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Petroleum explorer
Heritage Oil must pay the full amount of tax on earnings from the sale
of assets in Uganda before the government fully endorses the deal, the
country’s energy minister told Reuters on Sunday.

The Ugandan
government said, on July 6, it had given Heritage conditional approval
to sell its exploration assets in the country to Tullow Oil after
months of delay caused by a dispute over tax on earnings from the sale.
Under the conditional approval, Heritage was to deposit 30 percent of
the disputed $404 million capital gains tax with the Uganda Revenue
Authority (URA) and give the a bank guarantee for the remaining 70
percent, which would be redeemable on completion of an arbitration
process. “Heritage is evasive. They have been doing all sorts of things
to avoid paying the tax but they will have to pay the full amount and
the earlier they pay the better,” Energy Minister Hilary Onek told
Reuters on Sunday. Uganda discovered oil in 2006 in the Albertine Rift
basin along the border with the Democratic Republic of Congo and
reserves are estimated at about 2 billion barrels. Commercial
production is expected to start in the last quarter of 2011.

Taxation question

On July 7, Heritage
issued a statement saying it had received advice that the disposal of
the assets was not taxable in the east African country. “Look, these
guys are making super-normal profits,” Minister Onej said. “They just
invested a tiny little figure of $150 million and now they are going to
earn $1.5 billion, why don’t they want to pay taxes on that money? They
pay taxes in their own country, why not here in Uganda?”

Onek decline to
comment on whether the government had scrapped the conditional approval
given to Heritage on July 6 and nor whether Uganda would go for
arbitration in London to resolve the tax dispute. However, two sources
told Reuters on Sunday the URA had advised President Yoweri Museveni to
reject arbitration because Uganda was unlikely to be able to match
Heritage’s legal resources in such a process and was almost certain to
lose the case.

“URA has told the
president that the law is very clear on capital gains tax and that
there’s no need for arbitration and the president has already given
instructions to the energy minister to demand full payment, or else the
government uses other means to get what is due to it,” one of the
sources said.

Once Tullow has acquired Heritage’s stakes in blocks 1 and 3A for up
to $1.5 billion, it plans to bring in China’s CNOOC and France’s Total
to develop the fields and turn Uganda into a top-50 oil producer.