If the pre-existing interests were 16.67% when they increase to 33.33% the signature bonus doubles. Where the interests were 50% and are reduced to 33.33%, the expenses incurred in the cost base and incidental expenses are proportionately reduced. This means the cost base and incidental expenses are reduced by a third. The weighted costs approach or the costs incurred in proportion to the interests has the effect of reducing the cost base. The effect of using the averaging or equitable proportion method increases the gain in blocks EA1 and EA3A and hence the tax liability of the applicants. Using the above illustration the applicants’ tax liability before pre- investment would be US$ 551,445,970.   In TUL’s financial statements, Exhibit A22, it is indicated that the legal fees incurred were US$ 1,072,914. The respondent put it at US$ 459,318. That is a difference of US$ 613,596.  The respondent submitted that the guarantee arrangement fees were US$ 31,800,000, guarantee commitment fees were US$ 10,829,241 totalling to US$ 42,629,241.  The financial statements of TUL put the guarantee arrangement and commitment fees at US$ 46,549,850. That is a difference of US$3,920,609.

The said financial statements had an interest expense of US$  65,981,553 which the respondent did not consider. However the said interest expense is an incidental expense. The total of the above differences (i.e. 613,596 and 3,920,609) plus the interest expense of US$ 65,981,553 is US$ 70,515,758. TUL sold interests 33.33% of its interests from each block. The sale from both Blocks 1 and 3A constituted 66.67%.  66.67% of US$ 70,515,758 is US$ 47,010,505. Hence the above expenses should be proportionate to the interest transferred in the said block. Accordingly half of US$ 47,010,505 which is US$ 23, 505, 252 was added to the cost base of EA1 and EA2. See Note (A) on the incidental expenses in the cost base of EA1and EA3A.   The Tribunal agrees with the respondent’s decision to disallow the applicants from using a loss of US$ 20,987,930 on EA3 to reduce their gain on the sale of their EA3A interests because the said loss related to a separate contract area, EA3.

The respondent submitted and Mr. Kajubi testified that Tullow had incurred costs of US$ 150,000,000 as excess costs. However he did not tell the Tribunal how he came to arrive at the said figure. There is no report from the joint advisory committee, nor any audited report to substantiate the excess costs incurred. The respondent also submitted that it disallowed pre-existing costs of US$ 320,545,819 on the ground that they should be deducted against cost oil. However there is no evidence to show that the applicants ever presented the said figure to the respondent, nor is there any evidence to substantiate the said costs. There is no evidence that the said exploration costs of US$ 320,545,819 claimed to have been incurred by the applicants on EA1, EA2 and EA3A were audited. It is not clear which amount of recoverable costs were sold to Tullow by Heritage.

In the absence of any certified excess costs the Tribunal will not allow the deduction of US$ 150,000,000 by the respondent from the cost base.  The Tribunal has made adjustments as indicated in the table above by adding US$ 75,000,000 to the incidental expenses of Blocks 1 and 3A. Please see note (B) in the cost base of EA1 and EA3.   The respondent, in its submission, admitted that the applicants furnished further information that increased the incidental costs to US$ 61,903, 387 which resulted in a further reduction of tax liability from US$ 475,924,120 to US$ 467,271,971. That is a reduction of US$ 8,652,149. The respondents did not furnish the Tribunal with the further information that was given to it by the applicants.

Hence the Tribunal did not include the said information in the tabulation. However the Tribunal will reduce the tax liability of the applicants before the pre-investment relief from US$ 551,445,970 by US$ 8,652,149 to US$ 542,793,821. The said tax liability has been arrived at by making adjustments according to the evidence adduced before the Tribunal. The amounts may not necessarily be the actual ones incurred by the applicants. However the Tribunal has to make its ruling on the evidence presented.    (d) Pre-investment relief   The Tribunal has already noted that the applicants wished to transfer 50% of their interests.  However the applicants disposed of a further 16.67% of their interests which was held to be an involuntary disposal. 16.67% of 66.67% interests transferred is 25%. Hence the applicants are entitled to a tax relief of 25%. If the tax liability of the applicants before the pre-investment relief is granted is US$ 542,793,821 then the relief would amount to US$ 135,698,455 and the tax liability would be reduced to US$ 407,095,366 after the grant.

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