JUDGEMENT: Court orders URA to refund excess tax to Heritage Oil in decades-long legal dispute

The High Court’s Commercial Division Judge, Susan Abinyo, has issued an order to Uganda Revenue Authority (URA) to refund excess tax to Heritage Oil after a decades-long legal battle between the two entities with millions of dollars at stake in a complex commercial oil transaction. 

On December 23rd, 2024, Judge Abinyo ruled that over USD 150 million in exploration costs such as drilling, geological surveys, among others that Heritage Oil incurred should have been accounted for during the capital gains tax computation. This, in effect, resulted into inflated tax charges on Heritage oil.

According to audit firm PwC, Capital gains are included in and taxed together with the business income at a rate of 30% , which arises from the disposal of non-depreciable business assets as well as sale of shares.

A change in ownership by 50% or more in a company located in Uganda (with a few exceptions) triggers a deemed realisation of all assets and liabilities for market value.

The judgement was based on a 2010 transaction deal, in which, Heritage oil sold a 50 percent stake in two oil exploration blocks to Tullow Oil Uganda for a USD 1.45 billion deal in which URA issued tax assessments amounting to USD 435 million. 

URA has also been ordered to pay statutory interest to Heritage Oil on the excess tax at a rate of 2% per month, prescribed in section 123(4) of the Income Tax Act, from the date Heritage Oil paid the excess tax until URA refunds the tax in full.  

Heritage was awarded a quarter of the costs of the appeal, with an interest of 6% per annum from the date of the judgment until payment in full. 

Heritage was represented by lawyers from ABMAK Associates including, Denis Kusaasira jointly with Festus Akunobera, Joshua Byabashaija, and Steven Kabuye while URA was represented by lawyers including, Catherine Donovan Kyokunda jointly with Tonny Kalungi,  Diana Prida Praff, Barbara Ajambo Nahone, Gloria Akatuhurira, and Charlotte Katutu of  URA’s Legal Services and Board Affairs Department, Uganda Revenue Authority.  

Background 

The consolidated appeal by Heritage Oil at the Commercial Division was brought under section 28 of the Tax Appeals Tribunal Act, Cap 341 against two decisions of the Tax Appeals Tribunal Application No. 26 of 2010 and the Tribunal’s Application No. 28 of 2010. 

A Civil Appeal No. 0023 of 2011, arises from the Application No. 26 of 2010, where Heritage Oil challenged an income tax assessment of USD 404 million by the URA arising out of a Sale and Purchase Agreement (SPA) between Heritage Oil and Tullow Uganda, after Heritage sold its share in Production Sharing Agreements (PSAs) and a Joint Operating Agreement (JOA) to Tullow in which the Tribunal ruled in favour URA of the on 23rd November, 2011. 

 In another Civil Appeal No.0003 of 2012, Heritage Oil challenged an income tax assessment of USD 30 million by URA arising out of a settlement amount of USD 100 million, paid to the Heritage Oil in relation to a contingent amount under a Sale and Purchase Agreement to satisfy and discharge Tullow’s obligations, in which the Tribunal found in favour of URA on 7th December, 2011. 

Heritage being dissatisfied with the said rulings, filed the two appeals referred to above that were consolidated. 

Heritage Oil and Energy Africa (U) Ltd entered into Production Sharing Agreements with the Ugandan government in relation to Exploration Areas 1 & 3A in the Albertine Graben, and were accordingly granted licenses for petroleum exploration, development, and production.

Energy Africa (U) Ltd later sold its interests to Tullow (U) Ltd, pursuant to which, Heritage and Tullow each held equal (50%) participating interests in the exploration areas.

By way of a Joint Operating Agreement, Heritage Oil and Energy Africa appointed Heritage, a wholly owned subsidiary of Heritage, as the operator for both exploration areas; Heritage being the pioneer oil company in Uganda made discoveries of oil in Block 3A. 

One of the terms in the Joint Operating Agreement between the Heritage and Tullow was that in the event the Heritage wished to dispose of its 50% interest, Tullow had a right of pre-emption. 

The term pre-emption, in commercial law, is generally introduced to protect shareholders against potential changes in the corporate structure, giving them a right of preference over the potential external party. This clause also protects the right of shareholders to proportionally increase their respective shareholding in the share capital and keep internal balances unchanged.

Tullow exercised its right of pre-emption with the result that Heritage and Tullow entered into a Sale and Purchase Agreement dated 26th January 2010, by which the Heritage sought to transfer its rights under the Petroleum Exploration licences  for exploration areas in Uganda.

Heritage also sought to transfer it’s participating interests under the Joint Operating Agreement, and its rights under the Production Sharing Agreements, subject to the satisfaction of various conditions precedent, which included, among others, obtaining the consent of the Minister for Energy and Mineral Development under section 44 of the Petroleum (Exploration and Production) Act, and Article 24 of the respective PSAs. 

The total consideration for the purchase of the two exploration areas was valued at USD 1.45 billion being a base purchase price of USD 1.35 billion and a contingency amount of USD 100 million. 

 By a letter dated 6th July 2010, the Minister then gave conditional consent to Heritage Oil for the proposed transfer of its interests on terms including that, Heritage Oil pays all taxes accruing from the transaction as assessed by URA. 

The transfer was set to be approved following full payment of taxes by Heritage Oil to the government of Uganda.

It is at that point that URA issued tax assessments to the Heritage amounting to USD 404 million on 6th July 2010 and USD 30 million on 19th August 2010, being taxes payable in relation to the base purchase price, and the contingency amount respectively.

Heritage objected to the first assessment on 18th August 2010 and to the additional assessment on 19th August 2010. URA issued objection decisions on 12th November 2010 and 1st December 2010 in respect of the first assessment and the additional assessment respectively, and maintained the assessments for reasons that the transaction was subject to tax under the laws of Uganda. 

Subsequently, Heritage filed two applications in the Tax Appeals Tribunal vide TAT Application in 2010, challenging URA’s objection decisions in respect of its tax liability, in which the Tribunal dismissed both applications and upheld the assessments.

Heritage Oil, being dissatisfied with the said decisions of the Tax Appeals Tribunal, filed the instant Appeals to the High Court of Uganda leading to this judgment. 

Heritage presented a number of grounds noting that The Tax Appeals Tribunal erred in law in its decision when it disallowed the addition of the admitted and agreed exploration cost of USD 150 million of the cost base in calculating the capital gains tax. 

The Tax Appeals Tribunal erred in law in failing to hold that there could be no tax liability by virtue of the “Convention between the Government of the Republic of Mauritius (where Heritage is domiciled), and the Government of the Republic of Uganda for the avoidance of Double Taxation and the Prevention of Fiscal evasion with respect to Taxes on Income and section 88 of the Income Tax Act, even if (which is denied) there would otherwise have been a tax liability.

 The Tax Appeals Tribunal also erred in law when it failed to properly evaluate the evidence before it and thereby came to the wrong conclusion that tax was due.