URA ordered to pay over Shs700 billion to Heritage Oil in tax dispute

The Uganda Revenue Authority (URA) has been ordered to pay Shs709 billion to Heritage Oil and Gas Ltd, a United Kingdom firm, over a wrongful tax assessment standoff that dates back to over 14 years ago.

Justice Susan Abinyo of the Commercial Division of the High Court ruled that URA wrongfully slapped Capital Gains Tax (CGT) of $45m (about Shs164.4 billion)  and $148.5m (Shs542.5 billion) in interest on Heritage Oil after it sold its exploration stake in Uganda to Tullow Oil,  and thus must refund it.

One of the terms in the Joint Operating Agreement (JOA) between Heritage Oil and Tullow Oil was that, in case one of them wished to sell off their shares, the partner would express the first interest.

On January 26, 2010, Heritage Oil agreed to transfer its Petroleum Exploration licences, participating interests, and participating rights under the Production Sharing Agreements (PSAs) to Tullow Oil after  a $1.45b (Shs5.3 trillion).

Of the $1.45b, $1.35b (Shs4.9 trillion) was the base purchase while $100m (Shs365.3 billion) was the contingency amount.

But URA on July 6 and August 19, 2010, slapped Capital Gains Tax (CGT)  of $404.9b (Shs1.4 trillion) and $30m (Shs109.6 billion) on the base purchase and contingency amount, respectively.

This prompted Heritage Oil to go to the Tax Appeals Tribunal, arguing that URA was wrong to tax the$150m since it was an investment in the exploration.

However, the tribunal ruled in favour of URA, forcing Heritage to go to the High Court.

In her December 23 ruling, Justice Susan Abinyo ruled that URA was wrong to assess a Capital Gains Tax (CGT) on the $150m.

“Accordingly, this court makes the following declarations and orders: 1) The computation of the capital gains tax excludes the sum of $150m which formed part of the cost base, and therefore not subject to tax. 2) The respondent shall compute the capital gains tax by the order in (1) above, and the appellant shall be entitled to a refund of the excess sum in the contested amount herein,” the ruling reads in part.

It adds: “The computed amount in (2) above, and as required under section 31 (2) of the Tax Appeals Tribunal Act, Cap. 341(Revised Laws of Uganda, 2023 Edition), the respondent shall pay statutory interest to the appellant on the excess tax at a rate of 2 percent per month, prescribed in section 123(4) of the Income Tax Act, from the date the appellant paid the excess tax till the 20 respondent refunds the tax in full.”

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.