Uganda’s petroleum
fiscal regime is a production sharing agreement type with signature bonuses,
rentals, royalty, income tax and ring-fence among others. The fiscal terms applicable to upstream operations are
governed by Part IXA of the Income Tax Act, (Cap 340) (ITA), the 2012
Upstream Act) and the terms of any petroleum agreement and. The Ugandan
government has, to date, used a production sharing form of petroleum agreement.
The principal fiscal terms are as follows:
ü The government
is entitled to a royalty computed as a percentage of gross daily production,
such royalty to be in kind or cash at the government’s election. The percentage
can be on an escalating scale as production increases. Royalty rates
are biddable and will be set out in the licence or petroleum agreement- current
information suggests Based on Gross
Total daily Production. Where production (P) does not exceed 2,500 5%,
2,500<P<5,000 7.5%, 5,000<P<7,500 10%, and P>7,500 12.5%.
Royalty is paid on a monthly basis.
ü Under a
production sharing arrangement, the contractor is entitled to cost recovery
from a specified percentage of gross oil or gas production after deduction of
any applicable royalty. Cost recovery may be ring-fenced with costs only
recoverable from production from the contract area to which they relate. After deduction of Royalty, 60% cost recovery limit
is allowed. For Purposes of the estimation below, 40% of the Gross revenue
(prior to deducting royalties) is assumed. Unrecovered costs can typically be carried
forward;
ü After deduction
of royalty and cost recovery, remaining production is split between the
government and contractor on a sliding scale as set out in a petroleum
agreement, with the government’s percentage increasing as daily production
increases. Available information suggests a 67.5% for government and the
remaining share for companies;
ü The contractor
is required to pay income tax at the standard corporation rate tax of 30 per
cent on the proceeds of the sale of their share of profit oil under the
petroleum agreement. Contract areas are ring fenced for tax purposes with each
contract area taxed as if it is a separate tax payer- this protects loss
transfer by companies from one project to another to minimize tax payment;
ü Under the 2012
Upstream Act signature bonuses are payable on the award of exploration and
production licences and are not cost recoverable. Signature bonuses have,
according to media reports, been paid in respect of petroleum agreements entered
into under the repealed Petroleum (Exploration and Production) Act (PEPA)
regime. It was reported, for example, that the PSAs that were signed on 3
February 2012 by Tullow with CNOOC and Total included a signature bonus of
US$500,000 and development bonuses of US$2m;
ü A licensee must
pay an annual charge calculated on the grant of a licence and thereafter
annually on the anniversary of the grant until the termination of the licence;
ü A participation
dividend paid by a resident contractor to a non-resident company is liable to a
withholding tax at a rate of 15 per cent. A lower rate of withholding tax may
apply if the dividend is paid to a resident of a country with whom Uganda has a
favourable Double Taxation Agreement. This
is indeed a welcome move to mitigate transfer pricing.
ü Any capital
transfer /appreciation/ gains is considered as an income and subjected to 30%.
ü Thin capitalisation rules- Debt/equity ratio 2:1.
Interest is allowed to the extent of the rule.
ü Excise duty and VAT- Applicable on all procurements
subject to the duties.
Despite the
aforementioned, Uganda’s fiscal regime provides generous allowable deductions
including initial allowances of 75%, decommissioning costs, loss carry forward,
tax exemption of machinery and equipment and depreciation allowances.
It has been
estimated that Uganda has 3.5 billion barrels of oil reserves. Assuming a
recovery rate of 50%[1]
implies that one billion, seven hundred and fifty thousand barrels of oil will
be recovered. At envisaged peak production of 200,000 bpd expected in 2020,
then the current deposits would be exhaustible in 24 years earning Uganda 3.6
billion dollars annually[2]
based on the calculations in table below.
| Annual Profits In USD- peak procuction 200,000 barrels per day | |||||||||
| A | B=12.5% of A | C=40% of A | D=A-B-C | E=67.5% of D | F=32.5% of D | G=30% of F | H=B+E+G | J=H*365 | |
| Quantity | (A)Total revenues of 200,000 barrels per day @100USD | (B) Royalties 12.5% of Total Rev | (C) Recovery costs 40% ofgross revenue | Profit Oil | Government share of tax 67,5% | company share 32,5% | company share taxed 30% corporate tax | Government profit per day | Annual Profit |
| 10000 | 1 000 000 | 125 000 | 400 000 | 475 000 | 320 625 | 154 375 | 46 313 | 491 938 | 179 557 188 |
| 20000 | 2 000 000 | 250 000 | 800 000 | 950 000 | 641 250 | 308 750 | 92 625 | 983 875 | 359 114 375 |
| 30000 | 3 000 000 | 375 000 | 1 200 000 | 1 425 000 | 961 875 | 463 125 | 138 938 | 1 475 813 | 538 671 563 |
| 40000 | 4 000 000 | 500 000 | 1 600 000 | 1 900 000 | 1 282 500 | 617 500 | 185 250 | 1 967 750 | 718 228 750 |
| 50000 | 5 000 000 | 625 000 | 2 000 000 | 2 375 000 | 1 603 125 | 771 875 | 231 563 | 2 459 688 | 897 785 938 |
| 60000 | 6 000 000 | 750 000 | 2 400 000 | 2 850 000 | 1 923 750 | 926 250 | 277 875 | 2 951 625 | 1 077 343 125 |
| 70000 | 7 000 000 | 875 000 | 2 800 000 | 3 325 000 | 2 244 375 | 1 080 625 | 324 188 | 3 443 563 | 1 256 900 313 |
| 80000 | 8 000 000 | 1 000 000 | 3 200 000 | 3 800 000 | 2 565 000 | 1 235 000 | 370 500 | 3 935 500 | 1 436 457 500 |
| 90000 | 9 000 000 | 1 125 000 | 3 600 000 | 4 275 000 | 2 885 625 | 1 389 375 | 416 813 | 4 427 438 | 1 616 014 688 |
| 100000 | 10 000 000 | 1 250 000 | 4 000 000 | 4 750 000 | 3 206 250 | 1 543 750 | 463 125 | 4 919 375 | 1 795 571 875 |
| 150000 | 15 000 000 | 1 875 000 | 6 000 000 | 7 125 000 | 4 809 375 | 2 315 625 | 694 688 | 7 379 063 | 2 693 357 813 |
| 200000 | 20 000 000 | 2 500 000 | 8 000 000 | 9 500 000 | 6 412 500 | 3 087 500 | 926 250 | 9 838 750 | 3 591 143 750 |
| According to available information, Government will charge Royalties of 5% if production capacity is less than 2500 bpd, 7.5% if production is between 2500 bpd and 5000 bpd, 10% if production is between 7500 bpd and 10,000 bpd, and 12.5% for all quantities above 10,000 bpd. After deducting royalties, the oil companies are supposed to deduct their recoverable costs(40% of gross revenue) to obtain profit oil. The profit oil is then shared between the government (67.5%) and the oil companies (32.5%) respectively. | |||||||||
| Calculation by Enock Twinoburyo | |||||||||
Oil revenues over the
24 years at peak production of 200,000 bpd, would earn Uganda about 84bn
dollars revenue. With a population of 35 million, the latter means $2,400 per capita, or
more than 4.5 times GDP per capita at market prices. Thus, the value of the
discovered oil is large but far from being large enough to itself lead to a revolutionary
change in the living conditions of the average Ugandan. The oil will not make
the average Ugandan a rich oil sheik but if the oil re- source is wisely spent,
it certainly may make a difference.
It is also important-
to take stock of how much Uganda has earned so far. Oil in Uganda
(www.oilinuganda) estimates that Uganda has got close to 1 billion USD (UGX 2.6
Trillon- which is about 20% of the current Budget of UGX 13.6 trillion). Tullow
Transferred two thirds of its rights worth USD 2.9billion ( a third each) to
Total and CNOOC. Government levied a capital gains tax of 472.7m in capital
gains and Tullow only paid a third of it (USD 141 Million). Tullow is expcted
to pay full amount after a London arbitration hearing found that heritage
should have paid full amount of capital gains.
According to Bank of Uganda- Uganda has so far received USD 620 Million
and should expect another USD 286 Million the balance on capital gains of
Tullow’s farm down to CNOOC and Total.
According to Tullow published reports about USD 32 million has been paid
in other fees and taxes last year, assuming the same payments by Total and
CNOOC would mean Uganda has so far received USD 720 milloon and expects USD 286
Million. It is a fair assumption that Uganda is USD 1 Bn Rich todate or more
bearing in mind Uganda presumably has earned some cash from the eight years of
oil exploration before 2012.
[1] With improved and enhance recovery methods, Norway
managed to increase recovery rate from 25% to 45% offshore. Recovery rate can
even increase to 60% with the use of modern and efficient technologies.
[2] Without clear fiscal rules on how the government will share revenue
between the budget and investment, Fiscal sustainability analysis has not been
calculated due to missing information. An assumption can however be made and calculations made for different types of fiscal rules i.e. Bird in hand or Permanent income hypothesis rule. To the done at later stage
