This archive report was first published on 31 August 2019.
Uganda's oil and gas sector is facing a major setback after Tullow Oil's stake deal with Total E&P and China National Offshore Oil Company (CNOOC) collapsed due to a tax dispute.
The dispute revolves around a $185 million capital gains tax, equivalent to 30% of the $617 million investment by Tullow in Uganda's oil and gas sector.
According to Total's president for exploration and production, Arnaud Breuillac, all parties had been actively progressing the Sale and Purchase Agreement (SPA) since 2017, but no agreement on the fiscal treatment of the transaction had been reached.
On January 1, 2017, Tullow signed an SPA with Total E&P to transfer 21.57% of its 33.33% interests in the joint venture partnership. However, on March 17, Tullow informed the Uganda government that CNOOC had exercised its pre-emptive right to claim a 50% stake in Total's buy.
The successful completion of the farm-down would have implied that Total and CNOOC would have each increased their interests to 44.1%, while Tullow would have kept 11.8%. The transaction was valued at $900 million, but the Uganda Revenue Authority (URA) assessed a tax of $167 million after protracted dialogue.
However, a twist developed when the URA assessed tax on the $617 million Tullow's investment, leading to a stalemate in the negotiations.
Under the existing tax regimes and Production Sharing Agreement, the $617 million is recoverable and tax deductible. However, the Uganda government is unwilling to transfer tax deductions of the $617 million to Total and CNOOC, the buyers of Tullow's shares.
