Panama Papers: Uganda foils company's dogged bid to avoid tax
Leaked documents show the paper trail of attempts by Heritage Oil and Gas (Hogl) to avoid paying capital gains tax in Uganda.
The company knew beforehand of a capital gains tax that Uganda was going to impose and worked aggressively to circumvent it, according to previously unreported details contained in internal correspondence.
Hogl, besides deciding to fight the tax liability head on, engineered a re-domiciliation from the Bahamas to Mauritius, which would have benefitted it financially since Uganda has a double-taxation agreement with Mauritius.
In an April 1 2016 email to The Guardian newspaper, Hogl, through the law firm Carter-Ruck Solicitors, said the process of re-domiciliation began “long before the completion of the transaction [in Uganda] ... [and] for a variety of business reasons”.
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In 2010, after Hogl sold its 50% stake in Uganda’s oil fields for $1.5-billion to Tullow Uganda Ltd, yielding the biggest windfall of the country’s nascent petroleum sector at the time, the Uganda Revenue Authority slapped a $404-million capital gains tax on the transaction.
Tullow Uganda Ltd is a subsidiary of Tullow Oil Plc, which, like Hogl at the time, is listed on the London Stock Exchange. Hogl shares’ listing and trading on the stock market was suspended on June 27 2014 and cancelled four days later, on July 1, according to information on the company’s website.
The tax dispute developed into a protracted legal battle and it took several different courts, including a Ugandan Tax Appeal Tribunal and the Commercial Court in London, four years to resolve it.
Domiciliation approach to avoid tax liability
New evidence shows that Hogl learned of the imminent tax liability weeks before it was officially imposed and employed tax accountants and lawyers to fight it off as unwarranted and illegal.
In the offshore and tax haven business, nothing moves until lawyers and accountants have had their word and cut.
The oil firm settled on two approaches: to tackle the levy head on and, if they failed, to move the business and its assets to a tax haven with the professional help of lawyers and accountants.
Although Hogl was at liberty to restructure its business portfolio, including for the purpose of paying the least taxes, its re-domiciliation approach was contrived to avoid tax liability in Uganda, according to copies of emails obtained by the International Consortium of Investigative Journalists based in Washington, DC.
The proposal to re-domicile from the Atlantic island nation of Bahamas to Mauritius in the Indian Ocean, the correspondences show, was “primarily due to the double-tax agreement between Uganda and Mauritius”.
Hogl contacted Bruce McNaught, a chartered accountant and then director of Hansard, the firm’s administration office in Guernsey, who, on February??8 2010, wrote to Messrs Moller and Morris introducing Mossack Fonseca & Co Bahamas as the oil firm’s registered agent.
The identity of Messrs Moller and Morris is not clear from the correspondences or online. Mossack Fonseca, the Panamanian law firm whose documents were leaked and are now known as the Panama Papers, helps investors to set up tax structures in Panama and other Caribbean tax havens.
“Hogl … is due to complete the sale of an asset in Uganda within the next 11 days,” McNaught wrote. “Due to tax reasons emanating from Uganda, the directors have been advised by tax accountants to re-domicile Hogl to Mauritius from the Bahamas before completion [of the sale].”
He added: “The group’s tax accountants are working hard to eliminate the potential tax charge imposed by the Ugandan authorities without Hogl having to be re-domiciled but, as a second line of defence, the directors have been advised to put in place all that is necessary to effect re-domiciliation to Mauritius so that the process can be completed if it becomes necessary (which we believe to be the case).”
The double-taxation agreement enables only one of two countries where an individual or entity earns income to collect tax. Uganda signed one with Mauritius in an attempt to attract direct foreign investment, the permanent secretary of Uganda’s foreign affairs ministry, James Mugume, said on March 20 2016.
“The double-taxation principle is to benefit us, not the foreign oil companies,” Mugume said.
But Hogl embarked on a different game plan that people familiar with the dealings in the underworld of tax evasion say could have only been to deprive Uganda of the tax revenue.
“The proposal to re-domicile its operations is clearly an attempt at aggressive tax avoidance since the only motive is to dodge a potential tax liability,” the executive director of the London-based Tax Justice Network and a global campaigner for tax justice, John Christensen, said in reply to an email inquiry from Uganda’s Daily Monitor.
Shortly after Hogl initiated the scheme, Hansard’s general counsel, Jonathan Hart, in a follow-up to McNaught’s email, wrote to the Mossack Fonseca to emphasise how “extremely urgent” it was to stop the capital gains tax.
Hart asked them to share information about Hogl with the contracted two firms and “provide them with all such assistance as they may request”.
The teams then set up an impromptu conference call to discuss the details, shortly after McNaught, in his email, sought guidance on know-your-customer requirements, or key information to minimise risks across jurisdictions, including on anti-money laundering, to allow them to assemble the material necessary to save Hogl from having to pay the tax.
Developing countries lose to practice
In July 2015, International Monetary Fund (IMF) researchers published an estimate of profits shifted by multinational companies, suggesting that developing countries such as Uganda lose about $213-billion a year, almost 2% of their national income, to this practice.
The IMF’s monetary and exchange affairs department in 2000 listed Mauritius as one of the offshore financial centres where companies prefer to be headquartered to avoid paying tax, Uganda’s Observer newspaper reported, adding that offshore financial centres reduce transparency in different jurisdictions and affects good governance.
Much of the potential benefit from attracting foreign direct investment to developing countries under double-taxation agreements is lost, Christensen said, because of the aggressive tax avoidance practices of the companies involved.
At less than 14%, Uganda’s tax to gross domestic product ratio is one of the lowest in East Africa, putting pressure on its authorities to collect tax wherever it can.
This was behind the approach Ugandan officials adopted in dealing with the foreign oil firms, and their meetings over the tax dispute often turned hostile, according to revelations before London’s Commercial Court. Justice Michael John Burton heard the case in which Tullow sued to recover monies it paid in capital gains tax to the Ugandan government on Hogl’s behalf.
With Hogl unwilling to pay the tax, Ugandan officials, including President Yoweri Museveni and the then Uganda Revenue Authority commissioner general, Allen Kagina, dug in their heels and demanded that the payment be made.
The London court heard that, at a meeting on August 3 2010 with Tullow’s head of tax, Richard Inch, Kagina lost her temper and “there was shouting and she was angry”. When they met two months later, on October 23 2010, Kagina told Inch, “tax is imposed and collected by law, not compromise”.
Because Tullow, as the buyer, had yet to pay Hogl, the Ugandan government threatened not to renew its exploration licences, which were due to expire, unless it deducted an amount equivalent of the capital gains tax from the sale price and remitted it to the government.
After hard bargaining, in April 2011, Tullow capitulated and sent to the Ugandan government $121-million, a 30% threshold down payment, before filing tax appeals under the country’s laws. The balance of $283-million was deposited in an escrow account with Standard Chartered Bank in London, pending resolution of the tax dispute, which finally ended in 2013.
Another $30-million was separately assessed on a $100-million that Heritage additionally paid Tullow Uganda Ltd as cash settlement arising from a breach of the companies’ Sharing and Production Agreement.
Hogl later opposed these tax payments as “collusion” between Tullow and the Ugandan government, resulting in the London case that Burton on June 14 2013 decided in Tullow’s favour.
Strong political will
Although Uganda eventually bagged its capital gains tax, the protracted flexing of muscles by rich and powerful foreign investors, often supported by their powerful home governments, is generally likely to force developing countries fraught with corruption and weak systems to capitulate rather than to fight for what is their right.
Uganda’s approach, in this instance, showed exceptionally strong political will.
The Uganda Revenue Authority would not comment on the lessons it had learned from this tax dispute, but the Ugandan Parliament is considering proposed amendments to the country’s income tax law to help close some of the loopholes that foreign investors exploit.
According to Christensen, developing countries need to re-negotiate or revoke weak treaties, particularly on withholding tax, to prevent multinational companies from shifting their profits to tax havens.
“[Their] governments should require all inwards investors to provide annual accounts based on country-by-country reporting requirements, which might reveal where profits shifting is taking place and trigger a tax audit,” he said, proposing that African leaders should support attempts by the United Nations Tax Committee to shape new global rules for taxing multinational companies.
Hogl, Hardman Resources Pty (which Tullow Oil Plc later acquired) and Tullow Uganda Ltd struck the first commercially viable quantities of the hydrocarbon deposits, bringing the country closer to becoming an oil producer.
Although the intent of Hogl, which has since left Uganda, to use offshoring to avoid tax liability was referred to in the London case, this is the first time that the details of the scheme have become known.
The African Network of Centres for Investigative Reporting (ANCIR) supported development of this story.