The respondent’s second witness was Mr. Moses Mesach Kajubi, its Commissioner Domestic Taxes. The Domestic Tax Department is responsible for collecting all domestic taxes in Uganda inclusive of income taxes.   Sometime in October 2010, the department received the SPAs of Tullow, Total and CNOOC. The department studied the SPAs and realised that Tullow was selling its interests to Total and CNOOC. On the 18^th October 2010, the respondent issued assessments to Tullow. The assessments were issued because it was a one off transaction and it was of substantial value. The respondent revised the assessments on the applicant. A revised assessment was issued in February 2012 which was again revised in November 2012.  What changed between the earlier assessments was that the cost base changed from US$ 1.299 billion to US$ 1.3136871116 billion because Tullow paid an extra US$ 13.687 million dollars to Heritage. There was also new information that Tullow incurred more costs from US$ 57,000,000 to US$ 61,903,387. The effect of the changes was to reduce the total tax payable to US$ 467,271,974.

The respondent in computing taxes made some deductions. These included the signature bonus in respect of EA 1 and EA 3A. Excess costs were allowed. The recoverable costs that had been sold by Heritage Oil were subtracted. The incidental expenses incurred by Tullow of US$ 47 million were allowed. The net gain for TUL was computed at US$ 1,303,081,531 and the tax at 30% was US$ 390,924,460. For TUOP the net gain was computed at US$ 28,332,200 and taxed at 30% bringing the tax to US$ 84,999,660. The total tax payable was US$ 475,924,120.05. Tullow objected to the assessments of the said taxes on the 1^st December 2010. An objection decision was made on the 24^th February 2011.   The assessments did not remain the same. Costs of about US$ 10,586,638 were accepted.

These costs were related to guarantee commitment fees and legal fees of US$ 457,397 dollars and stamp duty of US$ 14,500,000. The assessments were revised to US$ 387,748,468.65 for TUL and US$ 84,999,660 for TUOP bringing the total to US$ 472,748,128.65.   The respondent rejected the applicants’ objection to have no tax paid in relation to EA2 as a result of Article 23.5 of the PSA. Mr Kajubi argued that Article 23.5 of the EA2 PSA was not part of the ITA. The PSA was not an international agreement. Tullow is not an international organisation and the PSA was not ratified in accordance with the ratification of laws.  Mr. Kajubi also argued that the powers to levy tax in Uganda are vested in the Parliament. The said income was not exempted by Parliament. The Ministry of Energy could not take away the power of Parliament to grant exemptions. Mr. Kajubi argued that capital gains tax is not a transfer tax and therefore is not exempted by the ITA.   Mr. Kajubi argued that excess costs should be used in the computation of taxes.

Excess costs are relevant in subsequent disposals. Tullow argued that excess costs were nil. However the respondent argued that excess costs were US$ 150 million. According to Mr. Kajubi, excess costs reduce the cost base on the subsequent disposal. Mr. Kajubi argued that when a subsequent disposal is made, a taxpayer is only restricted to excess costs.   Mr. Kajubi testified that the recoverable costs incurred by the applicants were rejected as deductions. This is because they are available for recovery under the SPA. To allow them would give the taxpayer a double benefit.   As regards the issue of reinvestment relief, Mr. Kajubi stated that the respondent did not get any evidence of an involuntary disposal. In order for an involuntary disposal to take place it must be done against one’s will.

Tullow was willing to sell its interests. There was no evidence to show that Tullow was forced to sell the extra 16.67% of its interest. According to Mr. Kajubi what was required to prove involuntary disposal would be a letter, a decree or something in writing. Secondly, the proceeds of an involuntary disposal should be reinvested in an asset of a like kind. This has to be done within one year of the disposal. He contended that the transaction was concluded in March 2012 and there is no evidence that there was reinvestment within one year from the date of disposal. Any expenses that would be brought to the attention of the respondent would be used to make an adjustment. Mr. Kajubi opined that the assets of a like kind should be an investment in an interest in another PSA..   Mr. Kajubi said the sale price for the interests in EA1 was US$ 775 million and on EA3 was US$ 575 million. These figures were picked from the SPAs. The cost base was US$ 746,152,777 for EA 1 and US$ 553, 597,222 for EA2.

He also argued that the economic loss claimed by the applicants was a creation and not real. The purported economic loss arose from Tullow claiming that what were sold first were Heritage’s interests. Out of the 66.67% interest sold, 50% was what was purchased from Heritage. Therefore the cost base for that should be accepted as a cost in the computation of the loss. The loss was a result of the ‘last in first out’ (LIFO) in the allocation of costs approach. If the ‘first in first out’ (FIFO) approach was used there would be no loss. The gain for FIFO approach is about 230 million dollars.

Pages: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57