Details of Uganda government case with Heritage Oil in London

Legal Brief of Heritage oil case with Uganda Government- this is a government of Uganda document prepared by the Attorney General’s Office in Kampala.

1.0     BACKGROUND INFORMATION REGARDING THE RELATIONSHIP BETWEEN THE GOVERNMENT OF THE REPUBLICOF UGANDAArND HERITAGE OIL & GAS LIMITED.

1.1     Heritage Oil and Gas Limited (Heritage) and Tullow Uganda Limited (Tullow) were jointly licensed by the Government of Uganda (Government) for petroleum exploration, development and production in Exploration Areas I and 3 A, in the Albertine Graben, with each having a participating interest (interest) of 50% in each of the said Exploration Areas.

1.2     On 26th January, 2010, Heritage entered into a Sale and Purchase Agreement (SPA) by which Heritage agreed to sell (transfer) to Tullow its 50% participating interest in each of Exploration Areas 1 and 3 A.

1.3     By letter dated February 2, 2010, Heritage requested for consent for the said transfer of its interest in the said Exploration Areas from the Minister of Energy and Mineral Development in accordance with Section 44 of the Petroleum Exploration and Production Act (PEPA) Cap 150, Laws of Uganda.

1.4     By letter dated 6* July 2010, the Minister gave a conditional consent to Heritage for the proposed transfer of interest subject to the following terms:

a.        “Upon closure of the transaction, Heritage shall pay all taxes accruing from the transaction as shall be assessed by the Commissioner, Uganda Revenue Authority; and

b.       For the avoidance of doubt, the approval shall not become effective unless Heritage has paid all taxes or demonstrated to the satisfaction of the Government of Uganda that the said taxes shall be paid immediately upon demand”.

On 6th July 2010,-the Uganda Revenue Authority (URA) which, is a body corporate and the -tax collection body for the Government of Uganda issued a tax assessment to Heritage in the amount of USD 404,925,000 as’taxes payable in relation to-the said transfer (herein after referred to as the “First-‘ Assessment”). On 19th A’ugust 2.010, URA issued an additional tax assessment to Heritage in the amount of .USD” 30,000,’OQO (herein after referred to as the “Second Assessment”)

1.6     Heritage objected to the above assessments contending that the said transfer does not give rise to any tax liability under -the laws of Uganda. The Government of Uganda on the other hand strongly maintained that the said transaction is taxable under the laws of Uganda.

1.7     On 27th July 2010, the URA issued an Agency Notice under Section 108(1) of the Income Tax Act (ITA) Cap 340 Laws of Uganda to Tullow, appointing Tullow as a Third Party Agent for purposes of collection of the aforementioned taxes payable by Heritage in respect of the First Assessment. On 2nd December 2010, the URA issued a farther Agency Notice for purposes of collection of the aforementioned taxes payable by Heritage in respect of the Second Assessment.

1.       On 26th July, 2010, Tullow and Heritage purported to complete a Sale and Purchase Agreement transaction without the Government’s approval whereupon Tullow paid to Heritage USD 1,045,000,000 in respect of the transfer. In addition, Heritage and Tullow deposited 30% of the taxes . thereof, that is USD 121,477,500 with URA in accordance with Section 103(2) of the ITA and further deposited the balance of 70% of the taxes thereof (USD 283,447,500) in an Escrow Account held between Tullow and Heritage with Standard Chartered Bank of UK, without Government’s consent and approval.

1.9 On the failure by Heritage to pay the taxes on the First Assessment in fall, Government by letter to Heritage dated 3rd August 2010, stated that the conditions set out in the letter of 6th July 2010 had not been met and therefore the conditional consent had not become effective. Consequently, the said transfer between Heritage and Tutyow was of no legal effectv or-consequence under section 44 of the PEP A.

1.10   Arising from the above, Tullow could not legally acquire Heritage’s 50% .. participating interest. This prompted Tullow to enter into negotiations with Government whereupon, -under the’ Memorandum of Understanding dated .15th March 2011 between, the Government and URA on the one part,-”and Tullow and Tullow Uganda Operations Pry Ltd on-the other part, Tullow undertook to pay USD 313,447,500 being the balance of the assessed taxes payable by Heritage on tHe said Transaction, on the strength of the Agency Notices issued by URA to Tullow on the “First and Second Assessments.

tullow oil well in Bulisa

Accordingly Tullow paid Government_a total of US S 404J^liIIion on_ ‘behalf oTHeritage7 an action being contestedfby Heritage?^

1.11   By letters dated 1st October 2010 and 18th August, 2010 to URA, Heritage, in accordance with section 99(1) of the ITA objected to the First and Second tax Assessments respectively.
1.12 The Commissioner-General of URA issued the Objection Decisions to Heritage in respect of the First and Second Assessments by letters dated 1 st November 2010 and 1st December 2010 respectively, in accordance with Section 99(5) of the ITA.

 Consequently,   in accordance with Section 100 (1) (b) of the ITA, Heritage *&.   ^/lodged an application for review of the taxation decision before the Tax ff>   Appeals Tribunal inUganda, hearing of which has begun.

1.14   In total disregard of the on-going dispute proceedings in the Tax Appeals Tribunal, Heritage wrote two letters requesting for re-negotiation of the PSAs and further served two Notices of Arbitration to the Government in respect of the same tax dispute.

1.15   The Government studied Heritage’s claims, found no merit and totally rejects them.

1.16   Arising from the foregoing, a need arose to engage External Legal counsel to give support to the Government Legal Team in the execution of the said arbitral proceedings.

2.0  THE SELECTION PROCESS -OF THE EXTERNAL ”LEGAL COUNSEL

2.1     The abjective of the selection process was to ensure.that the Government is effectively represented in the said arbitral proceedings by a highly qualified, knowledgeable, skilled and reputable legal firm in fields of international commercial arbitration, oil and gas and taxation matters especially as they relate to oil and gas, to achieve success and victory in the matter in favour of Government. The subject matter is in the excess of USD 404M. If the arbitration proceedings are lost, the Government will be liable to pay the amount in issue plus costs, damages and interest. This will have a negative effect on the economy ofUganda.

2.2     Out of the several international law firms on the online databank, some specialized international  law firms  detailed below were identified and invited to submit their proposals: 1st June, 2011

1. Crowell and Moring LLP (United Kingdom),
11 Pilgrim Street,London,EC4V 6RN                                             •

United Kingdom                              ‘

2. White and Case LLP (United Kingdom)                                               .   .

5 Old Broad Street                                              ,.

LondonEC2N 1 DW
.  United Kingdom                                                                                     .


3. MacLeodDixonLLP (Venezuela)Toronto-DominionCenterTDWaterhouseTower.79 Wellington Street West Suite 2300. P.OBox 128Toronto,ONM5K1H1

4. DLA Piper LLP DLA Piper UK LLP Victoria SquareHouse Victoria SquareBirminghamB2 4DL

5. Curtis, Mallet-Prevost, Colt & Mosle LLP 99Gresham StreetLondonEC2V7NGUnited Kingdom

An evaluation was conducted and M/S Curtis, Mallet- Prevost, Colt & Mosle LLP was the best evaluated firm and therefore retained as the External Legal Counsel (See evaluation report).

2.3     The Hon. Attorney General issued instructions to the said law firm in accordance with the Government Proceedings (Civil Procedure Rules), Statutory Instrument No. 77-1, on 15th June 2011, to act for and on behalf of the Government of Uganda -( See letter of Instruction by Attorney

General).    _        .                      • .

2.4.    The-^Contract for Legal Services was signed on-3.0* August 2011 (see copy
attached)./                  _’ – ‘ ” / – •

3.0 BUDGET BREAKDOWN                                      –

3.1.    In order to facilitate the arbitration proceedings, a budget of Ug.Shs. 11,942,283,9067= (Uganda Shillings Eleven Billion, Nine Hundred Forty Two Million, Two Hundred Eighty Three Thousand, Nine Hundred Six only) inclusive of the legal fees for the external lawyers was eventually submitted to the Permanent Secretary/Secretary to Treasury, Ministry of Finance and Economic Development on June 10, 2011. A copy of the budget breakdown is attached hereto.

3.2 It is important to note that although some important aspects like the filling fees, reimbursable and arbitrators’ fees etc, appear on the budget, they were not costed at the time the budget was submitted. This implies therefore, that the budget needs to be modified to include all the necessary expenditure requirements. •

MINISTRY OF JUSTICE AND CONSTITUTIONAL AFFAIRS

 

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