carried forward? S. 89A (1) defines recoverable costs to mean a cost of a contractor that is recoverable under a petroleum agreement. Article 10 of the EA2 PSA and Article 12 of the EA1 and EA3A PSA state that the licencees shall carry forward to subsequent years all unrecovered costs until full recovery is completed. According to the PSAs, is any unrecovered costs excess costs? Once again the PSAs are also silent as to when the right to cost recovery becomes absolute. While the applicants’ argument points to excess oil being due when oil production starts the respondent refers to them as any unrecovered costs.   S. 89C of the ITA states that excess costs may be deducted against cost oil until excess is fully deducted or the petroleum operations in the contract area cease. Petroleum operations have been defined to include exploration, production and development. According to the said Section, petroleum operations need not cease at production level, they may even cease at exploration level.

This means excess costs are deductible before production starts. Excess costs which are in effect deductible or allowable costs are accumulated along the value chain until deducted or oil the oil operation ceases. If there is no oil production the contractor losses the opportunity to recover the deductible costs.   S. 89C (2) should be read together with S. 89G (a). S. 89G (a) states that any excess costs attributable to the interest at the date of disposal. The word “attributable” is defined by Oxford Advance Learner’s Dictionary 6^th Edition p. 63 to mean “probably caused by the thing mentioned”. According to S. 89G(a) if there are any excess costs that can be traced to the interest at the time of disposal they should be deducted. The time of disposal, as was in the case of the applicants was at exploration level. There is nothing that prohibits the respondent from deducting excess costs deductible by the transferee contractor from the cost base when production has not started. As long as the excess costs can be attributable to the interest at the date of transfer or disposal of interest, the S. 89C (2) provides for them. In reality excess costs are recovered against cost oil when oil production starts. For purposes of valuation, what are deemed excess costs are allowable or deductible costs even when oil production has not commenced.

They can be considered as an asset.   As to what excess costs may mean one has to look at the intention of the Parliament. In interpreting statutes, courts may use a purposive approach where the term used is unclear. In Crane Bank v Uganda Revenue Authority HCT-00-CA-18-2010 his Lordship Kiryabwire stated that: “The position of the law is that if any doubt arises from the words used in the statute where the literal meaning yields more than one interpretation, the purposive approach may be used, to determine the intention of the law maker in enacting of the statute. (See Justice Choudry in the case of UGANDA REVENUE AUTHORITY V. SPEKE HOTEL (1996) LTD (CA No. 12 of 2008). The purposive approach has been used in several cases.

In the case of Sussex Peerage (1844) 8 ER at 1057, it was held that “If the words of the statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense. The words themselves alone do in such case best declare the intention of the law giver but if any doubt arises from the terms employed by the legislature, it has always been held a safe means of colleting the intention to call in aid the grounds and cause enacting the statute and to have recourse to the preamble which according to Dire CJ is ‘a key to open the minds of the makers of the Act and the mischiefs they intend to redress.” Lord Griffiths in the case of PEPPER V. HART [1993] 1 ALL ER 42 at p 50, also held that: “The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt a literal meaning of the language. The court must adopt a purposive approach which seeks to give effect to the true purpose of the legislation and are prepared to look at much extraneous material that bears on the background against which the legislation was enacted.” Since the application of the term ‘excess costs’ may have different effects depending on its interpretation, the Tribunal will use the purposive approach to ascertain what was the intention of Parliament.   Black’s Law Dictionary 8^th Edition page 222 defines a capital gain as “the profit realised when a capital asset is sold or exchanged.” It defines capital gains tax at page 1496 as a tax on income derived from the sale of a capital gain. The purpose of capital gains tax is to collect income tax from that gain. Under S. 52 (6) of the ITA, “expenditures incurred to alter or improve an asset -which would not have been allowed as a deduction are added to the cost base of the asset.” Under Petroleum Sharing Agreements a contractor is entitled to recover his cost. At the time the ITA was enacted, in 1997, petroleum operations and transfers of interests under the PSA had not been anticipated.

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