It does not make economic sense to compute the cost base of an asset and exclude costs which the contractor will recover when production starts.   The result of the modification of Part IXA on Part VIA is to allow the taxman to compute the cost base as the amount involved in acquiring the asset plus incidental costs of a capital nature incurred. Excess costs that have been incurred at the time of the disposal of the interest should be part of the cost base. Likewise excess costs that have been incurred are allowable deductions as prescribed in S. 89C (2) of the ITA.   S. 89G (a) deals with the disposal of original interests. The disposal of Tullow’s pre-existing interests which were not purchased from Heritage would be considered as such. S. 89G (a) provides that any excess costs under S. 89(c) attributable to the interest at the date of the disposal are deductible by the transferee contractor. S. 89G defines a transferor contractor as one who disposes of an interest in a petroleum agreement and the ‘transferee contractor’ as a person who receives the interest or who as a result becomes a contractor in relation of the operations. From the said definitions it is clear that the applicants were transferor contractors while CNOOC and Total are transferee contractors.

Therefore any excess costs are at the date of disposal are deductible by CNOOC and Total, as transferee contractors.       (ii) Subsequent disposal   Part IXA modifies Part VI of the ITA. In respect of subsequent disposals of interests under petroleum agreements, S. 89G (d) under Part IXA of the ITA provides that: “in a subsequent disposal of the whole or part of the interest disposed under paragraph (c), the cost base for the purposes of calculating any capital gain or loss on disposal of the interest is the amount of the transferor contractor’s capital gain 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” The effect of S. 89G (d) is to modify the application of Part VI of the ITA in respect to the latter’s application to subsequent transfer of interests of petroleum agreements. What is peculiar about S. 89G (d) is that it computes the capital gain or loss on a disposal of an interest using the gain by the transferor contractor on a prior disposal of an interest which is unrelated to the gain made in the subsequent transfer.   iii) COMPUTATION OF THE APPLICANTS’ TAX LIABILITY   The Tribunal having found that the exemption granted to the applicants in respect of EA2 cannot hold; that the doctrines of estoppel and legitimate expectation do not help the applicants and having discussed the rules that apply to the transfer of interests of petroleum agreements, have to apply what was discussed in computing the applicants’ tax liability taking into consideration the evidence adduced.

(a)  Receipts   It is not in dispute that the applicants disposed of their interests in EA1, EA2 and EA3A to CNOOC and Total for US$ 2,933,330,400. What was in dispute was whether the applicants disposed of Heritage’s interests first and later their pre-existing interests. The Tribunal concluded that the LIFO accounting method, preferred by the applicants, was inappropriate. The respondent had proposed as an alternative the application of the FIFO accounting method. In discarding the applicants’ LIFO accounting method, the Tribunal noted that what the applicants sold were intangible interests. It is not feasible to separate intangible interests acquired at different times. One cannot treat portions of undivided interest as separate and distinct assets. Therefore if the Tribunal cannot tell whether the applicants sold their last interests purchased first, nor is it in a position to say that it was the interests purchased first that were sold first.

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