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Uganda scores tax victory in oil Host Government Agreement

President Yoweri Museveni signing the oil agreements

President Yoweri Museveni signing the oil agreements

In signing the Host Government Agreement for the East Africa Oil Pipeline on April 11, 2021, the Uganda government scored a major victory in ensuring that the project company is made resident in the country largely for tax purposes.

While the Host Government Agreement (HGA) will allow the project company – a special purpose vehicle - for the East Africa crude oil pipeline to be registered somewhere in England, in what is expected to be a tax haven, the company will be taken as a resident of Uganda, and will abide by the country’s tax rules.

“The Project Company will be resident, for tax purposes, in Uganda with its management and control exercised in Uganda and its place of effective management situated in Uganda…,” the HGA reads in part.

The project company for the East Africa Crude Oil pipeline has four shareholders. France’s Total E&P with a majority stake of 72 per cent, the Uganda National Oil Company with 15 per cent, China’s Cnooc with 8 per cent, and Tanzania Petroleum Development Corporation expected to take up the remaining five per cent. The project company is expected to be registered in one of the British Virgin islands, an area with low tax rates. 

Less than two months ago, a group of civil society officials, with support from Oxfam, authored a report, Illicit Financial Flows Risk Factors in Uganda’s Oil and Gas sector, where they raised fears about the element of oil companies being domiciled in tax havens.

The report notes: “…while Uganda has taken several critical steps to safeguard its oil revenues, and ensure that the oil sector is properly governed, illicit financial flows risk factors still exist. First, the study shows that the major international oil companies currently involved in Uganda’s oil sector are registered in tax havens, and some have concealed ownership structures which pose a high illicit financial flows risk.”

By getting the project company to be a tax resident, Uganda has limited the number of potential tax leakages and disputes that might arise in the future – a signature blockade that has defined the delays the country’s oil project has faced for a decade.

Since early 2010, when Heritage Oil sold its Uganda assets to Tullow Oil, right up to 2019, when Total E&P took a controlling stake in Uganda’s oil fields, tax has been a bone of contention during the sale of interests.

There was a cheerful mood at State House Entebbe when President Yoweri Museveni, Tanzania’s President Hassan Samia Suluhu and the top officials of Total E&P and Cnooc, signed three separate oil agreements on April 11.

Three agreements were signed: The Shareholders Agreement, the Tariff and Transportation Agreement, and the HGA. Patrick Pouyanne, the chairman and chief executive officer of Total, described the signing ceremony as a “momentous occasion.”

But it is the structure of the HGA – a copy of which this newspaper has – that is a victory for Uganda. While the project company will have to pay a number of taxes such as withholding tax, Value Added tax, perhaps the most interesting tax head will be on the corporate income.  The corporate income tax largely looks at the profit that the project company makes, and how much of that is taxed.

The oil companies will also enjoy a 10-year tax holiday, where no corporate income tax from the tariff income will be levied. The issuance of tax holidays of this nature is thought to be a deliberate business strategy to help a project developer attract capital with little financial burden in the early years.

For the 230,000 barrels of crude oil that is expected to be shipped through a heated 1,443km pipeline from Hoima in western Uganda to Tanzania’s Tanga port, a tariff of $13.03 will be charged against each barrel.

However, both Uganda and Tanzania will charge some income during the 10-year tax holiday. The manner in which taxes will be charged on the East Africa crude oil pipeline is defined in the Agreed Fiscal regime as stipulated in the Inter Government Agreement that Uganda and Tanzania signed in May 2017.

During a meeting in northern Tanzania between President Yoweri Museveni and the late President John Pombe Magufuli in September 2020, the two men agreed to have the allocation percentage of the tariff income from owning and operating the EACOP system at 60 per cent to 40 per cent in favour of Tanzania. More than 1,100km of the pipeline route is in Tanzania.

According to Total’s Patrick Pouyanne, the first oil tank for export is expected in early 2025, nearly four years after construction of the project works starts. Mary Goretti Kittutu, the minister of Energy and Mineral Development, said she was ready to table a Bill for the East Africa Crude Oil Pipeline before parliament, after all parties agreed to the draft.

After the signing of the agreements, Peter Muliisa, the chief legal and corporate affairs officer at the Uganda National Oil Company, said “the next steps are now going to be the award of contracts to sub-contractors who will construct the Tilenga (for Total) and Kingfisher Development Area (for Cnooc) facilities as well as construction and other works for the pipeline. Execution of the projects is thus in motion…”

The East African Crude Oil Pipeline project is expected to attract about $10 billion to $15 billion in investment. There are expectations that nearly $5 billion of this money should go to local companies as part of abiding to local content rules.

Uganda has discovered 6.5 billion barrels of crude oil. About 1 billion to 1.4 billion of that amount is thought to be recoverable. A number of this oil is found in environmentally sensitive areas such as the Murchison national parks. Civil society groups have called on the project developers to pay attention to environment and land rights issues.

Antoine Madelin, the advocacy director at the International Federation of Human Rights, said “Despite our persistent calls for urgent action from the Ugandan government, Total and Cnooc, the oil project is accelerating while most of our concerns and recommendations remain unaddressed. Major environmental and human rights risks remain. The top priority should be to deal with the concerns of communities suffering from the project, not start drilling at all cost.”

Pouyanne, at the signing ceremony, said that onshore oil projects (those on land) are more difficult to undertake compared to those offshore (the ones on water) due to the environmental challenges.

He said the biodiversity around Total’s Uganda project is unique. He added that their Uganda oil project “will not be a success if we are not exemplary in sustaining the environment and taking care of the people.”

jeff@observer.ug

© 2016 Observer Media Ltd