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Oil & Gas: experts tip on tax exemptions, revenue sharing

There are great expectations among Ugandans and investors from the development of an oil refinery.

It will include the development of 211-kilometre petroleum products pipeline from Hoima to North West of Kampala and is predicted to boost the region’s refining capacity and ensure
a consistent supply of petroleum products.

President Museveni says the investment in a refinery will improve Uganda’s balance of payments by reducing the petroleum products import bill and checking the globally alarming greenhouse gas footprint of the trucks that bring in white products over long distances.

“The refinery will generate Liquefied Petroleum Gas (LPG) that will help offset the use of biomass for domestic cooking and some industrial operations in the process of which the environment will be protected,” he argues.

The president adds that the Ugandan refinery will also produce feedstock for the possible future development of the fertilizer industry in Uganda as offshoots of the petroleum industry, thus enhancing and promoting agriculture.

ENVIRONMENTAL ISSUES

Contrary to the expectation, not so long ago, the European Union (EU) triggered a heated debate on broadcast, print, and social media about the proposed East African Crude Oil Pipeline (EACOP). Those against it claim it will emit 34.3 million metric tonnes of carbon dioxide per year.

This is based on the fact that chopping down trees reduces forest cover and causes the area to emit 3.7m tonnes of carbon in a year. What is of concern to both parties is deforestation, the leading cause of greenhouse gas emissions.

And although the country has put up a spirited fight to save the oil and gas project, questions on the sharing of oil revenues already linger, especially by local governments expecting to benefit from royalties across the entire value chain.

This is at a time when Uganda’s oil and gas resources are under the custodianship of the ministry of Energy and Mineral Development. It is valued to peak at approximately 6.5 billion confirmed barrels of oil, a 1.4 billion that is recoverable. The oil is expected to earn the country about $6.28bn per year, which will turn around its fortunes over a 25-year period.

The point of the contest remains, as the oil will be drilled along the Albertine Graben, Hoima, Kyankwanzi, Mubende, Gomba, Sembabule, Lwengo, Rakai, and Kyotera districts. This arguably makes them part of the country’s oil districts.

SHARING

According to section 75 of the Public Financial Management Act, 2015 (PFMA), the sharing of royalty revenues should be with local governments, and cultural or traditional institutions that fall among the oil districts, recorded in the government gazette.

On the ground, there is uncertainty on whether all the districts where drilling is done and where the infrastructure passes are recorded in the government gazette. It remains a stumbling block in planning and satisfying public expectations.

Paul Lakuma, a research fellow with the Economic Policy Research Centre (EPRC), says providing clarity to subnational authorities is of great importance, especially in development planning, and managing local expectations.

Lakuma cautions that as oil revenues start trickling in, uncertainty could trigger conflicts between traditional leaders and local governments as they start demanding royalties from the national resource.

Section 75(2), the Public Finance Management Act (2015) requires the minister responsible for petroleum is expected to publish the local governments eligible to receive royalties and this has not been done. This has led to confusion as different local governments in the region are warming up and preparing to receive royalties from the oil production.

LOCAL GOVERNMENT CONCERNS

For instance, Elias Byamungu, the Homa Chief Administrative Officer (CAO), says the district is captured under the national gazette for the oil-producing districts although doubt has been cast on Hoima’s eligibility to share in the oil royalties.

Currently, the district has an active oil well at Ngasi, which is in advanced degrees of exploration activity as more oil wells are discovered as exploration continues.

“The district expects to get a share of the oil revenues that is proportional to the amount of crude oil it will contribute to the export market,” says Byamungu.

“The revenues will aid the district in skilling its labor in the oil and gas sector, as well as build requisite infrastructure, to supplement government efforts in building industrial parks, international airports, and the critical oil roads network.”

According to the deputy executive director, ACODE, Onesmus Mugyenyi, sharing of oil revenue is not yet clear.

“In the first place there is no production as yet,” argues Mugyenyi.
“There is also a need to define the districts that are in the oil-producing areas. The minister is yet to name the list of oil-producing districts.”

TAX HOLIDAYS AND EXEMPTIONS

Mugenyi also wonders why the government continues to give tax exemptions to mining and oil companies, thus denying the country revenue. It should be noted that under the East African Community Customs Management Act, of 2004, Players in the oil and gas sector enjoy a number of tax exemptions on imported machinery and inputs that seek to support the exploration, development, and distribution of the oil and gas sector.

Over the years, tax experts, including the World Bank, have been warning the government about the harmful effects of tax exemptions, but in spite of the warnings, exemptions continue especially in the oil and gas sector.

Mugenyi says, managing risks of tax avoidance and tax evasion as was the case of URA against heritage international, is of paramount importance if the country is to curtail barriers to increasing domestic revenue mobilization.

Additionally, he says, the government must also deal with the issue of double taxation agreements that deny the country revenue in terms of taxes, and manage recoverable costs, in order to ensure that the country generates enough revenue from its oil resources.

That said, accurate estimation of the revenue loss is a difficult task given the information vacuum on tax exemptions. The agreements in which some of the exemptions are granted are untraceable but also the majority of the beneficiaries do not furnish this information to URA in their tax returns.

MONEY LAUNDERING THREAT

Meanwhile, the analysts agree that the requirement for companies to disclose beneficial owners and for the government to publish that beneficial ownership information is important for curbing money laundering, capital flight, and other forms of IFFs.

“The Companies Act would ideally help curb IFFs because of the provision (clauses 45 and 331) for declaration of beneficial ownership since laws and regulations on financial transparency and anti-money laundering have the strongest influence on IFFs,” said Lynn Gitu, program leader at IMPACT, a non-governmental organization which attempts to control the sourcing of minerals in regions of conflict.

However, she said, curbing IFFs requires a concerted effort beyond just one government ministry or agency and beyond just a couple of provisions in the law.

“I think consideration should be made of the need for political will to set up legal and institutional frameworks that support curbing of IFFs. The Financial Intelligence Authority (FIA) for example, needs strengthening,” Gitu said.

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