following the money in the extractives sector

7/28/2019 Following the Money in the Extractives Sector

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Following the Money in

the Extractives SectorPresentation to African Centrefor Media Excellence

www.pwc.com

08 February 2012


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Agenda

The current state of the Petroleum sector in Uganda

The Legal and Regulatory environment

General principles relating to the taxation of petroleum operations

Capital gains tax on the transfer of an interest in a petroleumagreement

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Genera VAT princip es

Customs and import duties

Gist of the current Government vs Heritage dispute

Transfer pricing

Proposals for the Oil money Questions?

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Following the Money in the Extractives Sector 8 February 2012


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The current state of the petroleum sector inUganda

Currently Uganda meets all its petroleum needs by way of imports atan estimated value of about USD 320 million per annum.

This constitutes about 8% of the countrys total national imports.

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Its for this reason that the government is very keen to capitalise onthe countrys confirmed petroleum reserves because of theimportance of petroleum products in meeting national energydemands

Update on Discoveries and Reserves

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The Legal &Regulatory environment

The Constitution of the Republic of Uganda, 1995;

The Petroleum (Exploration and Production) Act, Cap 150;

The Petroleum (Exploration and Production) (Conduct ofExploration Regulations 1993;

Petroleum (Exploration, Development, Production and Value

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on , 2010 w repea e e ro eum an ro uc on conce passed into Law);

Ministry of Energy & Mineral Development (through PEPD);

Various new polices, legal and regulatory framework are currently inthe pipeline for example The Revenue management law, The

Resource Management Law, Fiscal Regime and Establishment of theOil Revenue Fund.

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Hierarchy of the revenue share as contained in thePSAs

1. Royalty

The royalty is computed on the basis of gross daily production.

2. Cost Recovery is in the form of cost oil

Before sharing of production, the contractor is allowed to recover costs outof the gross oil revenues. PSAs place a limit on cost recovery and where the

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recovered in the following year of income.

3. Profit sharing

The oil revenue that remains after the royalty and cost recovery is the profitoil, and this is shared between the contractor and the government througha pre- agreed profit sharing arrangement.

4. Taxes

The contractors share of profit oil is then subject to tax at the corporationtax rate of 30%.

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Cost recovery

All the contractors exploration, development, production andoperating expenditures as defined in the 8th Schedule are recoveredas a % of the total gross oil production this is also called cost oil;

For purposes of cost recovery, a ring fence applies around eachcontract area;

If a contractor has more than one contract area, then cost recovery

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shall apply on a contract area by contract area basis;

Most PSAs have a limit to the amount of costs that a contractor canrecover, and if the actual costs incurred exceed the allowed limit,the balance is carried forward and recovered in future years againstprofits from that same contract area, and so on until fully

recovered; The cost recovery limit ensures that the government gets a share of

the profit in all circumstances where there is oil production.

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General principles relating to the taxation ofcontractors / licensees

Profit oil is split between the contractor and the governmentaccording to the terms of the PSA;

According to the PSA, all taxes and duties shall be paid inaccordance with the laws of Uganda;

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, ,Customs

The contractors share of the profit oil is subject to taxation at thecorporate tax rate of 30%;

The special provisions relating to the taxation of petroleum

operations and the PSAs prevail over other parts of the Income TaxAct, in case of any inconsistency.

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Capital gains tax on transfer of an interest

The amount of any gain arising from the disposal of an asset is theexcess of the consideration received for the disposal over the cost

base of the asset at the time of the disposal.

The cost base of an asset is the amount paid or incurred by the

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taxpayer in respect of the asset including incidental expendituresof a capital nature incurred in acquiring the asset.

Illustration


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Withholding tax on payments to non resident subcontractors in respect of Ugandan source services contracts

Is the payment being made by acontractor?

Is the payment being made in respectof a Ugandan source services

But ..

1. Who is a non residentsubcontractor?

2. What is a Ugandan

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contract

Are the services provided by the nonresident sub contractor directlyrelated to petroleum operations?

If Yes, Yes, Yes.then 15%withholding tax rate applies

3. Does the 15%withholding tax ratealways apply?

4. What if the payment is

being made to a subcontractor resident in alower wht rate treatycountry?

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General VAT PrinciplesVAT obligations of non resident sub contractors

Non resident sub contractors may also have obligations for VAT inUganda

First step is to establish whether there is a supply being made orservice being rendered in Uganda

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, If the contractor is making the payment for services rendered by the

non resident sub contractor offshore is that an imported service?

Who would be obliged to account for VAT in such a situation thenon resident sub contractor (as a local supply) or the residentcontractor (as an imported service)?

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Customs and Import duties

The exemption only applies at the time of importation of the goods intoUganda as a result of the Fifth Schedule of the EAC CMA;

However, the local supply of such equipment by way of sale, lease or hireby a local supplier (sub contractor) to a contractor does not qualify as aVAT exempt supply ------ not in the Second Schedule of VAT Act;

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As a result when you import the equipment, no VAT applies, but whenyou buy, lease or hire the equipment locally VAT is payable;

In order for a contractor to benefit from the VAT exemption they mustimport the goods themselves;

Hiring the goods from a sub contractor and paying lease, hire or rental feeswould give rise to VAT since the lease, hire and rental is not exempt fromVAT;

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Gist of the current Government- Heritage Dispute

The dispute is in respect of an application by Heritage challengingan income tax assessment of US$ 404,925,000 arising out of a saleand purchase agreement where Heritage sold its 50% share in PSAto Tullow

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Issues raised were as follows;

(i) Whether the sale of Heritages 50% interest to Tullow is taxablein Uganda

(ii) Whether the URA assessment was proper

(iii) What remedies were available to the parties.

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Gist of the current Government- Heritage DisputeSummary of URA Submissions

The applicant had sold an assignable interest in a PSA.

The rights that were assigned were a right to explore, a right tosearch, a right to develop, a right to produce, a right to get samplesa right to take oil and dispose of the oil produced from thedesignated areas in the PSA.

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The income was sourced in Uganda under Section 79(g) of ITAwhich provides that income is derived from sources in Uganda tothe extent to which it is derived from the disposal of an interest inimmovable property located in Uganda

The purchase price was US$1,350M which was reduced by costs

inform of signature bonuses of US$ 250,000 to obtain the capitalgain of US$ 1,349M.

30% of the capital gain is the disputed tax liability of US$ 404M

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Gist of the current Government- Heritage DisputeSummary of URA Submissions

According to the URA, the exploration license was more than amere permission to explore for oil in land

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e c e e case o enwoo um er o m e pwhere Lord Davey said;

it is not however a question of words but substance. If the effectof the instrument is to give the holder exclusive right of occupationof the land though subject to certain reservations or to arestriction of the purposes for which it may be used, it is in law, ademise of the land itself.

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Gist of the current Government- Heritage DisputeSummary of Heritage submissions

Proceeds received were not income derived from sources inUganda.

According to Heritage, Section 79 (g) of the ITA did not apply as the

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property.

Heritage argued that a contractual licence or permission to searchfor petroleum does not create an interest in land.

Heritage quoted the case of Thomas V Sorell where Vaughan CJheld that a dispensation of license property properly passeth nointerest no alters or transfers property in anything but only makesan action lawful, which without it would have been unlawful

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Gist of the current Government- Heritage DisputeContd TATs submissions;

The applicant had business in Uganda which qualified the companyto be a taxpayer

What was sold could only be ascertained by looking at Article 2.1 ofthe SPA which provided subject to the terms and conditions ofthis Agreement, the seller agrees to sell to the buyer and the Buyer

a rees to urchase rom the seller or the consideration set out in

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Article 3.1, the assigned interest

Article 1 of the SPA defines assigned interest to mean all the sellersrights, titles and interests in the interest documents

The tribunal agreed that Heritage sold its participatory interest toTullow and the corresponding entitlements thereto and therefore

earned income. According to the tribunal the sale of applicantsrights and interest was a sale of property.

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Gist of the current Government- Heritage DisputeContd TATs submissions;

In the absence of a statutory definition of immovable property, thetribunal resorted to rules of statutory interpretation to guide it todefine an interest in immovable property under Section 79 (g)

Blacks law dictionary 8th edition defined immovable property tomean property that can not be moved, an object so firmly attached

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to land that is regarded as part of the land.

On this basis Blocks 1 and 3 A of the Albertine Graben were held tobe pieces of land and therefore constituted immovable property.

Having regard to all circumstances of the case, Heritage failed tosatisfy the requirement that the assessment by the respondent as

excessive and or erroneous and case was dismissed with costs to therespondent.

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Transfer Pricing

What is a Transfer Price?

This is a price charged for goods and services between companies inthe same group/related parties.

Why are tax authorities concerned?

Com anies are able to shift rofits between countries usin transfer

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prices. This can be done by way of overcharging /undercharging.

The tax law requires that transactions between related parties areconducted at arms length. This means that the prices that relatedparties charge each other for goods and services should be similarto the prices that would have been charged between independent

parties to the transaction.

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Transfer Pricing Illustration

Company A

Distributor(Mauritius)

Owned100%

Sale of Cars

UGX 80 million

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Uganda tax rate 30%

Uganda Revenue Authority loses tax on the UGX 20 Million revenue.

If the transactions are not at arms length, tax authority can adjust prices to reflect the price thatwould have been charged in a similar arms length transaction.

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Company BManufacturer of Cars

(Uganda)

Company CIndependentDistributor

(Kenya)Sale of cars at UGX 100million



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How best Uganda can use the revenues accrued

National Oil and Gas Policy- goal to use the countrys oil and gasresources to contribute to early achievement of poverty eradicationand create lasting value to society.

Government plans to establish a rules-based framework to balancethe need to spend against the need to save oil revenues for the

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future.

Immediate goals are infrastructure, refinery etc

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Questions?

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Government may have no control

over the gifts of nature but they docontrol taxes, and will use the taxsystem to maximize benefits to thecountry

This publication has been prepared for general guidance on matters of interest only, and does

not constitute professional advice. You should not act upon the information contained in this

publication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PricewaterhouseCoopers Uganda , its

members, employees and agents do not accept or assume any liability, responsibility or duty of

care for any consequences of you or anyone else acting, or refraining to act, in reliance on the

information contained in this publication or for any decision based on it.

2012 PricewaterhouseCoopers Limited. All rights reserved. In this document, PwC refersto PricewaterhouseCoopers Uganda which is a member firm of PricewaterhouseCoopers

International Limited, each member firm of which is a separate legal entity.

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