A miscalculation by the Uganda Revenue Authority (URA) will cost taxpayers Shs709 billion after the High Court’s Commercial Division ordered the refund of wrongly assessed taxes and interest to a United Kingdom-based company.
In a December 23, 2024, ruling, Justice Susan Abinyo directed URA to reimburse Heritage Oil and Gas Ltd $45 million (Shs164.4 billion) in erroneously assessed Capital Gains Tax (CGT) and an additional $148.5 million (Shs542.5 billion) in statutory interest.
The ruling concluded a 165-month legal dispute between the tax authority and the UK firm.
Implications for Uganda
The decision has sparked concern among analysts, who warn that such a significant financial setback could strain the national treasury and tarnish Uganda’s reputation among foreign investors.
URA officials acknowledged the ruling’s impact, with senior management stating that further steps would be determined after reviewing the court’s decision.
Background of the Dispute
The case arose from URA’s 2010 assessment of CGT following Heritage Oil’s sale of its shares in Uganda’s exploration licenses to its joint venture partner, Tullow Oil.
Heritage had invested $150 million (Shs548 billion) in oil exploration and held a 50% stake in the venture.
In January 2010, Heritage and Tullow signed a $1.45 billion (Shs5.3 trillion) agreement, with $1.35 billion allocated as the base purchase price and $100 million as a contingency payment.
URA imposed a CGT of $404.9 million (Shs1.4 trillion) on the base purchase price and $30 million (Shs109.6 billion) on the contingency payment.
Heritage objected, arguing that the $150 million invested in exploration should not have been included in the CGT calculation.
Court’s Findings
Justice Abinyo ruled in favor of Heritage Oil, stating that URA had improperly taxed the $150 million exploration cost.
The court declared the amount to be part of the cost base and not subject to taxation.
“The computation of the capital gains tax excludes the sum of $150 million, which formed part of the cost base and therefore is not taxable,” Justice Abinyo stated in her judgment.
The court further ordered that statutory interest of 2% per month be paid on the excess tax from the date of payment until the refund is completed.
Broader Context
URA had previously defended its CGT assessments, citing provisions under Uganda’s Income Tax Act.
The Tax Appeals Tribunal (TAT) initially upheld the assessments, but Heritage Oil challenged this in the High Court.
The Commercial Division consolidated Heritage’s appeals and overturned the TAT’s rulings.
URA defines CGT as a 30% tax levied on profits from the disposal of business assets, shares, and commercial properties.
In this case, the court found URA had incorrectly included the $150 million investment in its tax base, leading to an over-assessment of $404.9 million instead of the correct calculation based on $1.2 billion.
What’s Next?
The ruling represents a major blow to URA’s enforcement of CGT and highlights the need for greater scrutiny in tax assessment processes.
As stakeholders await URA’s next steps, the case underscores the importance of upholding legal and procedural accuracy in taxation to avoid costly disputes.
