THE REPUBLIC OF UGANDA

IN THE MATTER OF THE TAX APPEALS TRIBUNAL

TAT APPLICATION NO. 4 OF 2011
1. TULLOW UGANDA LIMITED
2. TULOW OPERATIONAL PTY LTD ..................... APPLICANTS
VERSUS
UGANDA REVENUE AUTHORITY ........................ RESPONDENT
RULING
This ruling is in respect of an application brought by the applicants challenging initial
assessments of income tax of US$ 472,748,128 by the respondent in respect of a transfer of
their interests in xploration !reas !1, !2 and !" to #$%%# and Total for the
consideration of US$ 2,&"",""',4''( The said assessments )ere e*entually re*ised by the
respondent to US$ 4+7,271,&71 being capital gains tax( The applicants being aggrie*ed by the
said assessments appealed to the Tribunal(
This ruling is brought after the Tribunal has complied )ith S( 1" of the Tax !ppeals Tribunal
,T!T- !ct( .r( .artin /eeta, one of the members of the panel listening to the dispute passed
a)ay on the 2'
th
.ay 2'14( !t the time of his passing a)ay, all the parties had presented their
e*idence, closed their cases and made their submissions( 0eli*ery of the ruling )as pending( !t
the time of his passing a)ay the then Tribunal had reached a decision( %n the 1+
th
1une 2'14,
)hen the matter came up for ruling, the parties )ere informed that the Tribunal did not ha*e the
legally re2uired #oram to deli*er a ruling( #ounsel for the parties agreed that a ne) member
should be assigned to the panel to replace .r( .artin /etaa( 3t )as also agreed that matter be
reheard by the record of e*idence being a*ailed to a ne) member under S( 1",4- of the Tax
!ppeals Tribunal !ct )ithout the need of recalling )itnesses( .r( 5ius 6ahemu7a )as appointed
to replace the deceased( The record of the e*idence and the submissions of the parties ha*e
been handed to him( Though the Tribunal cannot say that this is a ruling of four members as the
#oram is three, it can say that this is a unanimous decision(
1
1. SUMMARY OF CASE
The facts agreed upon by both parties are8
1( The first applicant, Tullo) Uganda 9imited ,hereinafter called :TU9;-, is registered under the
la)s of the 3sle of .an and )as formerly nergy !frica Uganda 9imited ,:nergy !frica;-(
The second applicant, Tullo) Uganda %perations 5ty 9imited ,hereinafter called :TU%5;- is
registered under the #orporations !ct 2''1 in <estern !ustralia and )as formerly =ardman
!frica 5ty 9td ,:=ardman;-( The applicants are residents for tax purposes in Uganda(
2( %n the 8
th
%ctober 2''1, both the applicants and the >o*ernment of Uganda ,:>%U;-
executed a 5roduction Sharing !greement ,5S!- under )hich they )ere granted
exploration, de*elopment and production rights in xploration !rea !2 ,the :!2 5S!;-( 3t
)as signed by =on( Syda $( .( 6bumba, .inister of .ineral and nergy 0e*elopment for
and on behalf of the >o*ernment, by .r( d)ard 1ohn llyard ,.anaging 0irector- on behalf
of =ardman and by .r( <(! $el ,#hief %perating %fficer- on behalf of nergy !frica(
"( !nother 5S!, in relation to !1, )as entered into on the 1
st
1uly 2''4 ,the :!1 5S!;-
bet)een nergy !frica, =eritage %il and >as 9imited ,:=eritage;- and the >%U( The !1
5S! )as signed for and on behalf of the >%U by =on( 0audi .igere7o, .inister of State for
nergy, also holding the portfolio of the .inster of .ineral and nergy 0e*elopment, by .r(
6rian Smith on behalf of =eritage and by .r( ?him)aan >asaut on behalf of nergy !frica(
4( !nother 5S!, in relation to !"!, )as entered into on the 8
th
September 2''4, bet)een
nergy !frica, =eritage and the >%U ,:the !"! 5S!;-( The !"! 5S! )as signed for an
behalf of the >%U by =on( Syda $( .( 6bumba, .inster of .ineral and nergy
0e*elopment, by .r( 6rian Smith on behalf of =eritage and by .r( !ndre) <yndham on
behalf of nergy !frica(
4( =eritage and nergy !frica agreed to continue )ith the 1oint %perating !greement ,:1%!;-
bet)een =eritage and nergy !frica entered into on the 2&
th
!ugust 2''2 for !", under
)hich the first applicant@s participating interest )as 4'A(
2
+( 5rior to 2''&, Tullo) %il 5lc, the parent company of both applicants, ac2uired the nergy
!frica >roup, )hich had a subsidiary, )hich later became TU9( Tullo) %il 5lc later ac2uired
the =ardman >roup, including =ardman !frica 5ty 9imited, )hich later became TU%5(
Tullo) %il 5lc ac2uired the rele*ant subsidiaries@ rights and interests in the 5S!s in Uganda(
7( !t this stage the interests in the 5S!s )ere as follo)s8
a( TU9 held 4'A of !1, !2 and !"!B
b( TU%5 held 4'A of !2B and
c( 4'A of each of !1 and !"! )as held by =eritage and the interests then held by TU9 in
!1 and !"! are hereinafter referred to as :the %ther %riginal 3nterests;(

8( The applicants through their exploration acti*ities disco*ered hydrocarbons in the respecti*e
exploration areas(
&( %n or about the 17
th
1anuary 2'1', TU9 in*o7ed its preCempti*e rights under the 1%! for the
purchase of 4'A participating interests of =eritage in xploration !reas !1 and !"! ,the
=eritage interests;- at a consideration of US$ 1,44',''',''' ,United States 0ollars one
billion four hundred and fifty million-, subDect to appro*al from the >%U(
1'( %n about the 2+
th
1anuary 2'1', TU9 and =eritage signed a Sale and 5urchase !greement
,the :S5!;- under )hich TU9 )ould ac2uire =eritage@s 4'A participation rights in xploration
!reas !1 and !"!(
11( %n the +
th
1uly 2'1', the >%U granted a conditional appro*al to the transaction bet)een
=eritage and TU9(
12( %n the 18
th
%ctober 2'1', the respondent raised assessment number S!E9T%E24+& of US$
"&',&24,4+' and assessment number S!E9T%E247' of US$ 84,&&&,++' on TU9 and TU%5
respecti*ely being income tax ,#apital >ains Tax-(
1"( %n the 1
st
0ecember 2'1', the applicants obDected to the assessments(
14( %n the 24
th
/ebruary 2'11, the respondent made an obDection decision that adDusted the
assessment on the TU9( The assessment $o( S!E9T%E24+& of US$ "&',&24,4+' )as
amended to US$ "87,748,4+&, )hile assessment $o( S!E9T%E247' of US$ 84,&&&,++' )as
3
unaffected, resulting in a total of US$ 472,748,128(
14( %n the 14
th
.arch 2'11, the applicant, the >%U and the respondent executed a
memorandum of understanding ,:.%U;-(
1+( %n the 24
th
.arch 2'11, the applicants filed an application for re*ie) before the Tax !ppeals
Tribunal ,T!T- contesting the assessments and the obDection decision by the #ommissioner
of the respondent(
17( TU9 ac2uired the =eritage 3nterests pursuant to the S5! and upon fulfilment of conditions in
the .%U of 14
th
.arch 2'11( /ollo)ing the ac2uisition the holdings in the xploration !reas
)ere8
a( TU9 held 4'A of !2 and 1''A of ! 1 and ! "!B and
b( TU%5 held 4'A of !2(
18( The applicants disposed of ++(+7A of their interests in !s 1, 2, and "! to #$%%# and
Total at US$ 2,&"",""',4'' ,United States 0ollars t)o billion nine hundred thirty three million
three hundred thirty thousand four hundred-(
1&( /ollo)ing the disposal the holdings are8
a( TU9 holds ""(""A of the interests under the ! 1, and ! "! 5S!s(
b( TU%5 holds ""(""A of the interests under the !2 5S!(
c( #$%%# holds ""(""A of each of the interests under the !1, !2 and !"! 5S!sB and
d( Total holds ""(""A of each of the interests under the !1, !2 and !"! 5S!s(

2'( %n or about the 22
nd
/ebruary 2'12, the applicants paid US$ 141,824,4"8 ,United States
0ollars one hundred forty t)o million eight hundred t)enty four thousand four hundred thirty
eight- being "'A of the tax assessed(
2. ISSUES
The issues agreed upon by both parties are8
1. In r!"#$ %& EA2
4
1(1 <hether !rticle 2"(4 of the 5S! for area !2 co*ers capital gainsEincome tax arising from
gains deri*ed out of disposal of interests in the 5S!F
1(2 <hether !rticle 2"(4 of the 5S! for !2 entered into by and bet)een the >o*ernment of
Uganda acting through the .inister of nergy and .ineral 0e*elopment is *alidEla)ful
under Uganda 9a)F
1(" <hether !rticle 2"(4 is *alidEla)ful under international la)F
1(4 3f the ans)er of either issue 1(2 or 1(" is in the affirmati*e, should !rticle 2"(4 be enforced
by the T!T, and if yes do the assessments fall to be discharged or notF
1(4 <hether the respondent is estopped by !rticle 2"(4 from raising an assessment in respect
of the gains made on the disposal of the applicants@ interest in !2, and if yes, do the
assessments fall to be discharged or notF
1(+ <hether the reference to the respondent being estopped includes references to principles
rooted in fairness including legitimate expectationF
2. In r!"#$ %& $' %$'r PSA!
<hat is the gain, and ho) is that gain computed, on the disposal of the interests in the 5S!s ,a-
purchased by TU9 from =eritageB and ,b- other)iseF
(. R)n*!$+n$ r,)&
"(1 <hether the applicants are entitled to rein*estment relief under S( 44,1- ,c- of the 3ncome
Tax !ct #ap "4'F
5
"(2 3f so )hat is the 2uantum of the disposal consideration in respect of )hich rein*estment
relief can applyF
(. REPRESENTATION OF THE PARTIES
The applicants )ere represented by .r( Stephen 6randon G#, .r( %scar Hambona, .s(
!manda =ardy, .s( ?eshma Shah, .r( 0a*id .panga and .r( 6ruce .usinguIi(
The respondent )as represented by .r( !li Sse7ata)a, .r( 5eter .ulisa, .r( .atthe) .ugabi,
.r( .artin .uhanDi, .s( Syson !inebabaIi and .r( >eoffrey .ucureIi(
4. SUMMARY OF EVIDENCE ADDUCED AT TRIAL
!ll the parties agreed that the applicants shall be allo)ed to file )itness statements( Their
)itnesses )ould then be crossCexamined by the respondent( The respondent opted to call its
)itnesses for examination in chief instead of filing )itness statements(
The applicants@ first )itness )as .r( .artin >raham, the >eneral #ounsel, of the Tullo) >roup
,hereinafter called JTullo)@- )hich includes both applicants( 3n his statement, he stated that he
dealt )ith the ac2uisition of nergy !frica Uganda 9imited and =ardman ?esources 9imited by
Tullo)( =e deponed that on their ac2uisition, nergy !frica Uganda 9imited changed its name to
TU9 )hile =ardman changed to TU%5(
=e further deponed about the signing of the 5S!s bet)een the >%U and the applicants( The
5S!s ga*e exclusi*e rights to a party to explore for hydrocarbons in certain areas 7no)n as
xploration !reas ,!s-( These areas included !1, !2 and !"!( !t the beginning of
1anuary 2'1', TU9 held 4'A of the interests in !1, !2 and !"! and TU%5 held 4'A of the
interest in !2( The other 4'A interests in !1 and !"! )ere held by =eritage( %n the 17
th
1anuary 2'1', TU9 exercised its preCemption rights and ac2uired =eritage@s interests in !1
and !"!(
6
3n /ebruary 2'1', =eritage as7ed the >%U for consent to the transaction( The >%U ga*e
consent subDect to payment of tax( =eritage obDected to the payment of tax( 9ater an
arrangement )as agreed upon )here =eritage deposited the tax payable on an escro)
account( The >%U and the applicant entered into a memorandum of understanding on the 14
th
.arch 2'11 )here TU9 paid US$ "1" million tax as agent for =eritage(
!ccording to .r( >raham, Tullo) ac2uired =eritage@s interests in !1 and !"! )ith the
express intention of selling them to third parties( 3t had intended to sell 4'A of the interests in
each of the 5S!( =o)e*er the >%U )ould not gi*e its consent to a sale to only one party( 3t
e*entually sold ++(+7A of its interests in each of the 5S!s to #$%%# and Total on 21
st
/ebruary 2'12, each purchaser ta7ing ""(""A of the interests( =e ga*e a bac7ground and
history and the nature of oil exploration in Uganda in his statement, )hich )e shall not repeat(
=e stated that the exploration areas had not yielded any income as yet(
.r( >raham, in his statement, noted that under the 5S!s the >%U gets its sta7e on oil in a
number of )ays )hich includes royalties, profit oil and 14A of the contractors@ share of profit oil
under the state participation pro*isions( 3f a proDect fails the >%U does not suffer any loss( The
costs reco*erable are pooled together each year, and the balance is reduced by the *alue of
cost oil recei*ed( Unreco*ered costs are carried for)ard to subse2uent years until full reco*ery
is completed( =e argued that this is not a tax relief or any 7ind of relief li7e indemnity( 3t is simply
the reco*ery of expenditure incurred by one party( Such reco*ery does not pre*ent the oil
company from deducting )hat it expended in tax computation(
.r( >raham discussed the protection of the oil companies in the 5S!s( =e stated that :it is
common for go*ernments to pro*ide certain incenti*es to encourage oil exploration( These
incenti*es ta7e the form of exemption or reliefs that reduce the company@s costs(; !ccording to
him, the !2 5S! contained a clause pro*iding that no tax )ould be payable in respect of a
farm do)n of TU9@s interests in !rticle 2"(4( .r( >raham testified that !rticle 2"(4 of the !2
5S! pro*ided that the assignment or transfer of an interest under the agreement )ould not be
subDect to any tax, fee or other impost or fee le*ied either on the assignor or the assignee( To
him he )as not sure )hether #apital >ains Tax and transfer tax are the same( =e stated that at
the time the !2 5S! )as entered into, it )as not certain that there )ere any hydrocarbon
7
deposits in Uganda and so potential in*estor@s interest in the !2 5S! )as *ery lo)( =e argued
that !rticle 2"(4 )as ad*antageous to the >%U because it significantly increased the possibility
of in*estment in Uganda( =e argued that )ithout any tax brea7s it )as unli7ely that any
companies )ould ha*e in*ested in Uganda, especially )here exploration in*ol*ed a lot of
monies( !ccording to him, !rticle 2"(4 of the !2 5S! )as certainly important to Tullo)( 3t had
incurred considerable expenditure( Tullo) could not 7eep the )hole of its interests in !2, so a
farmdo)n )as ine*itable( .r( >raham testified that the applicants relied on !rticle 2"(4 of the
!2 5S! )hen selling their interest as they )anted to benefit from the no tax on the farmdo)n
of their interests(
.r( >raham said that US$ 1(44 billion )as paid by TU9 for the ac2uisition of =eritage@s
interests( The money )as raised from shareholders( =e said farming do)n )as a )ay of the
applicants financing exploration acti*ities and de*elopment( =e referred to exhibit !4+, a letter
to the .inster of nergy, )here the applicant expressly stated that upon ac2uisition of the
interest in 6loc7s 1 and "!, the applicants )ould farm do)n at least 4'A of the interests in all
the 6loc7s to one or more partners acceptable to >%U( =e stated that the applicants )ere
forced to sell an extra 1+(+7A of their interests( There )as pressure from the >%U for the
applicants to brea7 the monopoly in oil exploration( There )as no official communication that the
applicants should sell ++(+7A of their interests( =o)e*er there )ere se*eral meetings )ith >%U
officials at different le*els )here it )as indicated that the applicants should retain a third of their
interests(
.r( >raham said he did not engage in drafting the 5S! for the farmdo)n( The legal team did it(
=o)e*er as head of the legal team he too7 responsibility( The tax department )as )or7ing )ith
him( .r( >raham stated that he is not a tax expert( The applicants did not do a due diligence
before they transacted )ith =ardman and others(
.r( >raham said that the applicants sold first )hat )as purchased from =eritage( The =eritage
interest )as the )hole of the *alue that )as presented in the 5S!( They too7 o*er the costs
incurred by =eritage( The monies the applicant used to pay the tax for =eritage came from Total
and #$%%#(
8
The applicant@s second )itness )as .r( 5aul .c0ade, the #hief %perating %fficer of the Tullo)(
=e noted that the respondent raised assessments on the 18
th
%ctober 2'1' in respect of the
three bloc7s( =o)e*er the farmdo)n had not ta7en place( 3t too7 place on the 27
th
/ebruary
2'12( !t the beginning of 1anuary 2'1' TU9 held 4'A interests in !1, !2 and !"! and
TU%5 held the other 4'A of !2( The other 4'A of !1 and !"! )as held by =eritage(
.r( .c0ade ga*e a bac7ground to the farmdo)n in his )itness statement, )hich is as stated in
the agreed facts( =e added that since the disco*eries in 2''+ and 2''7, the applicants planned
to farmdo)n in order to meet the substantial costs needed for exploration( %ne of the functions
of the farmdo)n )as to assist financing their proDected in*estments(
.r( .c0ade further testified that the >%U indicated to the senior Tullo) executi*es that a 4'A
farmdo)n )ould not be acceptable to it( 3t )as >%U policy to a*oid a monopoly situation in the
!lbertine >raben( .r( ?ichard 3nch emailed to him about a con*ersation he had )ith .r( HiiIa,
the 0irector of conomic !ffairs, .inistry of /inance, 5lanning and conomic 0e*elopment that
the >%U )ould not allo) a 4'A split( The applicants changed their position of a 4'84' split to a
""8""8"" split as the former proposal )ould not be allo)ed( .r( .c0ade argued that the
disposal of 1+(+7A )as therefore an in*oluntary disposal( =e further testified that at the time of
disposal Tullo) )as planning to rein*est considerable sums from the farmdo)n proceeds in
assets of a li7e 7ind )ithin one year from the farmdo)n(
3n crossCexamination, .r( .c0ade said that the intention to sell 4'A of its interest )as not
expressed in any form of board resolution( .r( .c0ade reiterated his earlier position that Tullo)
)anted to sell at least 4'A of its interests( There )as no correspondence bet)een >%U and
Tullo) that indicated that the latter )anted to sell 4'A of its interest( =e stated that there )as a
draft S5! )hich )as on a basis of 4'84' made in /ebruary 2'1'( =e did not clearly understand
)hat a reCin*estment relief )as(
3n reCexamination, .r( .c0ade stated that the monies obtained from the sale )ere to be spent
on the exploration acti*ities, drilling, appraisal acti*ities, testing of oils and associated acti*ities
9
or de*elopment studies( !ll the expenditures met prior to the farmdo)n )ere exploration and
appraisals expenditures, drilling of )ells, bridges, procuring of ser*ice studies, geological, etc(
The applicant@s third )itness )as .r( ?ichard 3nch, the =ead of Tax for Tullo)( The applicants
are subsidiaries of the Tullo)( =e is a #hartered !ccountant and a #hartered Tax !d*isor and
has held a number of senior tax positions( =is duties in*ol*ed the o*erall management of the
group@s tax affairs(
=e stated that follo)ing the ac2uisition of =eritage@s interests in !1 and !"!, Tullo) agreed
to sell a part thereof to Total and #$%%#( Tullo) had intended to sell 4'A of the interests in
!1, !2, and !"!( =o)e*er before the >%U )ould grant the necessary consent, it re2uired
Tullo) to sell a further 1+(+7A of the remaining interests( =e stated that in a meeting of the 2
nd
/ebruary 2'1', )ith .r( 9a)rence HiiIa the 0irector of conomic !ffairs, he )as told that >%U
)as not going to allo) a sale of only 4'A of the 5S! and )anted a single distinct operator for
each 5S!, )ith each ta7ing ""(""A interest( .r( 3nch testified that there )ere no minutes for the
meeting he had )ith .r( HiiIa, 3t )as a con*ersation( There )as no official communication(
=e deponed that, on the 18
th
%ctober 2'1', the respondent raised assessments on Tullo)( The
completion of the disposal too7 place on the 27
th
/ebruary 2'12( 3n response to the
assessments, Tullo) filed an obDection on the 1
st
0ecember 2'1'(
.r( 3nch, in his statement, a*erred that before 2''8, there )as no specific taxation regime for oil
companies in the 3T! though the 5S!s contained rele*ant tax pro*isions( 3n 2''8, the .inistry of
/inance introduced a specific code in relation to petroleum operations by the insertion in the
3ncome Tax !ct 1&&7 of a ne) 5art 3K! by the 3ncome Tax ,!mendment- !ct 2''8( The 2''8
!mendment !ct, )hich )as published on the "'
th
1une 2''8 had retrospecti*e effect from 1
st
1uly 1&&7( 5art 3K! under S( 8&> ,a- pro*ides for taxation in cases of transfer of interests( The
deponent felt that the said !ct did not impact on Tullo), in particular the !2 5S!, because it
had obtained an exemption(
.r( 3nch testified that around the time the 2''8 !mendment !ct )as passed, Tullo) )as in
discussion )ith its ban7s regarding funding of its operations( ! farmdo)n )as an important part
10
in its financing plans( 3t assumed that the farmdo)n proceeds )ould be recei*ed taxCfree( 3n
relation to the !1 and !"! 5S!s, he thought that the ne) 5art 3K! in the 3T! pro*ided for
exemptions in relation to the interests in the said 5S!s(

.r( 3nch emphasiIed that Tullo) did not anticipate any taxes( This )as because the !2 5S!
)as a legal and binding agreement( 3t had an exemption from capital gains tax in !rticle 2"(4(
.r( 3nch stated that8 :the obligations under the 5S!s )ere negotiated in good faith on the basis
of the stability and certainty of the Uganda fiscal regime(((; =o)e*er, he stated that .r( HiiIa told
Tullo) that there )ere *ie)s )ithin the >%U that the !2 exemption )as not *alid( Tullo) )as
informed that the U?! had in mind a tax liability of around US$ 47' million )hich indicated that
the >%U did not accept that !rticle 2"(4 of !2 5S! ga*e an exemption(
.r 3nch argued that the so*ereign state of the ?epublic of Uganda had the authority to enter
such agreement and therefore could not collect tax( !ccording to .r( 3nch, the terms of the 5S!
pre*ailed in case there )as a conflict )ith the 3T!( Tullo) had the right to expect >%U to 7eep
its )ords as set out and agreed in !rticle 2"(4 of the 5S!( !ccording to .r( 3nch, >%U has gi*en
exemptions to other companies, for example 6idco(
.r( 3nch also submitted that Tullo)@s cost base )as the =eritage gain subDect only to any
potential deduction in respect of excess costs( =e stated in his statement that Tullo) has no
excess costs( Tullo) paid the base price of US$ 1,"4' million and a contingent consideration of
US$ 1'' million( Tullo) also paid an additional US$ 1",&"7,11+ in respect of the )or7ing capital
at completion( Tullo) paid a guarantee cost of US$ 4+,'+1,'48, stamp duty of US$ 14,4'',''''
on ac2uisition and legal fees of US$ 1,'7&,'77 gi*ing to total incidental costs of US$
+1,14',1"4(
3n cross examination, .r( 3nch testified that the 3T! imposed capital gains tax subDect to the
pro*isions of the S5!( =e also testified that the proceeds from the farmdo)n )ould be used for
exploration, production and de*elopment(
.r( 3nch informed the Tribunal that =eritage and Tullo) had indi*isible interests( There )as no
)ay one could split and say )hat is for Tullo) and )hat is for =eritage( .r( 3nch stated that
11
there )as no letter saying that Tullo) )as buying the =eritage interests specifically to sell( The
intention )as not expressed in any board resolution( =o)e*er .r( 3nch said that )as the
common understanding of the senior management team(
=e said that 6loc7s 1 and "! )ere sold by Tullo) to #$%%# and Total at a loss of US$
174,477,241( =e stated that there )ere additional payments that )ere made to =eritage and
they could not pass them to the buyers( They incurred an economic cost of US$ 1'' million
contingent and guarantee fees to the ban7 )hich cost around US$ 4+ million( =e stated that
Tullo) sold ++(+7A of its interests at US$ 2(& billion but 4'A of that )ere interests that formerly
belonged to =eritage( They sold =eritage interests at US$ 1(44 billion at a loss( =e said the
ans)er )ould ha*e been different for tax computation if they had considered the asset as
undi*ided( =e said the loss arose because Tullo) expensed it )ith the cost of the asset
ac2uired in accordance )ith international accounting standards( 9egally Tullo) sold =eritage
interest first(
=e testified that there )as a difference bet)een the first disposal by =eritage and the second
disposal by Tullo) in respect of computing the cost base and deductions( The distinction is that
for an initial disposal, the cost base of the asset is the amount paid, to )hich is added incidental
costs of the ac2uisition and in the case of a subse2uent disposal the cost base is the first
seller@s gain(

The respondent called t)o )itnesses( The first )itness )as .r( rnest Tum)ine ?ubondo, the
#ommissioner 0epartment of 5etroleum xploration and 5roduction in the .inistry of nergy
and .ineral 0e*elopment in the >%U( .r( rnest ?ubondo ga*e a lengthy history of petroleum
explorations in Uganda )hich he stated dates bac7 as far as 1&1', )hen oil seeps )ere
reported( %il explorations started but ended around 1&4' as a result of the onset of the Second
<orld <ar( 3n the 1&8's efforts on oil exploration )ere restarted( ! successful sur*ey )as done
)hich identified " large deposit centres in the >raben(
To cut a long story short, in 1anuary 1&&7, the >%U licensed =eritage to explore oil in !"!( 3n
$o*ember 1&&7, the >%U signed an agreement )ith =ardman for !2 )hich the latter
surrendered in 1&&& because oil prices had gone lo)( =eritage )as Doined by nergy !frica in
12
2'''( 3n 2''2, =eritage and nergy !frica drilled Turaco 1 )here they encountered oil shoals(
The companies also drilled Turaco 2 and " )here they encountered hydro carbons in 2''4( 3n
2''4, =eritage and nergy !frica actually surrendered !rea " and reapplied for it from the >%U(
3n 1uly 2''4, the companies ac2uired another licence in the 5a7)ach 6asin( 3n 2''+ oil )as
disco*ered(
.r( ?ubondo testified that he )as part of the >%U team that negotiated the !1 5S!( >%U
)ould do a due diligence on a company and if it )as )orth dealing )ith, it )ould send it a draft
5S!( The parties )ould then agree on the terms( =e testified that !rticle 2"(4 )as in the model
5S! that )as prepared in 1&&"( 3t )as not negotiated by the parties( =e said that the intention of
>%U )as that it did not )ant licensees to be encumbered )ith fees, imposts and taxes( The
obDecti*e of the clause )as to facilitate the licensees to bring on board partners to share ris7
)ithout the need to pay fees and imposts li7e stamp duties and signature bonuses( =e said
clearly the clause )as not meant to co*er taxes on gains( 3ts purpose )as to facilitate the
sharing of ris7 and not to guide the taxation of a gain(
=e further testified that TU9 ac2uired nergy !frica in 2''4( TU%5 ac2uired =ardman in 2''7(
TU9 had 4'A interests in !1 and !2( TU9 )as together )ith =eritage in !" in a 4'A each
Doint *enture( TU9 too7 o*er =eritage@s interests on 7
th
!pril 2'11 after it exercised it right of preC
emption( TU9 ac2uired the rights of =eritage to de*elop and produce oil( =e stated that the said
interests in the agreements )ere indi*isible(
%n crossCexamination, .r( ?ubondo reiterated his earlier position that !rticle 2"(4 does not
apply to farmdo)ns( =e stated that the farmdo)n to #$%%# and Total )as dependant on
consent from >%U, more precisely the .inistry of nergy and .ineral 0e*elopment(
The respondent@s second )itness )as .r( .oses .esach HaDubi, its #ommissioner 0omestic
Taxes( The 0omestic Tax 0epartment is responsible for collecting all domestic taxes in Uganda
inclusi*e of income taxes(
Sometime in %ctober 2'1', the department recei*ed the S5!s of Tullo), Total and #$%%#(
The department studied the S5!s and realised that Tullo) )as selling its interests to Total and
13
#$%%#( %n the 18
th
%ctober 2'1', the respondent issued assessments to Tullo)( The
assessments )ere issued because it )as a one off transaction and it )as of substantial *alue(
The respondent re*ised the assessments on the applicant( ! re*ised assessment )as issued in
/ebruary 2'12 )hich )as again re*ised in $o*ember 2'12( <hat changed bet)een the earlier
assessments )as that the cost base changed from US$ 1(2&& billion to US$ 1("1"+87111+
billion because Tullo) paid an extra US$ 1"(+87 million dollars to =eritage( There )as also ne)
information that Tullo) incurred more costs from US$ 47,''',''' to US$ +1,&'","87( The effect
of the changes )as to reduce the total tax payable to US$ 4+7,271,&74(
The respondent in computing taxes made some deductions( These included the signature
bonus in respect of ! 1 and ! "!( xcess costs )ere allo)ed( The reco*erable costs that
had been sold by =eritage %il )ere subtracted( The incidental expenses incurred by Tullo) of
US$ 47 million )ere allo)ed( The net gain for TU9 )as computed at US$ 1,"'",'81,4"1 and the
tax at "'A )as US$ "&',&24,4+'( /or TU%5 the net gain )as computed at US$ 28,""2,2''
and taxed at "'A bringing the tax to US$ 84,&&&,++'( The total tax payable )as US$
474,&24,12'('4( Tullo) obDected to the assessments of the said taxes on the 1
st
0ecember
2'1'( !n obDection decision )as made on the 24
th
/ebruary 2'11(
The assessments did not remain the same( #osts of about US$ 1',48+,+"8 )ere accepted(
These costs )ere related to guarantee commitment fees and legal fees of US$ 447,"&7 dollars
and stamp duty of US$ 14,4'','''( The assessments )ere re*ised to US$ "87,748,4+8(+4 for
TU9 and US$ 84,&&&,++' for TU%5 bringing the total to US$ 472,748,128(+4(
The respondent reDected the applicants@ obDection to ha*e no tax paid in relation to !2 as a
result of !rticle 2"(4 of the 5S!( .r HaDubi argued that !rticle 2"(4 of the !2 5S! )as not part
of the 3T!( The 5S! )as not an international agreement( Tullo) is not an international
organisation and the 5S! )as not ratified in accordance )ith the ratification of la)s( .r( HaDubi
also argued that the po)ers to le*y tax in Uganda are *ested in the 5arliament( The said income
)as not exempted by 5arliament( The .inistry of nergy could not ta7e a)ay the po)er of
5arliament to grant exemptions( .r( HaDubi argued that capital gains tax is not a transfer tax and
therefore is not exempted by the 3T!(
14
.r( HaDubi argued that excess costs should be used in the computation of taxes( xcess costs
are rele*ant in subse2uent disposals( Tullo) argued that excess costs )ere nil( =o)e*er the
respondent argued that excess costs )ere US$ 14' million( !ccording to .r( HaDubi, excess
costs reduce the cost base on the subse2uent disposal( .r( HaDubi argued that )hen a
subse2uent disposal is made, a taxpayer is only restricted to excess costs(
.r( HaDubi testified that the reco*erable costs incurred by the applicants )ere reDected as
deductions( This is because they are a*ailable for reco*ery under the S5!( To allo) them )ould
gi*e the taxpayer a double benefit(
!s regards the issue of rein*estment relief, .r( HaDubi stated that the respondent did not get any
e*idence of an in*oluntary disposal( 3n order for an in*oluntary disposal to ta7e place it must be
done against one@s )ill( Tullo) )as )illing to sell its interests( There )as no e*idence to sho)
that Tullo) )as forced to sell the extra 1+(+7A of its interest( !ccording to .r( HaDubi )hat )as
re2uired to pro*e in*oluntary disposal )ould be a letter, a decree or something in )riting(
Secondly, the proceeds of an in*oluntary disposal should be rein*ested in an asset of a li7e
7ind( This has to be done )ithin one year of the disposal( =e contended that the transaction )as
concluded in .arch 2'12 and there is no e*idence that there )as rein*estment )ithin one year
from the date of disposal( !ny expenses that )ould be brought to the attention of the respondent
)ould be used to ma7e an adDustment( .r( HaDubi opined that the assets of a li7e 7ind should be
an in*estment in an interest in another 5S!((
.r( HaDubi said the sale price for the interests in !1 )as US$ 774 million and on !" )as US$
474 million( These figures )ere pic7ed from the S5!s( The cost base )as US$ 74+,142,777 for
! 1 and US$ 44", 4&7,222 for !2(=e also argued that the economic loss claimed by the
applicants )as a creation and not real( The purported economic loss arose from Tullo) claiming
that )hat )ere sold first )ere =eritage@s interests( %ut of the ++(+7A interest sold, 4'A )as
)hat )as purchased from =eritage( Therefore the cost base for that should be accepted as a
cost in the computation of the loss( The loss )as a result of the Jlast in first out@ ,93/%- in the
allocation of costs approach( 3f the Jfirst in first out@ ,/3/%- approach )as used there )ould be no
loss( The gain for /3/% approach is about 2"' million dollars(
15
.r( HaDubi stated that Jexcess costs@ is the difference bet)een the costs that are a*ailable for
reco*ery from the first person )ho sold, minus anything that is reco*ered( They apply to a
subse2uent sale( =eritage had reco*erable costs of US$ 14' million( =e said that excess costs
are deducted from cost oil( =e defined cost oil to mean a contractor@s entitlement to production
as cost reco*ery under a 5S!( =e said that a company obtains cost oil at the commencement of
commercial production( There has not been any commencement of commercial production and
reco*ery of costs( $one of the companies in*ol*ed, =eritage, Total #$%%# and =ardman ha*e
reco*ered any expenditure(
.r( HaDubi told the Tribunal that stamp duty )as paid in the ac2uisition of interests from Tullo) to
#$%## and Total( =e said there )as no exemption for stamp duty( 3n order to get an exemption
the .inister of /inance )ould ha*e to issue a statutory instrument to that effect as per the
po)ers delegated to him by 5arliament( =e stated that no tax exemption is *alid unless there is
a specific pro*ision in the 3T!( Tax holidays and tax exemptions re2uire a statutory instrument
issued by 5arliament( =e said the respondent does not grant exemptions, it implements( 3t
issues certificates but the exemptions are granted by 5arliament(
.r( HaDubi said the right to reco*er costs is one of the rights disposed of under the S5! as an
assignable interest( =e stated that Tullo) recei*ed consideration for the transfer of the said right
to #$%%# and Total( To obtain a benefit from such a relief after disposing of the same interest
)ould amount to double dipping(
-. SUMMARY OF THE PARTIES. MAIN ARGUMENTS

%n issue 1(1, the applicants submitted that the completion of the sale and purchase bet)een
the applicants, #$%%# and Total occurred on the 21
st
/ebruary 2'12 )hen the *arious
conditions )ere met and the purchase price paid( !s a result thereof the applicants transferred
parts of their interests in the 5S!s to #$%%# and Total on that date( The applicants contended
that such disposals )ere go*erned by S( 8&> of the 3T!( =ence they attracted capital gains tax(
The applicants submitted that !2 5S! !rticle 2"(4 contained an exemption from taxes( 3t not
only co*ered income tax but all other fees or imposts le*ied on an assignor( Such a )ide
16
exemption cannot be said to exclude a charge to tax under the 3T!( The income tax charge
imposed by the 3ncome Tax !ct is clearly a charge to tax( !ccording to them, !rticle 2"(4 of the
!greement )as )ide and clearly co*ered income tax on capital gains accruing on assignment or
transfer( The applicants argued that )hen a person passes an interest in an agreement to
another contractor, he must assign or transfer that interest( The applicants cited Blacks Law
Dictionary )hich defines assignment as an :act by )hich one person transfers to another, or
causes to *est in that other, the )hole of the right, interest, or property )hich he has in any
realty or personality(((; !ccording to them, !rticle 2"(4 of the !greement )as )ide and clearly
co*ered income tax on capital gains accruing on assignment or transfer(
%n issue 1(2, the applicants argued that any minister irrespecti*e of )hether he or she is the
.inister of /inance could enter an agreement containing a term as found in !rticle 2"(4( They
contended that the .inister as an agent of the >%U had authority to sign the 5S! on its behalf
in respect of each pro*ision( The applicants contended that ?<1, .r( ?ubondo, admitted that
)hen an agreement )as reached the .inistry )ould send it to the cabinet before signing(

The applicants submitted that the .inster *alidly entered into the agreement on the basis of
po)ers conferred under the 5etroleum and nergy 5roduction !ct 1&84 ,55!-( The applicants
argued that under S( 2 of the 55!, the >%U may enter into an agreement )ith any person in
respect of, inter alia, the grant of a licence, etc and any matters incidental to or connected )ith
the foregoing( The applicants argued that S( 2 applied to !rticle 2"(4 of the 5S! and granted
necessary po)ers to the .inister to enter into the agreement )here an exemption )as granted(
This )as because !rticle 2"(4 )as incidental and connected )ith the foregoing, that is, the
granting of a licence( The applicants cited the case of Scottish Widows plc V RCC L2'1'M ST#
21"" )here the court emphasised that :(((the phrase Jin connection )ith@ generally merits a )ide
interpretation(((; it )as their submission that :connected )ith; re2uires a *ery )ide interpretation,
a7in to :ha*ing to do )ith; in 55!, S(2( The applicants submitted that the fact that there may be
specific exemptions in the 3T! go*erned by particular rules does not mean that the >%U cannot
grant a tax exemption under another !ct(
The applicants argued that though the 3T! )as enacted after the 55!, there is nothing in the
3T! that could be said to amend or repeal the 55!( ! later la) can only implicitly amend an
17
earlier la) )here t)o pro*isions in 2uestion cannot coCexist( S( 2 of the 55! co*ers a number
of possible matters, most of )hich ha*e nothing to do )ith tax( Thus the taxing legislation
cannot possibly be said to repeal implicitly a pro*ision )ith )ider import( S( 2 of the !ct does not
grant an exemption from tax, it empo)ers the .inister to grant such an exemption( 3t empo)ers
the >%U to agree to refrain from enforcing the 3T! in certain circumstances )hich are :incidental
to or connected )ith; the matters in the 55!(
The applicants submitted that there are other authorities gi*en to the >%U acting through the
.inister to enter the !2 5S!, including !rticle 2"(4( These authorities include preC)ritten
constitution po)ers preser*ed by the #onstitution( This is e*idenced in !rticle 274 of the
#onstitution( The applicants contended that the existing common la) or prerogati*e po)ers
*ested in the 5resident and the rest of the executi*e continue to apply, including the po)er to
)ai*e or *ary payment of tax )hich existed prior to the enactment of the #onstitution( Therefore
the preC)ritten constitution po)ers are one of the sources of the .inster@s po)ers to enter into
!rticle 2"(4(
The applicants contended that under the #onstitution of Uganda, the .inster had po)ers to
enter the 5S! !rticle 2"(4( %bDecti*e 3 of the #onstitution re2uired all organs and agencies of the
State to apply the obDecti*es and principles in the #onstitution in interpreting any other la) or
implementing any policy decisions( These obDecti*es include the right to de*elopment ,obDecti*e
3K- and stimulation of industrial de*elopment by adoption of appropriate policies ,obDecti*e
K3,ii--( The terms of the 55! are )orded to support the honouring of obligations such as !rticle
2"(4 as it encompassed policies aimed at stimulating industry and encouraging pri*ate initiati*e
for the benefit of Uganda(
The applicants argued that !rticle 2 of the #onstitution pro*ides for the supremacy of the
#onstitution( The applicants argued that the #onstitution does not ma7e express pro*isions of
granting tax exemptions or not( There is also no express pro*ision that the general po)ers of
the #onstitution shall pre*ail o*er statute la) )here the t)o are inconsistent( The applicants
argued that the *esting of executi*e po)er in the #onstitution in the 5resident gi*es him *ery
)ide po)ers( There is no specific pro*ision pre*enting the 5resident from granting a tax
exemption in the #onstitution( The applicants submitted that !rticle 11,2- of the #onstitution also
18
confers )ide po)ers on the cabinet( This is the source of the .inster@s po)ers to enter into
!rticle 2"(4( !rticle 2"(4 does not see7 to amend the 3T!(
3n respect of issue 1(", the applicants re2uested the Tribunal not to ma7e any ruling on the
application of international la) to the present dispute( 3n short, the applicants abandoned the
said issue(
!s regards issue1(4, the applicants contended that the respondent )as an agent of >%U( <hile
its actions bind >%U, it is also bound by >%U( The Uganda ?e*enue !uthority !ct 1&&1
,U?!!- established the respondent as a central body for the assessment and collection of
specified re*enue and to administer and enforce the la)s relating to such re*enue( Under the
said !ct, the !uthority is an agency of the >%U( The applicants cited Heritage Oil and Gas
Limited !R" #i*il !ppeal 14 of 2'11 )here the court said that U?! is not autonomous of
>%U( U?! as a statutory agent is part and parcel of >%U( 3t cannot therefore be seen to
disassociate itself from the 5S!( Thus the 5S!s are agreements entered into by the >%U but to
)hich the respondent is also a party( The applicants argued that the effect of the decision in
Heritage is that the >%U cannot simply ignore the !2 5S! !rticle 2"(4( The .inster signed on
behalf of the >%U( The respondent as an agent of >%U clearly cannot ignore a legally binding
obligation of the >%U, its principal(
The applicants argued the Tribunal should enforce !rticle 2"(4 exercising the Durisdiction
conferred on it by the T!T !ct( The applicants contended that the Tribunal@s po)ers are )ide(
They include the po)ers of it to :stand in the shoes; of the decision ma7er and exercise all the
po)ers he or she had at the time the decision )as made( The Tribunal can ma7e a ne)
decision in substitution of the original one(
3ssues 1(4 and 1(+ dealt )ith the doctrines of estoppel and of legitimate expectation
respecti*ely( The applicants contended that estoppel refers to circumstances in )hich by the
operation of la) an indi*idual or body is pre*ented from beha*ing in a particular manner(
?eferences to estoppel include reference to legitimate expectation( 9egitimate expectation
applies to pre*ent the >%U from ignoring its obligations under the !2 5S! !rticle 2"(4(
Similarly, the principle of pacta s#nt seranda may also operate to pre*ent unfairness(
19
The applicants also relied on :legitimate expectation;, a principle distinct from estoppel( The
applicants argued that since estoppel cannot apply to the >%U, the references to estoppel in
the obDection refer to >%U being estopped by other principles of fairness particularly legitimate
expectation and pacta s#nt seranda( The applicants contended that legitimate expectation can
and does apply to pre*ent the >%U from ignoring its obligations under the !2 5S! !rticle 2"(4(
Similarly, the principle of pacta s#nt seranda applies(
The applicants cited the case of Co#ncil o$ Ciil Serices !nion %inister $or Ciil Serice
L1&84M !# "74, )here 9ord /raser said8
:! legitimate expectation may arise either from an express promise gi*en on behalf of a public
authority or from the existence of a regular practice )hich the claimant can reasonably expect to
continue(((;
The applicants argued that its legitimate expectation is clearly )ithin the terms as defined( The
applicants submitted that the principle of legitimate expectation applies so as to estop an
agency of the state going bac7 on its representation( The applicant submitted that the >%U
through the .inister entered into the 5S!( The >%U has bound the re*enue authority, the U?!,
as its agent, to honour its agreement( The Tribunal should ensure that the respondent does this(
The applicants relied on the e*idence of their )itnesses to rely on the application of the principle
of legitimate expectation( !<1 .r( .artin >raham testified that8 :Tax reliefs or exemptions are
part of ensuring that the entering into a 5S! is economically *iable( (((( 3t is common for
go*ernments to pro*ide certain incenti*es to encourage oil production( (((; They concluded that
!rticle 2"(4 ga*e them the :confidence to proceed on the basis that there )ould be no tax(;
!<", .r( ?ichard 3nch, stated that in relation to !2, there )as :no concern as to the taxation
position because of the exemption for capital gains tax in respect of a farmdo)n in !rticle
2"(4(((;
The applicants also argued that the use of :estopped; by them is not the use of the technical
term :estoppel;( They argued that the term :estopped; has a )ider meaning( Blacks Law
Dictionary defines :estopped; to mean :to pre*ent, stop or bar something from happening(; The
use of legitimate expectation is co*ered by estopped( The applicants cited the case of R &RC'
20
e( p %)* !nderwriting "gencies Ltd+ L1&8&M ST# 87" )here 6ingham 91 lin7ed the concept of
legitimate expectation and estoppel in saying8
:3f in pri*ate la) a body )ould be ((( estopped from so acting a public authority should generally
be in no better position( The doctrine of legitimate expectation is rooted in fairness(;
Therefore the respondent as an agent of the >%U, )hich had agreed that there )ould be no tax
to be charged, should be estopped from acting unfairly by charging tax(
The applicants argued that )hile estoppel is a pri*ate la) remedy, legitimate expectation is a
public la) remedy( <hile the doctrine of estoppel may not apply to the >%U or the respondent,
this does not mean that public bodies ha*e a :free rein; to beha*e in a manner )hich is unfair
and preDudicial to the rights of the indi*idual( The applicants contended that the doctrine of
legitimate expectation )as also confirmed in the decision of the =ouse of 9ords in ,ast S#sse(
Co#nty Co#ncil- e( parte Reprotech ./e0sham1 Ltd+ L2''2M 4 !ll ? 48, )here 9ord =offman
stated at paragraph "48
:((( 3t seems to me that in this area, public la) has already absorbed )hate*er is useful from the
moral *alues )hich underlie the pri*ate la) concept of estoppel and the time has come for it to
stand upon its o)n feet(;
The applicants submitted that legitimate expectation can apply to restrict the acti*ities of an
agency of a state, including the discharge of its functions under a statute( The applicants cited
the case of /reston &RC L1&84M !# 8"4 )here the #ourt sa) no reason )hy it should not
re*ie)8
:((((( a decision ta7en by the commissioners Lof 3nland ?e*enueM if that decision is unfair to the tax
payer because the conduct of the commissioners is e2ui*alent to a breach of contract(((;
3n R &RC' e( p %)* !nderwriting "gencies Ltd L1&8&M ST# 87" the court noted8
:(((3f a public authority so conducts itself as to create a legitimate expectation that a certain course
)ill be follo)ed it )ould often be unfair if the authority )ere permitted to follo) a different course
to the detriment of the one )ho entertained the expectation(((;
The applicants therefore argued that )here the re*enue authority so conducted itself to create a
legitimate expectation that the state )ill not charge tax in particular circumstances, tax shall not
be charged( 3f the taxpayer has a legitimate expectation the state must 7eep its )ord( =ence if a
party )ere to sho) that the representations )ere made to it by a state or an agency of the state
and it has legitimate expectation then the state )ould be bound by those representations(
21
The applicants argued that the de*elopment of legitimate expectation can be seen in a decision
of the =igh #ourt of Henya in Rep#0lic and Others "ttorney General L2''+M 2 ! 2+4 )here
the court stated that8
:The principle )hich Dustifies the importance of procedural protection has come to be 7no)n as
legitimate expectation( Such an expectation arises )here a person responsible for ta7ing a
decision has induced in someone )ho may be affected by the decision a reasonable expectation
that he )ill recei*e or retain a benefit((((;
The applicants argued that the doctrine of legitimate expectation has also been applied in a
number of other cases in Henya( These include8 Rep#0lic %inister $or Local Goernment and
another e( parte /a#l %#geithi 2oel 345567 *LR %iscellaneo#s Ciil "pplication 865 o$ 4556,
Rep#0lic and others "ttorney General and another 345597 4 ," 49:( The applicants, therefore,
argued the Tribunal should accept that the doctrine of legitimate expectation forms part of the
la) of Uganda( They contended that the principle )as applied in the =igh #ourt of Uganda in
the case of *ato ;<#ki L2''&M U>=# 2"(
The applicants also relied on the doctrine of pacta s#nt seranda, )hich re2uires those entering
into contracts to honour their obligations( The applicant contended that respondent as agent of
the >%U is not entitled to collect tax from the applicants in contra*ention of !rticle 2"(4 of the
!2 5S!(
%n issue 2, the applicants contended that they sold ++(+7A of the interests they held in the
bloc7s( %f the ++(+7A interest, 4'A interest )as )hat they ac2uired from =eritage, 1+(+7A )as
their original interest( The applicants contended that they purchased the =eritage interests
exercising their preCemption rights for the purpose of selling them and to facilitate the
de*elopment of the areas( The applicants obDected to the respondent@s argument that the
interests they sold )ere indi*isible( The applicants argued that there )ere no accounting
principles )hich discourage transactions carried out in the )ay the applicants sold their interests
to #$%%# and Total i(e( by selling all of the =eritage interests first and a small proportion of the
original interests(
The applicants argued that the respondent@s alternati*e proposal of Jfirst in first out@ ,/3/%-
model )as aimed at yielding the greatest amount of tax )hich o*errides the clear pro*isions of
22
the S5!s( The applicants cited the case of Stanton Drayton L1&8"M 1 !# 4'1 )here the court
noted that the consideration in any particular case must be determined by reference to the
contract )hich the parties concerned concluded(
3n respect of computation of capital gains, the applicants contended that this is determined by
the rules set out in 5art 3K! of the 3T!( The applicants submitted that S( 8&6 pro*ided for
inconsistencies( <here there is an inconsistency bet)een 5art 3K! and other parts of the 3T!,
the former pre*ails( The applicants argued that S( 22 of the 3T! is not applicable by *irtue of S(
8&6 ,2-( S( 8&# N 8&/ sets out the rules dealing )ith allo)able deductions against the income,
)hich is rele*ant )hen commercial production starts(
The applicants obDected to the application of S( 22,c- of the 3T! )hich pro*ides for :reco*erable
costs;( They argued that this pre*ents the applicants being allo)ed the costs of expenditure as
their cost base in the computation of a chargeable gain( The applicant argued that the
respondent@s claim that the contractors obtained reco*ery of costs under an indemnity or
agreement is unfounded( There is no such indemnity or agreement, it is merely to apportion
turno*er in accordance )ith )hat each partner has spend(
The applicants argued that S( 22 does not apply to a first disposal( They contended that S( 22 is
not incorporated into 5art 3K!, in particular in S( 8&,c- or 5art O3( S( 22 is )ithin 5art 3O,
J#hargeable 3ncome@( S( 22 is only concerned )ith income, not gains( The applicants contended
that there is nothing that stops allo)able expenditure forming part of the cost base on the
original interest( The applicants submitted that Sections 8&#, 8&>,c-, 8&/, the 8
th
Schedule and
S( 42 contain the pro*isions of the taxation of disposals of interests in a petroleum agreement(
S( 22 is not applicable as it is inconsistent )ith 5art 3K!( The applicants see no tenable reason
)hy incidental expenditure incurred in impro*ing or altering the assets under the 5S! should not
be deducted under S( 42,+-(
3n reference to the double dip point raised in the obDection decision by the respondent, the
applicants argued it can only ha*e effect in t)o circumstances( The first in respect of the
possible future use of the carried for)ard potential deductions against cost oil( The second in
respect of the potential use by a transferee of the deduction against cost oil(
23
The applicants submitted that S( 8&>, )hich is headed :Transfer of interests in a 5etroleum
!greement;, sets out the rules for dealing )ith the allo)able deductions upon the transfer of an
interest( The applicants contended that there are separate charging codes for the original
interests ,/irst disposals- and subse2uent disposals(
The applicants submitted that S( 8&>,c- is used for determining the cost base )here there is an
original transfer of interest( The cost base )ill be determined in accordance )ith 5art O3 of the
!ct( 5art O3 comprises Section 4& N 44 of the 3T!( 3n 5art O3, the principal rules for the
computation of the tax base are set out in S( 42 of the 3T!( The applicants submitted )here
there is a first disposal the rules fix the cost base by ta7ing into consideration )hat the taxpayer
expended on the interest( The applicants contended that the transfer of the original interests and
the !2 interests )ere subDect to the regime in S( 8&>,c- of the 3T!( The applicants contended
that the cost base of the original !1 and !"! interests and the !2 interests included
incidental expenditure incurred to purchase, produce, construct or impro*e these interests( The
incidental expenses that )ere communicated by the applicants to the respondent )ere 47
million
5art 3K! contains separate charging rules for subse2uent transfers of interests in petroleum
agreements in S( 8&>,d-( <here there is a subse2uent disposal the rules allo) a deemed cost
base, )hich is the gains made by the person the taxpayer bought from, then it is reduced by
excess costs( The disposal of the =eritage interests to #$%%# and Total )as a :subse2uent
disposal(; The transfer of =eritage interests )as subDect to the regime in S( 8&>,d- for
subse2uent disposals( The applicants are the :transferee contractors; and =eritage is the
:Transferor #ontractor;( 3n determining the applicant@s cost base for the gain in the disposal to
Total and #$%%# it is =eritage@s gain )hich )as computed at US$ 1,44',''',''' as held in
Heritage Oil and Gas Limited !R" !pplications 2+ and 28 of 2'1'( The transferor contractor@s
gain is deemed to be the transferee contractor@s cost base(
The applicants submitted that deductions in income computation is dealt )ith by S( 8&# of the
3T!( The applicants further submitted that S( 8&# allo)s expenditure on petroleum operations as
a deduction in respect of income only against cost oil, if there is none, the expenditure is carried
24
for)ard( #ost oil is defined in S( 8&!( S( 8&#,1- pro*ides the rules for deductions allo)able
against income by allo)ing them only against cost oil( Thus the income deductions are gi*en
against cost oil only from the year in )hich commercial production commences, )hich has not
started( !s the applicants ha*e no cost oil, the applicants ha*e not deducted anything( Therefore
in respect of the original interests and !2 interests there )as no deduction allo)ed(
The applicants contended that excess costs are not defined( =o)e*er reference to the term may
be obtained from S( 8&#,2- of the 3T!( xcess costs under S( 8&>,d-,i- are the excess of the
total deductions gi*en in relation to petroleum operations less the cost oil for the year of income(
The applicants contended that excess costs cannot arise as commercial production has not
started( There are no excess costs to be ta7en into account and none to deduct from the cost
base under S( 8&>,d-,i-(
The third issue )as in respect to the applicants@ entitlement to rein*estment relief( S( 44 of the
3T! pro*ides for in*oluntary disposals and the entitlement to rein*estment relief( The applicants
had to sho) that the disposal )as in*oluntary and the proceeds are to be rein*ested in assets of
a li7e 7ind )ithin the specified period(
The applicants farmed do)n an aggregate of ++(+7A of their interests( The applicants argued
that they intended to dispose of 4'A of their interests( They needed >%U@s appro*al for the
sale( The >%U )anted three e2ual partners to in*est in the 9a7e !lbert 6asin( Since the
applicants needed that >%U@s consent to proceed )ith the sale, they had no choice but to
dispose ++(+7A of their interests( The disposal of the extra 1+(+7A of the interests )as not
made *oluntarily(
The applicants cited the authorities of B#ilding Society Commissioners o$ &nland Reen#e +4
T# 2+4 and !R" V Bank o$ Baroda =#TC''C##C#!C'4C2''4, )hich broadly interpreted and
discussed :in*oluntary; disposal( The applicants referred to the e*idence of !<2, .r( 5aul
.c0ade, )ho submitted at length the applicants@ desire to dispose of 4'A of their interest( The
applicants submitted that in*estment in assetsErights )hich are dealt )ith under the 5S!s
constitutes an in*estment in assets of a li7e 7ind( The applicants also submitted that they had
incurred US$ 1+4,721 as rein*estment relief for the period of .arch 2'12 to /ebruary 2'1"(
25
=o)e*er, the applicants also contended that, since the hearing before the Tribunal occurred
before the one year period expired e*idence of their expenditure on assets of a li7e 7ind )ould
not be gi*en(
=a*ing discussed the po)ers and Durisdiction of the Tribunal, the applicants prayed that the
assessments and the obDection decision of the respondent be set aside( They also prayed that
the Tribunal finds that !rticle 2"(4 of the 5S! is *alid under the la)s of Uganda and therefore
they are entitled to exemption from payment of capital gains tax( They also prayed that all the
costs incurred by the applicants, including exploration costs be allo)able under S( 42 of the 3T!(
They prayed that the Tribunal finds that there is no restriction to be made for excess costs for
purposes of S( 8&,>-,d- of the 3T!( They also prayed that the Tribunal finds that the applicants
are entitled to rein*estment relief to a tune of 1+(+7A interests in !s 1, 2 and "! )hich is the
sum of US$ 1+4,721 so expended for purposes of rein*estment( The applicants in short prayed
that the Tribunal ma7es ne) assessments of nil liability on each of the applicants( 3n the e*ent of
such, they prayed that the "'A deposit by them on filing the application be refunded to them(
3n its reply, the respondent submitted that this matter is an attempt by the applicants to a*oid
paying income tax on an enormous gain resulting from the largest transaction in the history of
Uganda, the sale of interests )orth US$ 2(& billion to Total and #$%%#( 3t argued that this is
through the inappropriate manipulation of figures and distortion of the Uganda tax la) by the
applicants(
%n 3ssue 1(1, the respondent submitted that !rticle 2"(4 of the !2 5S! deals )ith )hat is
referred to as transfer taxes )hich are distinct from taxes on income or gains resulting from
transfers and is therefore irrele*ant to the taxability of capital gains( The respondent argued that
income or gains tax applies only to the extent that income of gain is actually realised )hereas a
transfer tax is charged on a transfer )hether a gain or loss is realised and irrespecti*e of
)hether consideration is paid for the transfer( The respondent argued that the language of
!rticle 2"(4 is concerned only )ith taxes that ha*e :assignment or transfer; as the base of the
tax( The respondent ga*e examples of transfer tax exemptions( 3t also referred to pro*isions of
other countries C !ngola and 2uatorial >uinea, similar to !rticle 2"(4 of the !2 5S!(

26
The respondent submitted that pro*isions purporting to pro*ide exemptions from tax must be
narro)ly construed( The respondent cited the authorities of Ba0i0asssa Commissioner
General !ganda Reen#e "#thority L2'1"M U>#%..# 21, Helering ;orthwest Steel Rolling
%ills' &nc+ Supreme #ourt ,United States-, "11 U(S( 4+, Commissioner o$ &nternal Reen#e
2aco0son' Supreme #ourt ,United States-, ""+, U(S( 28, %ayo )o#ndation $or %edical
,d#cation = Research et+ al+ !nited States, Supreme #ourt ,United States-, 1"1 S( #t( 7'4,
,dward %a#ghan .S#reyor o$ >a(es1 >he General >r#stees o$ the )ree Ch#rch o$ Scotland,
#ourt of Session ,Scotland-, ,18&"- 2'?( 74&(
The respondent referred to the testimony of .r( rnest ?ubondo, and .r( .oses HaDubi, )ho
supported the position that !rticle 2"(4 of the !2 5S! did not confer a tax exemption( The
respondent argued that there is no e*idence on record that contradicted this testimony(
The respondent also referred to the 2'1' S5! )hich )as signed by the applicants and =eritage(
The said S5! defined transfer tax to mean :stamp duty payable under the la)s of the ?epublic
of Uganda;( $onC transfer Taxes )ere defined to mean :any taxes other than Transfer Taxes(;
Under #lause 7(1 of the !greement, all transfer taxes )ere to be borne by the buyer( Under
#lause 7(2 any $onCTransfer tax including any capital gains tax shall be borne by the seller( The
S5!s executed bet)een the applicants, #$%%# and Total maintained the clear distinction
bet)een transfer taxes )hich )as to be paid by the buyer and capital gains tax by the seller(
!s regards transfer tax, the respondent cited 1( ?ogersC>labush, &B)D &nternational >a(
Glossary +
th
?e*( ed(, 36/0 2''& )hich percei*es transfer tax as a :general term to refer to a tax
le*ied on the transfer of goods and rights e(g( purchase andEor sale of securities and immo*able
property(((; 3t also cited Blacks Law Dictionary &
th
ed( 2''&, 14&7 )hich defines transfer tax as8
:a tax imposed on the transfer of property, exp( by )ill, inheritance, or gift;, )hile Wests
,ncyclopaedia o$ "merican Law 2
nd
ed( 2''8, 7& defines it as :a charge imposed by the
go*ernment upon the passing of title to real property or a *aluable interest in such property(;
The respondent contended that under the %#0, taxes on income, profits and capital gains are
separated from taxes imposed on other bases including taxes on financial and capital
transactions( The respondent contended that transfer tax is a type of :indirect tax; )hile income
or gains tax constitute :direct taxes;(
27
The respondent submitted that in the US, there ha*e been attempts to distinguish bet)een
transfer taxes such as stamp duty and property transfer taxes, and taxes imposed on gains
resulting from a transfer( The respondent cited that authorities of S=% ,nterprises the !nited
States' Co#rt o$ "ppeals $or the )ederal Circ#it .!nited States1' 1&& /("d 1"17 )here the court
stated that if the tax is based solely on a gain, and not on the siIe of the transfer, it is not a
transfer tax( The respondent also cited the case of &&4 )i$th "en#e "ssociates ;ew ?ork
States Department o$ >a(ation and )inance #ourt of !ppeals for the Second #ircuit ,United
States-, &+" /, 2d 4'" )here the court emphasised that if the transaction yields no gain, there is
no tax due( The nature of gains tax is different from stamp taxes and documentary transfer
taxes(
The respondent also cited cases that ha*e been addressed in UH courts( 3n Carreras Gro#p
Limited Stamp Commissioner, 5ri*y #ouncil of the United Hingdom L2''4M S(T(# 1"77 the
court pointed out that transfer tax is an ad *alorem on the consideration for the property
transferred, )hereas the capital gains tax is a tax on capital gains(
The respondent obDected to the applicants@ reference of the )ords :any tax; in !rticle 2"(4 to
ha*e a )ide co*erage( The applicants had leaped to the conclusion that any tax clearly co*ers
income tax on a capital gain accruing on an assignment or transfer( The respondent argued that
this )as a result of confusion in the applicants bet)een the nature and the base of the charge(

The respondent argued that !rticle 2"(4 )ould be manifestly unla)ful under Uganda la) if the
applicants@ interpretation of it as an exemption is accepted( The respondent submitted that under
the #onstitution of Uganda a tax may be imposed through a la) passed by 5arliament( 9i7e)ise
a tax can only be *aried if a la) confers such po)er on the person or authority purporting to
grant the )ai*er( The respondent cited !rticles 7&, && and 142 of the #onstitution of Uganda(
The respondent contended that the said pro*isions ma7e it clear that the executi*e does not
ha*e the capacity to )ai*e the la)( The respondent cited that authorities of the Heritage case,
H(.( ,nterprises and others !ganda Reen#e "#thority =##S $o( 4&& of 2''1 and *ampala
;issan !ganda Limited !ganda Reen#e "#thority #i*il !ppeal $o( 7 of 2''& to support its
arguments(
28
The respondent submitted that discretionary tax exemptions are no longer allo)ed under the 3T!
after 1uly 1&&7( xemptions are no) statutorily pro*ided( The 3T! amended the 1&74 3ncome
Tax 0ecree and the 1&&1 3n*estment #ode !ct( The respondent contended that through the
adoption of the 1&&4 #onstitution and the 3T!, Uganda eliminated discretionary tax exemptions
)hich )ere replaced )ith statutorily pro*ided ones(
The respondent contended that the applicants@ argument that the 1&&" 5S! aimed at bringing
companies into high ris7 in*estment in*ol*ing enormous sums of money is not correct( <hen
the 1&&" 5S! is compared to the 2''1 5S! one can conclude that income tax exemptions are
unla)ful( 3t sho)s that !rticle 2"(4 only excluded taxes and fees imposed on the transfer and
not taxes on income resulting from a transfer( The respondent further contended that at the time
!rticle 1' of the 1&&" 5S! )as prepared, discretionary tax exemptions )ere la)ful( !fter 1&&"
the >%U too7 a series of policy reforms )hich eliminated discretionary exemptions( The
respondent contended that !rticle 11 of the !2 5S! pro*ided for all central taxes to be paid in
accordance )ith the la)(
The respondent submitted that the applicants@ argument that the .inister could grant an
exemption under S(" of 55! is defecti*e( The respondent a*erred that the term :connected
)ith; must be interpreted in the context of the phrase :incidental to or connected )ith the
foregoing(; The respondent cited the authority of Scottish Widow /lc RCC ,supra- already
cited by the applicants( 3t contended that thus :connected )ith; must be read as part of the
phrase :incidental to or connected )ith(;
The respondent also contended that the applicants@ argument ignores that the 3T! is a specific
statute go*erning income tax in Uganda and )as adopted after the 55! to consolidate and
amend the la) relating to income tax( 3t also contended that the 3T! does not need to repeal or
amend S( ",e- of the 55!( The respondent argued that the minister cannot ha*e unbounded
po)ers under S( " of the 55! as it may ha*e startling results( The respondent referred to an
admission by the applicant@s o)n )itness .r( 3nch, the =ead of Tax that :the constitution is clear
that an increase in tax is by an !ct of 5arliament;( =ence S( " of the 55! does not confer
po)er under !rticle 142 of the #onstitution on a minister to )ai*e or *ary a tax(
29
The respondent submitted that the applicants@ contention that the .inister )as authorised to
grant an income tax exemption on the basis of !rticle 274 of the #onstitution )as unfounded(
!rticle 274 does not pro*ide for the preser*ation of existing po)ers( 3t only pro*ides that existing
po)ers must be modified to bring them in conformity )ith the #onstitution( The respondent cited
the authorities of Hon+ Sam *#teesa and others "ttorney General #onstitutional 5etition $o(
4+ of 2'11 and "ttorney General Osotraco Ltd #i*il !ppeal "2 of 2''2, to support its
argument( The respondent submitted that the applicants do not explain the basis of their
assertion that :preC)ritten constitution po)ers include a po)er to grant exemption from tax(;
The respondent asserted that Uganda la) embraces the la) that there can be no estoppel
against a statute( 3f a contractual agreement is ultra *ires the agreement is null, *oid and
unenforceable( The respondent cited the authorities of %a<or General Daid >inye$#@a
"ttorney General #onstitutional 5etition $o( 1 of 1&&+, *% ,nterprises Ltd and others !ganda
Reen#e "#thority L2''8M U>#omm# 21, Heritage Oil = Gas Limited !R" #i*il !ppeal 14 of
2'11, /ride ,(porters Ltd !R" =##S 4'" of 2''+, !R" Golden Leaes = Resorts Ltd and
"pollo Hotel Corporation Ltd+ .! '78"E 2''7, !R" Bwama ,(porters Limited #i*il !ppeal + of
2''", *ampala ;issan !ganda Ltd+ !R" #i*il !ppeal 7 of 2''&(
The respondent submitted that the applicants@ arguments that the doctrine of estoppel should be
restricted by that of legitimate expectation should not be ta7en seriously( The notion that the
terms of a statute may be )ai*ed by an agreement that gi*es rise to a legitimate expectation is
contrary to the rule of estoppel against a statute( The respondent argued that the applicants@
citation of the case of *ato ;<oki ,supra- )as fri*olous as the application of the doctrine of
legitimate expectation )as remote(
The respondent submitted that the doctrine of legitimate expectation cannot apply to ultra *ires
acts( The respondent cited the case of ReA Watsons "pplication $or Leae to "ppeal $or 2#dicial
Reiew ,also 7no)n as Dollingstown )oot0all Cl#0 >he &rish )oot0all "ssociation- L2'11M $3G6
++ )here the court stated that8 :3t is trite la) that an expectation grounded upon an ultra *ires
representation cannot be legitimate(; 3n Rowland ,nironment "gency L2''4M #h(1 the #ourt
of !ppeal stated that :nglish domestic la) does not allo) the indi*idual to retain the benefit
30
)hich is the subDect of the legitimate expectation, ho)e*er strong, if creating or maintaining that
benefit is beyond the po)er of that public body(; The respondent also cited the authority of "l
)ayed and others "docate General $or Scotland 2''4 S(T(# 17'" )here the court affirmed
that an #ltra ires agreement cannot gi*e rise to a legitimate expectation( %ther cases cited by
the respondent included Wilkinson &nland Reen#e L2''4M 1 <(l(?( 1718, R ;orth and ,ast
Deon Health "#thority e( parte Co#ghlan L2''1M G(6, 21", R &nland Reen#e
Commissioners' e( parte %)* !nderwriting "gents Ltd L1&8&M S(T(# 87", R .on the application
o$ Corkteck Ltd+1 Reen#e and C#stoms Commissioners L2''&M S(T(#( +81, R ,ast S#sse(
CC e( parte Reptrotech L2''2M 4 !ll (?(48, Rep#0lic and others "ttorney General L2''+M 2 !
2+4, Rep#0lic %inister $or Local Goernment = "nother' e( parte /a#l %#gethi 2oel L2''8M
eH9? +, Rep#0lic ;ational ,nironment %anagement "#thority e(Bparte So#nd ,C#ipment
Ltd L2'1'M eH9? 8, Rep#0lic >he Disciplinary Committee = another ,(Bparte /ro$+ /a#l %#sii
Wam0#a L2'1"M eH9r 4( The respondent argued that most of the abo*e cases )ere cited by the
applicants )ho distorted their interpretations to suit their case(
The respondent argued that the applicants@ in*ocation of the international la) principle of pacta
s#nt seranda ,sanctity of contract- pro*ides no support that the principle o*errides the #ltra
ires principle( The respondent contends that the applicants abandoned their arguments based
on international la)(
%n issue 2, the respondent submitted that TU9 purchased a 4'A undi*ided interest in the
licences and agreements in relation to !1 and !"! from =eritage( 3t therefore obtained 1''A
o)nership interests in !1 and ! "!( TU9 and TU%5 o)ned 4'A undi*ided interests in !2(
!fter a sale to #$%%# and Total the holdings )ere as follo)s8 3n !1 TU9, Total and #$%%#
had ""(""A interests eachB in !2 TU%5, Total and #$%%# had ""(""A interests each and 3n
!"! TU9, Total and #$%%# had ""(""A interests each(
!fter recei*ing the S5!s, the respondent raised assessments in %ctober 2'1'( The applicants
obDected to the assessments on *arious grounds( 3n particular that they had incurred more
incidental costs( /ollo)ing a re*ie) of the applicants@ obDections, the respondent issued another
obDection decision and increased the incidental costs and disallo)ed other items( The
respondent recei*ed further information from the applicants and increased the allo)ed incidental
31
costs to US$ +1,&'","87 )hich resulted in a tax liability of US$ 4+7,271,&74( The respondent
communicated the current assessments to the applicants on 2
nd
$o*ember 2'12( The applicants
paid the "'A deposit of the tax before filing the application lea*ing a balance of US$
"24,447,4"+EP(
The respondent determined that the applicants had a taxable gain of US$ 1,11",""2,2'' from
the sale of the !2 interests, a taxable gain of US$ 44&,8"1,44' for their sale of the 4'A
undi*ided interests in !1 and !"! ,the :original interests;- and a loss of US$ 24,4&',4'" from
the sale of a portion of their 4'A undi*ided interests in !1 and !"! ,the :=eritage 3nterests-
for a total taxable gain of US$ 1, 447,47",247(
3n calculating the applicants@ gains, the respondent disallo)ed preCexisting petroleum operations
costs of US$ "2',444,81& from being included in the applicants@ cost base because such
expenses )ere deductible against cost oil pursuant to S( 8&# of the 3T!( The respondent also
disallo)ed a deduction for interest expense of US$ 11", 42&,'&+ under the thin capitalisation
rules under S( 8& of the 3T!, )hich it contended )as not in dispute( The respondent also
disallo)ed the applicants from using a loss of US$ 2',&87,&"' on !"! to reduce their gain on
the sale of their !"! interests because such loss related to a separate contract area, !", and
)as only a*ailable to offset cost oil from the area under S( 8&# of the 3T!, )hich is not in
dispute( The respondent also disallo)ed the applicants@ claim that they are entitled to US$
1+4,721,''' as rein*estment relief under S( 44,1- ,c- of the 3T!(
The respondent submitted that )here a contractor as an original o)ner of interests disposes of
them, S( 8&>,c- is applicable( 3t pro*ides that the cost base for calculating any capital gain or
loss is determined under 5art O3 of the 3T!( The general rules for the calculation of capital gains
under 5art O3 are contained in S( 42 of the 3T!( .ore specific rules for the treatment of
expenditures incurred in relation to petroleum operations are set forth in S( 8&# of the 3T!( S(
8&# ,1- pro*ides that the amounts deductible in relation to petroleum operations are allo)ed
only as a deduction against cost oil( The respondent submitted that under S( 8&# of the 3T! a
contractor@s petroleum operations expenditures are allo)ed deductions, )hich )hen they
exceed the cost oil for a gi*en year, the contractor carries them for)ard into subse2uent years(
32
The respondent submitted that the specification that deductions may be ta7en :only against cost
oil; precludes them from being included in an assets@ cost base pursuant to S( 42,+- of the 3T!(
The respondent agreed )ith the applicants that )hen the contractor disposes of an interest in a
petroleum agreement pre*iously ac2uired, S 8&> of the 3T! applies( The respondent submitted
that regardless of )hether the cost base is calculated under S( 8&>,c- or S( 8&> ,d- the
applicants are not entitled to include their exploration, de*elopment or production costs in their
cost base in calculating the gain they realised on the disposal of their interest because the costs
are only reco*erable against cost oil( 3n contrast, under S( 8&> ,d- of the 3T!, the applicants are
not entitled to include incidental expenditures in their cost base(
The respondent contended that the applicants recei*ed US$ 14',''',''' as excess costs, from
=eritage )hen they purchased the latter@s interest( The respondent argued that although
#$%%# and Total may reco*er excess costs from cost oil, the applicants@ argument that their
cost base should include the US$ 14',''',''' ignores the application of S( 8&> ,d- of the 3T!(
The respondent argued that under S( 8&> ,d- ,i- the applicant@s cost base for purposes of
calculating gain on the sale of =eritage@s interest cannot include the US$ 14',''','''( 3n
calculating the applicants@ gain from the sale, the respondent reduced the applicants@ cost base
by US$ 14',''','' )hich )ere exploration costs that )ere deemed as excess costs under S(
8&#,2- of the 3T! and must be subtracted pursuant to S( 8&>,d-,i- of the 3T!( The respondent
as7ed the Tribunal to allo) the reduction of US$ 14',''',''' as excess costs that )ould be
deductible by #$%%# and Total(
The respondent contended that the exploration costs of US$ "2',444,81& claimed to ha*e been
incurred by the applicants on !1, !2 and !"! )ere not substantiated nor audited by the
respondent( The applicants claim to ha*e transferred these costs to Total and #$%%#, at the
same time they see7 to reco*er them by including them in their cost base( The respondent
submitted that the US$ "2',444,81& )ere part of the bundle of rights and interests in the 5S!s
that )as sold for the consideration of US$ 2,&"",""',4''( The respondent contended that they
should not include them in the cost base because they are reco*erable against cost oil( The
respondent contended that Sections 8&# ,1- and 8&# ,2- do not disallo) deductions for
33
petroleum operation expenditures in the years )here there is no sufficient cost oilB they merely
suspend the deductions until future years(
The respondent contended that the applicants@ argument that prior to the commencement of
commercial production, no deductions are allo)ed as there is no excess costs is a misreading
of 5art 3K! of the 3T!( The respondent argued that exploration, operation and de*elopment
operations are by their *ery nature underta7en prior to the commencement of commercial
production( S( 8&#,1- of the 3T! specifically permits deductions for exploration and de*elopment
operations costs and limits these deductions to cost oil in the year they )ere incurred( The
respondent concluded that the portion of excess costs that has been passed along to
subse2uent purchasers under S( 8&> ,a- of the 3T! cannot be included in the applicants@ cost
base for purposes of calculating their gain(
The respondent argued that an alleged loss claimed by the applicants is fictitious( The
respondent claims that the applicants transformed )hat )as a profitable transaction into a loss
for tax purposes by applying the Jlast in, first out@ accounting method( The respondent submitted
that )hat the applicants sold )ere undi*ided interests( The respondent, inter alia, cited Blacks
Law Dictionary )hich defines :undi*ided interest; as :an interest held in the same title by t)o or
more persons, )hether their rights are e2ual or une2ual as to *alue or 2uantity;( The respondent
submitted that gi*en the nature of such an interest, a taxpayer cannot choose the cost base that
it )ishes to allocate to a subse2uent sale( The respondent cited the case of 2ohn *+ %c;#lty
Commissioner o$ &nternal Reen#e, Tax #ourt ,United States-, T(#( .emo, 1&88C274 )here the
court held that :! taxpayer )ho o)ns t)o undi*ided oneC half interests in property recei*ed at
different times, and disposes of an undi*ided oneChalf interest, is deemed to ha*e disposed of
4' percent of each of the hal*es he o)ned(; The respondent also cited the ruling of the 3nternal
?e*enue Ser*ice of the United States, 1&+7, the US case of /orter !nited States, #ourt of
!ppeals for the Sixth #ircuit ,United States-, 7"8 /(2d 7"1 and the UH case of >od .&nspector o$
>a(es1 %#dd L1&87M S(T(#( 141( The respondent a*erred that :it is not possible to treat
portions of an undi*ided interest as separate and distinct interests(;
The respondent submitted that the 93/% accounting method is not only inappropriate but is also
not acceptable under 3nternational /inancial ?eporting Standards( S( 4',1- of the 3T! re2uires
34
that a taxpayer@s methods of accounting shall conform to generally accepted standards(
3nternational !ccounting Standard 2 specifies that :the Standard does not permit the use of the
Qlast in first out@ ,93/%- formula to measure the cost of in*entories(; The respondent also cited
the case of %inister o$ ;ational Reen#e "naconda "merican Brass Ltd+ L1&4+M !(#( 84 )here
the application of the 93/% )as *itiated in the case(
The respondent contended that the applicants@ argument that :)hat the parties ha*e agreed to
sell must also determine )hat has been bought and sold for tax purposes; does not hold( Under
S( &1 of the 3T!, the #ommissioner has po)ers to reCcharacterise a transaction that )as
entered into as part of a tax a*oidance scheme, or does not ha*e substantial economic effect or
does not reflect the substance( The applicants contended that the cost base should be
recalculated using either the /3/% method or the a*eraging method(
!s regards incidental expenses, the respondent admitted that it accepted the applicants@
incidental expenditures of US$ +1,&'","87 incurred )ith respect to =eritage interests( =o)e*er,
the respondent as7ed the Tribunal to exclude those costs( The respondent contended that S(
8&> ,d- go*erns the calculation of the cost base for a subse2uent disposal of an interest in a
petroleum agreement( $othing in the Section allo)s a transferor to increase its cost base in the
subse2uent disposal by the amount of incidental expenditures(
%n issue ", the respondent submitted that the applicants are not entitled to rein*estment relief(
The respondent argued that under S( 44,1- ,c- a taxpayer must meet four conditionsB ,i- the
disposal of the asset must be in*oluntary, ,ii- the proceeds from the rein*estment must be
rein*ested, ,iii- the rein*estment must be in an asset of a li7e 7ind, and ,i*- the rein*estment in
an asset of a li7e 7ind must be made )ithin one year of the disposal( The respondent contended
that the applicants ha*e not met any of the four conditions(
The respondent alleged that the applicants ha*e failed to discharge the burden of pro*ing that
the disposal of 1+(+7A interest )as in*oluntary( .ost of the e*idence )as based on the
testimony of .r( 5aul .c0ade, )hich )as based on his belief( 3n crossCexamination of .r(
.c0ade, he admitted that there )ere no correspondences from the >%U( !ccording to .r(
.artin >raham, >%U communicated through meetings, but these )ere unCminuted(
35
/urthermore, .r( .artin )rote a letter to the .inister of nergy and .ineral 0e*elopment )here
he indicated that Tullo) )ould farmdo)n at least 4'A of their interest( The applicants re2uested
the >%U to appro*e the creation of a basinC)ide partnership )here the applicants, #$%%# and
Total )ere holding ""(""A interests each( !ccording to .r( ?ubondo, it )as Tullo) that decided
the a)ard of ""(""A interests to each party( The respondent argued that the case of !ganda
Reen#e "#thority Bank o$ Baroda L2''7M U>#omm# 8 )here the court held that the disposal
by the ban7 of its shares )as in*oluntary can be distinguished from the present case( 3n the said
case there )as an agreement unli7e the current one before the Tribunal(
The respondent submitted that the applicants are not entitled to the rein*estment relief because
they did not rein*est the proceeds in an asset of a li7e 7ind( The respondent contended that the
applicants@ claim that they used the proceeds from the sale of the interests in the 5S! to fund
preCexisting costs is incorrect( The respondent argued that S( 44,"- of the 3T! re2uired that the
rein*estment be made in a :replacement asset;( The commonly accepted definition of
replacement is :something that replaces;( The respondent claimed that from the e*idence
adduced the applicants did not use the proceeds from the sale of their interests to ac2uire ne)
interests( !ccording to the e*idence of .r( >raham, the proceeds from the sale )ere used to
build infrastructure and others( The respondent argued that such expenditure )as used to fund
obligations under the 5S!s that existed prior to the sale( 3t argued that such use of sale
proceeds to fund preCexisting obligations is clearly not an ac2uisition of a replacement asset as
re2uired by S( 44,"- of the 3T!( The respondent cited the US >eneral #ounsel .emorandum
$o( "&472 )here it is stated that the rein*estment pro*ision )as intended to be a relief pro*ision
for a taxpayer to restore its economic position to the prior position( The respondent contended
that the applicants by using the sales proceeds to fund their de*elopment obligations under the
5S!s they are discharging preCexisting debt( This is not an asset of li7e 7ind ac2uired and there
is no rein*estment at all( The respondent also argued that the applicant rein*estment )as not
made )ithin one year of disposal(
The respondent submitted that in the e*ent the Tribunal )ere to find that the applicants )ere
eligible for rein*estment relief, the relief should be limited to a fraction of the amount to )hich
they claim they are entitled( The in*oluntary disposal of interests represent 24A of the total
36
interests that the applicants sold ,1+(+7AE++(+7A P 24A- )hich is US$ 41(" million of the US$
1+4 million the applicants claimed ha*e expended on the 5S!s(
The respondent prayed that the Tribunal dismisses the application and orders that the
applicants pay the outstanding tax liability plus interest( They also prayed that the Tribunal finds
that !rticle 2"(4 of the !2 5S! does not purport to pro*ide an exemption to the imposition of
tax pursuant to the 3T!( 3f the Tribunal )ere to find that !rticle 2"(4 of the !2 5S! purported to
pro*ide an income tax exemption it )ould be null and *oid a0 initio under the la)s of Uganda(
The Tribunal should find that the respondent is not estopped from imposing tax from the
disposal of the interests in the !2( The respondent also prayed that the Tribunal finds that the
concept of legitimate expectation pro*ides no basis for not imposing tax as imposed by the 3T!(
The respondent also )anted the Tribunal to find that the applicants disposed ++(+7A of its
1''A interest and not the 4'A ac2uired from =eritage( 3t )as also prayed that the Tribunal
applies the a*erage cost accounting method or in the alternati*e the /3/%@ method as the basis
of calculating the gain obtained by the applicants( The respondent also )anted the Tribunal not
to include the exploration, de*elopment or production costs including the excess costs ac2uired
from =eritage in their cost base( The respondent also )anted the Tribunal to find that the
applicants are not eligible for rein*estment relief( 3n the e*ent the Tribunal finds other)ise, it
should exercise its po)er under S( 1& of the T!T !ct and remit the matter to the respondent for
reconsideration( The respondent also prayed for costs of the application(
3n its reply to the respondent@s submissions, the applicants complained about the approaches
used by the former( They argued the respondent has raised ne) issues and arguments that
)ere not raised before( They complained about the language use by the respondent(( The
applicants argued that the respondent@s use of authorities from other Durisdictions does not ta7e
into consideration the )eight such decisions may ha*e and their rele*ance to the Tribunal( The
applicants argued that some of the said authorities should be considered as e*idence and not
la)( The respondent should not ha*e relied on e*idence improperly submitted to the court to
)hich the applicants )ere not gi*en an opportunity to challenge(
3n respect of issue 1, the applicants replied that the respondent@s application of the principles of
statutory interpretation in the analysis of !rticle 2"(4 )as fla)ed and simplistic( They argued that
37
!rticle 2"(4 of the 5S! is a contractual pro*ision and not a pro*ision of a statute( <hat should
be applied are the rules of interpretation of contracts and not statutory interpretation( The
applicants argued that !rticle 2"(4 of the 5S! is not limited to transfer tax( The applicants
argued further that it has ne*er been any part of their case that income tax under 5art 3K! is a
Jtransfer tax@( They do not dispute that income tax on gains imposed by the 3T! is not a transfer
tax( The applicants argued that !rticle 2"(4 does not restrict itself to a transfer tax( To them, the
issue before the Tribunal is )hether or not the income tax charge or gains under the 3T! is :any
tax, fee or other impost or fee;( The applicants also argued that the language used in the 3T!
)hen considered in conDunction )ith the language used in !rticle 2"(4, it is clear that an
exemption )as granted under the !rticle(

The applicants submitted that the e*idence of .r( ?ubondo and .r( HaDubi in interpreting !rticle
2"(4 of the !2 5S! is inadmissible( $either of them )as a signatory to the 5S!, or in*ol*ed in
negotiating the terms of !rticle 2"(4 of the 5S!( <hat the Tribunal should ta7e into
consideration is )hat a reasonable man )ould ha*e considered as the intent in light of all
bac7ground 7no)ledge( .r( HaDubi@s experience as #ommissioner means that he is not li7ely to
see the pro*ision in the same )ay as the obDecti*e reasonable man( The applicants argued that
the e*idence of .r( ?ichard 3nch should be relied on( =e testified that the intention of >%U )as
to bring on board partners )ho )ould share the ris7 of oil exploration(
The applicants also submitted that the respondent@s attempt to point to the pro*isions in the
S5!s to support its interpretations )as )anting( The S5!s )ere bet)een different parties and
)ere negotiated at different times approximately ten years apart( !t the time the !2 5S! )as
signed it )as considered unli7ely that any commercial oil or gas )ould be found( The S5!s are
not bet)een the >%U and the applicants( There are bet)een the applicants and other
commercial parties(
The applicants argued that the .inister of /inance could enter into agreement containing !rticle
2"(4on behalf of the >%U( There is a difference )hen an exemption is granted by the
>o*ernment as opposed to statutory body acting outside its po)ers( The applicants submitted
that as a matter of constitutional la), the >%U )as empo)ered to enter into !rticle 2"(4 and the
.inister acting for and on behalf of the >%U, had authority to sign the 5S!(
38
The applicants argued that !rticle 142,2- of the #onstitution does not say that tax can only be
)ai*ed or *aried( !rticle 142,2- merely pro*ides that )here a taxing la) passed in accordance
)ith !rticle 142,1- grants a person authority to )ai*e or *ary tax there must be periodic reports
to 5arliament by the said person( The 3T! )hich is the taxing authority, the applicants submitted,
confer general po)erLsM on any person or authority to )ai*e or *ary a tax imposed by that la)(
The applicants also argued that !rticle 2"(4 of the !2 5S! is not a :)ai*er or *ariation;( 3t is an
exemption from tax, )hich tax is therefore ne*er chargeable( 3t is not a )ai*er or *ariation
granted :pursuant to a la) enacted under !rticle 142,1-( The applicants also argued that !rticle
2"(4 of the !2 5S! does not *iolate !rticle 142 of the #onstitution for the simple reason that it
does not in*ol*e :imposing; a tax(
The applicants also argued that the respondent@s application of !rticle 7& of the #onstitution is
misconcei*ed( !rticle 7& applies to the po)er to ma7e la)s, not to the terms of an agreement(
The applicants also argued that the respondent@s submission on !rticle && of the #onstitution is
not correct( !rticle && does not mention a restriction on the 5resident@s authority to :)ai*e the
la);( The applicant argued that the 5resident has po)er to grant a tax exemption( >ranting an
exemption does not sho) the >o*ernment@s failure to act according to the #onstitution( The
applicants argued that !rticle && of the #onstitution should be read in conDunction )ith !rticle
11" of the #onstitution( 3t pro*ides for the delegation of po)ers to cabinet ministers( The
.inister )as appointed by the 5resident )ith inherent po)ers to enter into agreements such as
the !2 5S!(
The applicants argued that the respondent@s reference to the remo*al of broad discretionary
exemptions under the 3ncome Tax 0ecree and the 3n*estment #ode has no rele*ance to the
matter before the Tribunal( /irstly, they relate to completely different specific statutory po)ers
granted to a different minister, the finance minister( Secondly, the said 0ecree and #ode ceased
to ha*e effect in 1&&7 and the !2 5S! )as entered into by the .inister in 2''1( The
respondent@s assertion that S( 12 of the 3ncome Tax 0ecree granted broad discretionary
exemptions is inaccurate( S(12 pro*ided specific statutory exemptions( The applicants argued
that respondent does not rely on e*idence in ma7ing these s)eeping allegations of facts(
39
The applicants argued that the granting of a capital gains tax exemption in relation to
assignment or transfer of an interest in !2 5S! is clearly connected )ith the granting of a
petroleum licence, and exploration or de*elopment under the licence as from the e*idence of
the )itness( There is no reason )hy such an exemption should not be regarded as incidental to
the matters set abo*e(

!s regards estoppel, the applicants argued that the respondent failed to distinguish bet)een an
act of go*ernment and an act of a statutory body( !rticle 2"(4 is not #ltra ires because the
go*ernment did ha*e po)er to enter in the !2 5S! !rticle 2"(4( The >%U is not a statutory
body( #onse2uently it does not ha*e statutory po)ers( The applicants posed a 2uestion8 :3f the
go*ernment is not able to grant tax exemptions, then )ho canF; There is no statutory prohibition
on the >%U gi*ing a tax exemption( The >%U as a principal has po)ers to bind U?!, its agent,
and has done so( The applicants argued that the cases cited by the respondent in respect to
estoppel are therefore not applicable( The respondent cannot identify a statutory po)er !rticle
2"(4 is said to be in excess of(
The applicants contended that the respondent@s argument on the sale of undi*ided interests )as
an attempt to introduce a ne) issue that )as not raised at the scheduling( The applicants did
not adduce any e*idence in respect thereof because they )ere not notified( They therefore
argued that it )ould be manifestly unfair for the respondent to be allo)ed to argue this ne)
point( The applicants also argued that for there to be undi*ided interests, there ha*e to be t)o or
more Doint o)ners( /rom the moment the TU9 ac2uired =eritage interests it alone held the )hole
of the interests in those 5S!s( /rom that moment there )as no :tenants in common, there )as
no :coCo)nership;, )hich concepts are in land la)( The applicants argued that the Tribunal is
not concerned )ith the disposal of land(
The applicants submitted that the respondent )as a)are that they intended to sell =eritage
interests since the drafts of the #$%%#ETotal contracts )ere sent to the >%U and the
respondent in %ctober 2'1'( The applicants submitted that >%U appro*ed the draft 5S!s
)here =eritage interests )ere sold( The )ord :interest; )as defined in the draft agreements to
include the 1+(+7A interest of the original interests( The respondent issued its assessments
7no)ing that the applicants )ere transferring =eritage interests(
40
The applicants contended that the respondent did not gi*e any authority as )hy it is opposed to
the :last in first out; accounting method( They also argued that there is no support in Uganda or
else)here for applying any other rule in respect of the disposal of an undi*ided interest(
!s regards S( 8&> of the 3T!, the applicants argued that the cost base in respect of the =eritage
interests comprises the =eritage gain less, if rele*ant, any :excess costs;( They are not see7ing
to :include the US$ 14',''',''' rather it is the respondent )ho should argue that such sum
should be deducted from the =eritage gain as excess costs;( The applicants argued that there
are no excess costs to date( The applicants argued that the respondent appears to be confusing
the right to deduct expenditure under S( 8&# )ith the deduction of excess costs from a
transferee contractor@s cost base )here it has disposed of its interest( The applicants submitted
that S( 8&# of the 3T! limits the use of expenditure against profits from oil production but it does
not cancel the relief in respect of a capital expenditure, in a computation of a capital gain under
S( 42,+-( To them, )hat S(8&>,d- states is that )hat must be deducted from the transferor@s gain
is the excess costs up to the date of the disposal deductible by the transferee contractor( !t the
date of disposal, there being no cost oil, there are no :excess costs; that can be deducted from
the =eritage gain(
The applicants submitted that they are entitled to a deduction for their expenditure of US$ "2'
million )hich )as passed on to #$%%# and Total( !s regards the respondent@s allegation that
the applicants failed to substantiate the costs of US$ "2',444, 81& incurred as exploration
costs, the applicants submitted that the said figure deri*es from communication bet)een the
parties in $o*ember 2'12 and the tax returns for the year ended "1
st
0ecember 2''&, submitted
in 1une 2'12 and pro*ided in the communication in $o*ember 2'12(
The applicants referred to their computation )here the applicants purchased their interests from
=eritage at US$ 774 million for !1 and US$ 474 million for !"! from )hich they deducted the
purchase price for the =eritage interests, US$ 77",1"4,248 for !1 and US$ 47",+"4,74' for
!"!, producing a loss( The applicants contended that the respondent misread S( 22 of the 3T!(
3t only relates to insurance situations(
41
!s regards the sale of =eritage interests, the applicants submitted that =eritage )anted to sell
its interests to $3( The applicants exercised their preCemption rights to pre*ent this( The
applicants )anted to ac2uire =eritage interests and as soon as consent )as gi*en to sell them
off( Tullo), #$%%# and Total executed documents sho)ing )hat that transaction )as and the
respondent issued assessment on capital gain on that basis( =ence there is no tax a*oidance
scheme( The applicants cited the case of Stanton Grayton L1&8"M 1 !# 4'1 )here the court
focused more on )hat the agreement said( The 2uestion is8 :ho) )ould a businessman see the
transactionF =a*ing regard to a businessman@s *ie), )hat one )ould conclude is that )hat
)ere sold )ere =eritage@s interests(
3n respect of rein*estment relief, the applicants argued that they are in principle, entitled to
rein*estment relief under S( 44,1-,c- of the 3T!( The applicants reiterated their position that the
affida*its of .r( .c0ade, .r( >raham and .r( .artin all sho)ed that the applicants did not
dispose off the 1+(+7A *oluntarily( The applicants also presented slides to the >%U )hich
indicated their desire to sell 4'A interest(
The applicants argued that in*oluntary should be )idely construed( 3t does not :re2uire force but
rather an action ta7en by a person )ho has no choice;( The e*idence sho)s that the applicants
acted in*oluntarily( They only )ished to dispose of 4'A of their interests but the >%U pressed
them to dispose of another 1+(+7A( They argued that they did not pro*ide e*idence of :force;,
)hether improper or proper, because force )as not necessary( The applicants cited again the
case of !R" Bank o$ Baroda =#T C''C##C#!C'4C2''4 )here it )as held that :one has to loo7
at the agreement itself to ascertain its true intention(((; !s regards the respondent@s argument
that the 6an7 of 6aroda case in*ol*ed an agreement unli7e the one before the Tribunal, the
applicants submitted that S( 44,1-,c- does not pro*ide any proscription as to the circumstances
in )hich the in*oluntary act must ta7e place( Secondly the disposal of the 1+(+7A )as
contained in an agreement, namely, the .%U and the S5!s( 3t )as an express condition of the
.%U that >%U@s consent )as re2uired to the farmdo)n(
The applicants also submitted that they could not present e*idence at the hearing as to the
expenditures incurred on the rein*estment relief as their one year period had not expired( This
)as because the respondent assessed the disposals before they had ta7en place( The
42
dispositions )ere completed on the 21
st
/ebruary 2'12 and the one year period ran until 21
st
/ebruary 2'1"( The hearing )as on 2+
th
to 28
th
$o*ember 2'12 and 1&
th
to 21
st
/ebruary 2'12(
This )as a result of the respondent assessing the gain o*er a year before the disposals actually
too7 place( The Tribunal )as only as7ed to rule if the applicants )ere entitled to relief in
principle(
The applicants argued that the respondent@s submission that the proceeds of sale can only be
used to ac2uire an interest in a ne) 5S! is not correct( The applicants cited Blacks Legal
Dictionary )hich defines it, inter alia, as8 :The act or process of replacing or being replacedB
substitution(; The applicants ha*e substituted the interests disposed of under the 5S!s )ith
interests in assets or rights )hich are dealt )ith under the 5S!s( The reference in S( 44,1- ,c- to
:assets of a li7e 7ind; can simply be a reference to a contract, under )hich expenditure is made(
The pro*isions do not re2uire rein*estment in assets to be of an :identical; 7ind( Therefore,
expenditures on :interest data; and :interest property; are expenditure on assets :of a li7e 7ind;
)ithin S( 44,1- ,c-( xpenditures )ere incurred on machinery, )ells, facilities, offshore and
onshore installations and structures(
/. FINDINGS AND DECISION OF THE TRIBUNAL
The Tribunal ha*ing read the )itnesses@ statements, heard the e*idence adduced, read the
parties@ submissions and perused the authorities cited, )ishes to rule as hereunder(
/.1 ARTICLE 2(.- OF THE EA2 PRODUCTION SHARING AGREEMENT 0PSA1
%n the 8
th
%ctober 2''1, the applicants and the >%U executed a 5S! under )hich the former
)ere granted exploration, de*elopment and production rights in !2( There )ere t)o !rticles in
the 5S! that referred to taxation( The first one )as !rticle 11 of the 5S!, )hich read as follo)s8
:!ll central, local, district, administrati*e, municipal or other taxes, duties, le*ies or other la)ful
impositions applicable to the 9icensee shall be paid by the 9icensee in accordance )ith the la)s
of Uganda in a timely fashion(;
The said !rticle does not seem to be in dispute( The applicants )ere a)are that they )ere
re2uired to pay taxes( The second !rticle )hich is the bone of contention is !rticle 2"(4 of the
!2 5S! )hich purportedly attempts to exempt transactions )hich in*ol*e the assignment or
43
transfer of an interest under the 5S! from tax( 3t does not seem to be in dispute, that the effect
of !rticle 2"(4 )as to car*e out from the main !rticle of tax liability, ,i(e( !rticle 11-, an exemption
or a )ai*er of tax to the licensee or its assignee in respect of an assignment or transfer of an
interest( <hat is in dispute is the interpretation of !rticle 2"(4 of the !2 5S! in light of the 3T!(
The applicants argued that !rticle 2"(4 of the !2 5S! offered an exemption to capital gains tax
)hich is disputed by the respondent(
The applicants sold a portion of their interests in, inter alia, !2 to #$%%# and Total( The
respondent assessed the applicants, capital gains tax on the gain they purportedly recei*ed(
The applicants obDected to the assessment of capital gains tax in 6loc7 !2 and claimed an
exemption( The applicants called t)o )itnesses )ho testified that because of !rticle 2"(4 of the
!2 5S! they )ere not liable to pay capital gains tax in respect of the transfer of interests in
!2( !ccording to .r( >raham, the applicants relied on !rticle 2"(4 of the !2 5S! in their
decision to farmdo)n( The applicants had incurred enormous expenditures and expected to
recoup them )hen they sold a portion of their interests( Though .r( >raham )as not part of the
legal team that drafted the 5S!, he )as its head( !ccording to him, !rticle 2"(4 exempted
capital gains tax( The second )itness, .r( ?ichard 3nch, the =ead of Tax, stated that the
applicants assumed that in the e*ent of a farmdo)n the proceeds )ould be recei*ed taxCfree
because of !rticle 2"(4( =e )as of the *ie) that the exemption under !rticle 2"(4 )as *alid(
The respondent@s )itnesses ga*e e*idence to the contrary( !ccording to .r( ?ubondo, !rticle
2"(4 )as not negotiated by the parties( =e testified that the >%U did not )ant licensees to be
encumbered )ith fees, imposts and taxes( The intention of !rticle 2"(4 )as to facilitate the
licensees to bring on board partners to share ris7 )ithout the need to pay fees and imposts li7e
stamp duties and signature bonuses( =e said the clause )as not meant to co*er taxes on gains(
3ts purpose )as to facilitate the sharing of ris7 and not to guide the taxation of a gain( !ccording
to .r( HaDubi, the #ommissioner 0omestic Taxes, !rticle 2"(4 )as not part of the 3T!( #apital
gains tax is not a transfer tax( =ence it )as not catered for under !rticle 2"(4(
The Tribunal notes that )hile .r( ?ubondo and .r( HaDubi )ere competent )itnesses, the
Tribunal does not thin7 that they are the most appropriate persons to testify on the intention of
the >%U in respect of !rticle 2"(4( /irstly, there is no e*idence that both )ere part of the
44
negotiating or drafting team of the !2 5S!( Secondly, the most appropriate person to testify on
the intention of the >%U should ha*e been the !ttorney >eneral or an official from hisEher
chambers( Under !rticle 11&,"- of the #onstitution, the !ttorney >eneral is the principal legal
ad*isor of >%U( !rticle 11&,4- ,b- of the #onstitution reads that the functions of the !ttorney
>eneral include8
:to dra) and peruse agreements, contracts, treaties, con*entions and documents by )hate*er
name called, to )hich the >o*ernment is a party or in respect of )hich the >o*ernment has an
interest(;
The Tribunal cannot say that .r( ?ubondo and .r( HaDubi are officials of the !ttorney >eneral@s
chambers( .r( HaDubi@s interpretation might ha*e carried some )eightB ho)e*er the Tribunal has
to caution itself against such testimony, as it is li7ely to be s7e)ed in fa*our of re*enue
collection )hich is entrusted to his employer, Uganda ?e*enue !uthority(
3ntention can still be ascertained from the use of the )ords in an agreement( 3n ;ile Bank .!1
Limited >ranslink .!1 Limited L2''1 N 2''4M 2 =#6 4" it )as noted that court must discern
intention from )ords in a document(
6oth parties ga*e lengthy submissions on the interpretation of !rticle 2"(4 of the !2 5S!( The
applicants submitted that the disposal of their interests under !rticle 2"(4 of the !2 5S! falls
under the 3T! and is go*erned by S( 8&>,c- )hich reads8
:<here a contractor, in this 5art referred to as the :Transferor contractor; disposes of an interest
in a petroleum agreement to another contractor or a person that as a result of the disposal )ill
become a contractor in relation to those operations, in this 5art referred to as the :Transferee
contractor;C
The applicants submitted that there )as a sale of interests as )itnessed by the S5!s )hich
transactions )ere completed on the 21
st
/ebruary 2'12( The 3T! is applicable to said
transactions(
The respondent submitted hea*ily on rules of statutory interpretation to determine )hether the
parties intended to grant an exemption( 3t submitted that capital gains tax )as not a transfer tax(
=ence it )as not exempted by !rticle 2"(4 of the !2 5S!( =o)e*er, the applicants obDected to
the respondent@s use of the rules of statutory interpretation as the !2 5S! )as an agreement
and not a statute( The Tribunal agrees )ith the applicants on this point( The !2 5S! is not a
45
statute, it is an agreement( The rules of statutory interpretation may not be appropriate )hen
interpreting agreements( The rules of statutory interpretation may be important )hen
determining )hether an agreement is in compliance )ith a statute but not the intentions of the
parties or to assign meanings to )ords or in determining ho) a reasonable man )ould interpret
a document(
The applicants argued that in order to get a good interpretation of the !rticle, the intention of the
parties is important( 0id the parties intend !rticle 2"(4 to include an exemption to capital gains
taxF <hile the applicants@ )itnesses testified that !rticle 2"(4 intended to co*er an exemption,
)e cannot say )hat the position of the >%U is( There )as no )itness from the !ttorney
>eneral@s chambers( The Tribunal notes that the >%U )hich )as a party to the 5S! is not a
party to the application before it( Under !rticle 11&,4- ,c- of the 1&&4 #onstitution, the functions
of the !ttorney >eneral include to represent the >%U in courts or any other legal proceedings to
)hich the >%U is a party( =o)e*er the T!T !ct en*isages one respondent, Uganda ?e*enue
!uthority( Though the Uganda ?e*enue !uthority is an agent for >%U, it did not sign the !2
5S!( The contractual obligations of the >%U cannot be determined )hen it is not a party before
the Tribunal( =o)e*er, the Tribunal is not interested in the contractual obligations of the parties(
<hat is of interest to the Tribunal are the tax liabilities of the taxpayers, in this case the
applicants( Tax liability is set by statute( 6e )hat it may, )hat the parties say )as their intention
may not help )hen it comes to determining tax liability( <here an agreement is in*ol*ed, the
taxman should determine )hether it is in line )ith the taxing legislation( 0oes !rticle 2"(4 of the
!2 5S! afford protection to the taxpayers, the applicantsF This in*ol*es interpretation of the
!rticle 2"(4 of the !2 5S! in light of the 3T!(
The taxman has to ma7e an obDecti*e analysis or interpretation of the agreement in light of the
statutory pro*isions( 3n &nestors Compensation Scheme Ltd V West Bronwich B#ilding Society
1&&8 1 !99 ? &8 9ord =offman 91 said8
:,1- 3nterpretation is the ascertainment of the meaning )hich the document )ould con*ey to a
reasonable person ha*ing all the bac7ground 7no)ledge )hich )ould reasonably ha*e been
a*ailable to the parties in the situation )hich they )ere at the time of the contract(
,2- The bac7ground )as famously referred to by 9ord <ilberforce as the matrix of factB but this
phrase is, if anything, an understated description of )hat the bac7ground may include(
46
SubDect to the re2uirement that it should ha*e been reasonable to the parties and to the
exception to be mentioned next, it includes anything )hich )ould ha*e affected the )ay in
)hich the language of the document )ould ha*e been understood by a reasonable man(
,"- The la) excludes from the admissible bac7ground the pre*ious negotiations of the parties and
their declarations of subDecti*e intent( They are admissible only in an action of rectification(
The la) ma7es this distinction for reasons of practical policy and in this respect only, legal
interpretation differs from the )ay )e )ould interpret utterances in ordinary life(
,4- The meaning )hich a document ,or any other utterance- )ould con*ey to a reasonable man is
not the same thing as the meaning of its )ords( The meaning of )ords is a matter of
dictionaries and grammarB the meaning of the document is )hat the parties using those )ords
against the rele*ant bac7ground )ould reasonably ha*e been understood to mean(((;
The said authority )as cited in Golden Leaes Hotels and Resorts Limited and "pollo Hotel
Corporation V !ganda Reen#e "#thority #i*il !ppeal +4 of 2''8( The Tribunal is interested in
ho) a reasonable man )ould ha*e interpreted !rticle 2"(4 of the !2 5S! in light of the 3T!
rather than the intentions of the parties( !s stated abo*e, the pre*ious negotiations of parties
and their subDecti*e intent are admissible only in an action of rectification( The Tribunal is not
interested in rectifying the !2 5S!( <hat is of concern to the Tribunal )ould be the meaning a
reasonable man )ould con*ey to the document in respect to an exemption to capital gains tax
and not the meanings of )ords( The meaning of )ords may not be the same as the meaning of
a document as the latter in*ol*es the parties using the )ords against the rele*ant bac7ground(
<here the agreement in*ol*es go*ernment, for once, the taxman may ha*e to forget that he is
collecting taxes for the go*ernment( <hat should be considered is the use of the )ords in the
agreement and the rele*ant bac7ground( The bac7ground that may be rele*ant, in this case, is
that the !2 5S! )as entered into by >%U for the exploration, production and de*elopment of
oil( 6y the time the !2 5S! )as signed no oil had been disco*ered( !rticle 2"(4 )as
incorporated in the agreement to entice oil companies in the oil exploration *enture( =o)e*er
)hat may not be clear is )hether !rticle 2"(4 )as to encourage oil companies in*est in the
*enture or )as it to facilitate them transfer off their interests to other in*estorsF This can only be
resol*ed by loo7ing at the )ording of the !rticle in relation to the rele*ant statute(
3n order to understand )hether !rticle 2"(4 included capital gains tax one )ould need to loo7 at
the statutory pro*isions )hich define the tax payable( 3t is a bit surprising that )hen the parties
47
)ere trying to interpret !rticle 2"(4 of the !2 5S!, none referred to the description of capital
gains tax under the 3T! and compared it )ith the !rticle( The rele*ant Sections in the 3T! include
S(18 )hich defines )hat business income is, and reads8
:,1- 6usiness income means any income deri*ed by a person in carrying on a business and
includes the follo)ing amounts, )hether of a re*enue or capital natureC
(a) the amount of any gain, as determined under 5art O3 of this !ct )hich deals )ith gains
and losses on disposal of assets(((;
S( 4' of the 3T! )hich deals )ith disposals of assets reads8
:,1- ! taxpayer is treated as ha*ing disposed of an asset )hen the asset has been
,a- sold, exchanged, redeemed, or distributed by the taxpayerB
,b- transferred by the taxpayer by )ay of giftB or
,c- destroyed or lost(;
S( 18 states that a disposal of an asset is business income( S( 4' sho)s that a disposal of an
asset includes )hen an asset has been sold or exchanged(
The applicants cited !rticle 2"(4 of the !2 5S!, as their shield against income tax liability
arising from a capital gain( !rticle 2"(4 read as follo)s8
:The assignment or transfer of an interest under this !greement and any related xploration or
5roduction 9icence shall not be subDect to any tax, fee, or other impost or fee le*ied either on the
assignor or the assignee in respect thereof(;
/or an interest to be exempt from any tax there should be an assignment or a transfer( 3s an
Jassignment@ or@ transfer@ under !rticle 2"(4 of the !2 5S! the same as a Jsale@ or Jexchange@
under S( 4' of the 3T!F The Blacks Law Dictionary 8
th
edition p, 128 defines assignment as
follo)s;
:1(The transfer of rights or property Rassignment of stoc7 optionsS( ((( 2( The rights or property so
transferred R the aunt assigned those funds to her niece, )ho promptly in*ested the
assignment in mutual fundsS(;
! transfer is defined under Blacks Law Dictionary ,supra- p( 14"+ as8
:1( to con*ey or remo*e from one place or one person to anotherB to pass or hand o*er from one
to another, esp( to change o*er the possession or control of( 2( To sell or gi*e(;
S( 4',1- ,a- of the 3T! pro*ides for :sold, exchanged, redeemed, or distributed by the taxpayer(;
! sale is defined by Blacks Law Dictionary ,supra- p( 1"+4 as8
48
:1( The transfer of property or title for a price((( 2( The agreement by )hich such a transfer ta7es
place( T The four elements are ,1- parties competent to contract, ,2- mutual assent, ,"- a thing
capable of being transferred, and ,4- a price in money paid or promised(;
! transfer under !rticle 2"(4 of the !2 5S! in*ol*es a sale as pro*ided under S 4' of the 3T!(
The applicants contended that they sold their interests under !rticle 2 of the S5!( !rticle 2(1 of
both the S5!s bet)een the applicants, Total and #$%%# read as follo)s8
:SubDect as herein pro*ided, Tullo) hereby agrees to sell and transfer all of its legal and
beneficial right, title and interests in and to the interest free from all ncumbrances )hatsoe*er
relating thereto ,subDect to the pro*isions of the 3nterest 0ocuments- )ith full title guarantee to the
5urchaser for the consideration referred to in #lause "(1 and the 5urchaser hereby agrees to
purchase and ac2uire the interest( The transfer shall, as bet)een the 5arties, be deemed for
purposes to be made )ith effect on and from the ffecti*e 0ate(;
=ence it cannot be denied that the applicants@ sales of their interests in the S5!s )ere co*ered
under S( 4' of the 3T! and exempted by !rticle 2"(4 of the !2 5S!(
<ithout preDudice, !rticle 2"(4 of the !2 5S! mentions :any tax, fee, or other impost or fee
le*ied either on the assignor or the assignee;( The abo*e net is so )ide to include capital gains
tax as long as it is a tax or other impost(
So )ould one be )rong if one stated that the exemption under !rticle 2"(4 of the !2 5S!
co*ered a gain made by the applicants in the transfer of their interest in !2 under the S5!s to
#$%%# and Total and )as therefore exemptedF The Tribunal does not thin7 so( To a
reasonable man, an assignment or transfer of an interest under the 5S!s if it in*ol*es a sale or
an exchange is co*ered by both S( 4' of the 3T! and !rticle 2"(4 of the !2 5S!( Therefore to a
reasonable man the exemption under !rticle 2"(4 purportedly co*ered capital gains(
The respondent argued that capital gains tax is not a transfer tax( ! capital gain arises )hen
there is a gain on an asset or an interest( 3t therefore is not a transfer tax( =o)e*er the said gain
cannot be realised and taxed unless there is a disposal, sale or transfer( <hile the Tribunal
)ould agree )ith the respondent that capital gains tax is not a transfer tax, !rticle 2"(4 of the
!2 5S! does not mention transfer tax( ! transfer is one thing and a Jtransfer tax@ is another(
The Tribunal does not thin7 that the .inister of .ineral and nergy 0e*elopment, )ho signed
on behalf of the >%U or any reasonable person, )ould 7no) )hat a transfer tax is, or )hether
49
capital gains tax )as a transfer tax( The Tribunal )ould not )ish to import the terms :transfer
tax; into !rticle 2"(4( The term :transfer tax@ )as defined in the S5!s and not the !2 5S! and
the parties are different( The S5!s )ere made long after the 5S!( !ny arguments by the
respondent in respect of transfer tax are di*ersionary and shall not be accepted by the Tribunal(
The Tribunal therefore finds that !rticle 2"(4 of the !2 5S! included an exemption to capital
gains tax( 3ssue 1(1 is decided in fa*our of the applicants(

3ssue 1(2 )as in respect of the legal *alidity of !rticle 2"(4 of the !2 5S! under Ugandan la)(
3n its obDection decision, the respondent contended that in the e*ent !rticle 2"(4 of the !2 5S!
granted an exemption to the applicants in respect of capital gains tax, it )ould be manifestly
unla)ful under Uganda la)( /irstly, the .inister )as acting ultra *ires the authority granted to
him( Secondly, a tax can only be imposed or )ai*ed through a la) passed by the 5arliament(
%n the contrary, the applicants, in their submission, submitted that the >%U )as empo)ered to
enter !rticle 2"(4 of the !2 5S!( /irstly, the minister )ould do so under the po)ers conferred
by the 5etroleum and nergy 5roduction !ct ,55!-( Secondly, the >%U )ould enter such
agreement under the po)ers )hich preCdate Uganda@s )ritten constitution and ha*e been
preser*ed after the introduction of the )ritten constitution and under other po)ers expressly
conferred by the #onstitution(
The applicants argued *ehemently that the .inister of nergy had po)ers to sign for a tax
exemption under the 55!( The long title of the 55! reads8
:!n act to ma7e pro*ision for the exploration and production of petroleum and for other matters
incidental thereto or connected;
S( 2 of the 55! reads8
:The >o*ernment may enter into an agreement, not inconsistent )ith this !ct, )ith any person
)ith respect to all or any of the follo)ing mattersC
,a- the grant of a licenceB
,b- the conditions for granting or rene)ing the licenceB
,c- the conduct by a contractor of explorations or de*elopment operations on behalf of any
person to )hom a licence may be granted and the arrangements in any such case for
production sharingB
50
,d- the manner in )hich the .inister or the #ommissioner )ill exercise any discretion
conferred on him or her under this !ctB
,e- any other matter incidental to or connected )ith the foregoing(((;
The applicants argued that the .inister )ould exercise his po)ers under S( 2 ,e- and grant an
exemption to the transfer of interests as it )as incidental or connected )ith the foregoing( <ith
all due respect, to the counsel of the applicants@ position, the Tribunal does not thin7 that this is
a correct interpretation of the po)ers conferred on the .inister under the 55!( The granting of
a tax exemption has nothing to do )ith the granting of a licence, rene)al or regulation of oil
exploration, oil production or de*elopment operations(
#ounsel for the applicants cited the case of Scottish Widow /lc RCC L2'1'M ST# 21"" )here
the courts statedB :((( the phrase Jin connection )ith@ generally merits a )ide interpretation(((;
=o)e*er )ide an interpretation the Tribunal may gi*e to the )ords :incidental to or connected
)ith the foregoing; under S( 2 of the 55!, it cannot stretch its imagination and percei*e ho) a
minister can grant an income tax exemption under 55!( 3n the abo*e case, 9ord =amilton at
para( 77 noted8 :3n some contexts, though not al)ays, the problem may be sol*ed by
substitution of the )ords Jha*ing to do )ith@;( >ranting a tax exemption has nothing to do )ith
licensing or regulating the conduct of an oil operator( =e cited Bank o$ Scotland D#nedin
/roperty &nestment Co Ltd 1&&8 S# +47 at +71 )here 9ord Hir7)ood obser*ed8
:/or my part 3 am prepared to accept the )ords :in connection )ith; are capable of a )ide
construction and in a case of this nature 3 )ould be prepared to accept that it )ould be sufficient if
it )as demonstrated that there )as a substantial relationship in a practical business sense(;
9ord =amilton noted on p( 22'8, para( 788
:3 doubt )hether any useful guidance can be dra)n from the construction of :in connection )ith;
in these *ery different contexts( =ere it is associated )ith the phrase Jpart of J,a transfer of a
business-( The latter phrase )ould import that the addition ,or transfer- of the amount )as an
integral element of the transfer of the business( J3n connection )ith@ imports a less immediate but
not a tenuous relationship )ith a transfer of the business( 5erhaps Jin association )ith@ )ould
here be the closest e2ui*alent(;
The applicants should not gi*e the phrase :incidental to or connected )ith the foregoing; an
o*erC inflated application( The :connection )ith; should be practical and substantial( 9icence do
pro*ide for tax exemptions(
51
Blacks Law Dictionary ,supra- p( 777 defines :incidental; as8 :adD(, Subordinate to something of
greater importanceB ha*ing a minor role;( The Tribunal feels that this is the definition a
reasonable man should use( 3t is difficult to understand ho) a reasonable man )ould percei*e
the 3T! as being subordinate to the 55!( The 55! deals )ith exploration and production of
oil, )hile the 3T! deals )ith la) relating to income( 3ncome tax is created under the 3T!( S( 4 of
the 3T! imposes income tax( The long title of the 3T! reads8 :!n !ct to consolidate and amend
the la) relating to income tax and for other connected purposes;( 3f there is any connection
bet)een the 3T! and the 55! it is too remote to consider it under S( 2 of the 55!(
!ll legal po)ers and authorities emanate from the #onstitution( Under the Uganda #onstitution
a tax is imposed through a la) passed by 5arliament( This is clearly stated in !rticle 142 of the
#onstitution of Uganda )hich reads8
:,1- $o tax shall be imposed except under the authority of an !ct of 5arliament(
,2- <here a la) enacted under clause ,1- of this article confers po)ers on any person or
authority to )ai*e or *ary a tax imposed by that la), that person or authority shall report to
5arliament periodically on the exercise of those po)ers, as shall be determined by 9a)(;
The abo*e !rticle reminds one of the 6oston Tea 5arty of 1+
th
0ecember 177" )here !merican
colonists had a problem of paying taxes to 6ritain )hen they had no representation in 6ritish
5arliament( There is no 6oston in Uganda( This is not a =istory lesson( =o)e*er, it does not
harm to use a historical perspecti*e to understand the relationship bet)een the legislature and
the imposition of taxes( The framers of the 1&&4 #onstitution of Uganda thought it )ise that the
people@s representati*es should be the most suitable persons to impose the taxes they should
pay( So be it(
<here a po)er is *ested in one arm of the go*ernment, another arm cannot usurp the said
po)er unless it is legally pro*ided for( This )ould infringe on the doctrine of separation of
po)ers( 3t is the duty of the legislature to enact la)s that impose taxes( 9ord <ilberforce
explained in Vestey &RC L1&8'M ST# 1' at 18 44 T# 4'" at 4818
:Taxes are imposed upon subDects by 5arliament( ! citiIen cannot be taxed unless he is
designated in clear terms by a taxing !ct as a taxpayer and the amount of his liability is clearly
defined(;
52
This approach )as echoed by his 9ordship .adrama in *ampala ;issan !ganda Limited V
!ganda Reen#e "#thority !ppeal 7 of 2''&, L2'11M U>=# 8', )here he stated8
:/or emphasis 3 need to state that no tax can be imposed except under the authority of an !ct of
U5arliament neither can an authority )ai*e tax except under a la) enacted by 5arliament(;
3n Heritage Oil and Gas Limited !ganda Reen#e "#thority #i*il !ppeal 14 of 2'11, =er
9ordship %bura said that8
:!rticle 142,1- of the #onstitution of Uganda pro*ides that no tax shall be imposed except under
the authority of an !ct of 5arliament( The 3T! and other tax statutes specify the taxes payable and
the U?! is mandated to collect those taxes(;
3t cannot be doubted that po)ers to ma7e tax la)s are *ested in the legislature( %n the other
hand, 3t is the duty of the executi*e to collect the said taxes and use the said taxes in the
administration of public affairs( There )ould be a conflict of interest if the executi*e )as to
impose taxes, collect them and use them( 3t might get carried a)ay )ith the so much po)er that
)ould be *ested in it( 3n order to a*oid this, the constitution left the po)er to le*y taxes )ith
5arliament(
3f the 5arliament confers on a minister or the executi*e arm of go*ernment po)ers to grant or
)ai*e a tax, it has to expressly pro*ide for it in an !ct of 5arliament( This authority under the 3T!
is besto)ed on the .inister of /inance )ho has to report to 5arliament on )ai*ers or *ariations
in taxes( The Tribunal has not come across any !ct of 5arliament )here the .inister of nergy
and .ineral de*elopment is gi*en po)ers to grant tax exemptions(
The applicants argued that the >%U exercises po)ers )hich preCdate Uganda@s constitution or
expressly conferred by the constitution( The applicants submitted that such preC)ritten
constitution po)ers include a po)er to grant exemption from tax ,the :5# xemption 5o)er;-(
The Tribunal agrees )ith the applicants@ citation of !rticle 274 of the #onstitution that la)s
existing before the coming into force of the #onstitution )ere not affected by it and could be
construed )ith modifications, adaptations and 2ualifications as to bring them in conformity )ith
the #onstitution( The Tribunal also agrees that existing la)s mean both )ritten and un)ritten
la)( The Tribunal also agrees )ith the respondent@s citation of "ttorney General Osotraco Ltd+
#i*il !ppeal $o( "2 of 2''2, L2''4M U>#! 1 )here the court noted that !rticle 274 of the
#onstitution8
53
:((( only empo)ers all courts to modify existing unDust la)s )ithout necessarily ha*ing to refer all
such cases to the #onstitutional #ourt( This pro*ision enables the court to expedite Dustice by
construing unDust and archaic la)s and bringing them in conformity )ith the constitution, so that
they do not exist and are *oid(;
=o)e*er the applicants ha*e not cited any authority nor adduced any e*idence to sho) that the
5resident had po)ers to grant tax exemptions before the coming into force of the 1&&4
#onstitution and that such po)ers sur*i*ed its promulgation( The applicants merely argued that
:simply because there is no express pro*ision pro*iding for a po)er to grant an exemption from
tax does not mean that such a po)er does not form part of the 5resident@s executi*e authority;
3f such po)ers of the executi*e to impose tax exist they )ould be mythical( Such an assertion is
based on speculation( !lso the use of extra statutory materials ad*anced by the applicants on
the deri*ation of the said po)ers from ancient common la) prerogati*es of the #ro)n are not
useful aids in sho)ing the source of the purported 5resident@s po)ers( The applicants did not
cite any authority to sho) under )hich common can the #ro)n deri*es the po)er to grant any
tax exemption(
The applicants also argued that the .inister could sign under other po)ers conferred by the
#onstitution( The applicants relied on %bDecti*e 3K N the right to de*elopment, and %bDecti*e K3
,ii- N stimulation of industrial de*elopment by adoption of appropriate policies( The obDecti*es of
the 1&&4 #onstitution merely state the frame)or7 under )hich the #onstitution )ill operate( !
perusal of the said obDecti*es does not sho) any grant of tax exemption( Similarly, the
applicants@ reliance on !rticles 2, &&, 111 and 11" of the #onstitution do not sho) any po)ers of
the executi*e to grant tax exemptions(
3n "ttorney General %alal# %#sene Wilson and others #onstitutional !ppeal $o( 7 of 2''4 the
constitutional court )as of the opinion that :had the framers of the #onstitution )anted to confer
a tax exemption on emoluments of Dudicial officers, they )ould ha*e said so expressly(; !s
regards the exemption that )as extended to Dudges, the court stated that8
:<e )ish to add, ho)e*er, for clarity that the 3ncome Tax !ct did pro*ide for the .inister of
/inance to grant a tax exemption to any person( The #abinet did decide in 1&&1 to extend
exemption from payment of tax to 1udges(;
The applicants do not argue that the .inister of .ineral and nergy 0e*elopment )as conferred
po)ers under the 3T! to grant exemption to any person, )hich is not the case( The applicants
54
do not refer to any constitutional pro*ision )hich explicitly allo)s the .inister to grant tax
exemptions( 3n the absence of the #onstitution conferring po)ers to any other arm of the
>o*ernment or institution to impose taxes, it can safely be said that the authority to impose
taxes *ests only in the 5arliament or as it so pro*ides(
The #onstitution does not expressly state that 5arliament shall grant an exemption( =o)e*er S(
2" of the 3nterpretation !ct pro*ides that8
:<here any !ct confers a po)er on any person to do or enforce the doing of any act or thing,
all such po)ers shall be understood to be also gi*en as are reasonably necessary to do or
enforce the doing of the act or thing(;
S( 2 of the said !ct defines a person to include a body of persons corporate or unincorporate(
!pplying the 3nterpretation !ct, if the 5arliament has po)ers to impose taxes it also has the
po)ers to )ai*e them( =e )ho has po)ers to appoint, has po)ers to disappoint( 3f one has
po)ers to impose a tax, then the po)er to dispose off )ould be implied( Therefore !rticle 142
implicitly pro*ides that 5arliament has the po)ers to ma7e la)s granting exemptions or to
empo)er persons to grant them(
The applicants argued that !rticle 142,2- of the #onstitution sets out the procedure applying to
la)s enacted under !rticle 142,1-( !rticle 142 of the #onstitution pro*ides that )here under a
la) enacted by 5arliament, one is gi*en po)ers to )ai*e or *ary a tax that person should report
to 5arliament periodically( There is no e*idence to sho) that the .inister of nergy and .ineral
0e*elopment )ho signed the !2 5S! e*er reported to 5arliament on the exercise of such
po)ers, if she had any( There is no e*idence that she declared the grant of a tax exemption
under !rticle 2"(4 to 5arliament( Such an omission is fatal as the #onstitution is clear(
The applicants argued that !rticle 2"(4 of the !2 is not a )ai*er or *ariation of taxes at all(
Secondly it is not a )ai*er or *ariation granted :pursuant to a la) enacted under !rticle 142,1-
of the #onstitution, as it is in an agreement( :3t is a $ait accompli(; !n exemption is gi*en by la)(
! )ai*er is gi*en by an authority exercising its discretion ta7ing into account special
consideration( ! )ai*er ends it an exemption( 3t is a 2uestion of semantics( !n agreement to
confer on a minister, po)ers to grant exemptions or )ai*e taxes, there must be an enabling !ct(
55
3n the case of the !2 5S! there )as no enabling !ct that empo)ered the .inister of nergy to
grant exemptions or )ai*ers or *ariations of taxes(
Therefore the Tribunal finds that the .inister of nergy and .ineral 0e*elopment did not ha*e
legal authority to grant an exemption under !rticle 2"(4 of the !2 5S!( !ny such grant
offended the tax pro*isions of the tax la)s including the 3T!(
3ssues 1(" )hich )as in respect of the application of international la) to !rticle 2"(4 of the !2
5S! )as abandoned by the applicants( The applicants ho)e*er in the later issues discussed
the principle of pacta s#nt seranda( This is a principle of international la)( <e shall cross the
bridge )hen )e reach it(
3ssue 1(4 )as dependent on the findings on issues 1(2 and 1("( =o)e*er the applicants
submitted that the respondent is an agent of the >%U( The applicants argued that as an agent it
is bound by the !2 5S! signed by its principal, the >%U( The applicants cited Heritage Oil and
Gas !R" #i*il !ppeal 14 of 2'11 )here the =igh #ourt held that the U?! is a statutory body
established under S( 2 of the U?! !ct as an agent of >%U( The court noted that8
:3t follo)s that U?! as a statutory agent is part and parcel of >o*ernment( 3t cannot therefore in
my opinion be seen to disassociate itself from the 5S!, )hich is the principle the >o*ernment
la)fully signed )ith the !pplicant( To attempt to do so )ould Dust be splitting hairs(;
The applicants argued that the respondent is therefore bound by !rticle 2"(4 of the !2 5S!( 3t
therefore should not deny the .inister@s authority to enter into the 5S!, including !rticle 2"(4
The Tribunal does not deny that the respondent is an agent of >%U( =o)e*er, the la)
establishing the Uganda ?e*enue !uthority re2uires it to administer and enforce the la)s of
Uganda in respect of re*enue collection( The 5reamble of the Uganda ?e*enue !uthority !ct
reads8
:!n !ct to establish the Uganda ?e*enue !uthority as a central body for the assessment and
collection of specified re*enue, to administer and enforce the la)s relating to such re*enue and to
pro*ide for related matters(;
3n *+%+ ,nterprises and others !ganda Reen#e "#thority 345567 U>#omm# 21 the court
noted thatB
56
:The authority of the Uganda ?e*enue !uthority is to administer certain tax la)s, collecting the
tax due( The Uganda ?e*enue !uthority cannot, in breach of duties imposed by statute agree to
collect less tax than due from any particular tax payer(;
Therefore as an agent of the >%U one of the obDecti*es of the respondent is to administer and
enforce the la)s relating to such re*enue( The >%U, though is the principal, is still bound by the
la)s in respect to re*enue collection( !ny agreement entered into by the >%U should abide by
the la) in respect of re*enue collection( The Tribunal does not thin7 it is merely sufficient to
argue that once a person is an agent of go*ernment it )ill not abide by a statute(
<hile issue 1(4 )as raised in respect to the application of estoppel to !rticle 2"(4 of the !2
5S!, issue 1(+ addressed the application of the principles of legitimate expectation( The
applicants attempted to merge the principle of estoppel )ith that of legitimate expectation( They
argued that the t)o issues are hea*ily dependent on each other( They argued that :estopped; is
not a technical term but simply refers to :circumstances in )hich by the operation of la), an
indi*idual or body is pre*ented from beha*ing in a particular manner(; 9egitimate expectation is
a principle distinct from estoppel but shares a common origin )ith estoppel and is rooted in
principle of fairness( #onse2uently the >%U is estopped by the principles of fairness( The
applicants also argued that principle of pacta s#nt seranda operates to pre*ent unfairness(
The respondent, on the other hand, argued that both estoppel and the principle of legitimate
expectation are not applicable in the present application( The respondent argued that there can
be no estoppel against a statute( /urthermore, an expectation grounded upon an ultra *ires
representation cannot be legitimate( The respondent contended that :the pacta s#nt seranda
argument by the applicants is no more than a recycling of the same untenable arguments
discussed earlier under a different name(;
The rule of estoppel is a rule of e*idence( 3n order to understand it, )e loo7ed at *arious
descriptions and definitions( Under the *idence !ct #ap( +, estoppel is described as8
:<hen one person has, by his or her declaration, act or omission, intentionally caused or
permitted another person to belie*e a thing to be true and to act upon that belief, neither he or
she nor his or her representati*e shall be allo)ed, in any suit or proceeding bet)een himself or
herself and that person or his or her representati*e, to deny the truth of that thing(;
57
!ccording to Os0orns Concise Law Dictionary +
th
edition, estoppel is defined as8
:V( The rule of e*idence or doctrine of la) )hich precludes a person from denying the truth of
some statement formerly made by him, or the existence of facts )hich he has by )ords or
conduct led to others to belie*e it( 3f a person by a representation induces another to change his
position on the faith of it, he cannot after)ards deny the truth of his representation(((;
Blacks Law Dictionary ,supra- p( 48& defines estoppel as8
:n+1( ! bar that pre*ents one from asserting a claim or right that contradicts )hat one has said or
done before or )hat has been legally established as true((( 2( ! bar that pre*ents the relitigation
of issues( "( !n affirmati*e defense alleging goodCfaith reliance on a misleading representation (((;
/rom the abo*e definitions a number of things are clear( 3t is a rule of e*idence( Secondly, it is a
bar or a shield and cannot be a s)ord to create liability( 3n %#l<i 2etha Ltd V Commissioner o$
&ncome >a( L1&+7M (!( 4' it )as held, inter alia, that the claim must fail, because the plaintiff
)as see7ing to use the principle of e2uitable estoppel to found a cause of action( 3t pre*ents a
person from denying the truth of a representation made by another( The Tribunal does not thin7
that the concepts of :truth; and :legality; are one and the same thing( Those are different
concepts( /rom the abo*e definitions, it is doubtable )hether a party can rely on a
representation made by a third party( 3n this case it )as the >%U that purportedly made the
representation to the applicants and not the respondent, )hich are different legal entities(

The respondent has argued that there is no estoppel against a statute( The respondent stands
to be corrected( There has to be a distinction bet)een a legal act, conduct or representation,
)hich is intra ires, and one )hich is illegal or #ltra ires(
<here an act, conduct or representation is legal, estoppel may operate( 3n Regina &nland
Reen#e Commissioners ,( parte %+ )+ *+ !nderwriting "gents Ltd 1&&' <9? 1444 the court in
dismissing the application held that8
:it )as )ithin the managerial discretion of the 3nland ?e*enue to gi*e assurances as to the
taxation treatment )hich financial securities )ould recei*e albeit that might in*ol*e the re*enue
forgoing tax to )hich they might be entitled, for such assurances to be relied upon or form the
basis, in the e*ent of breach, of a successful application for a Dudicial re*ie), they must ha*e
been gi*en in response of full disclosure, by the party see7ing them, of the clear terms of a
specific transaction(;
3n Reg+ V &+R+C+' ,(+p %atri( Sec#rities Ltd L1&&4M <9? ""4 the court stated that8
58
:3t is no) established that in certain circumstances, it is an abuse of po)er for the re*enue to
see7 to extract contrary to an ad*ance clearance gi*en by re*enue( 3n such circumstances, the
taxpayers can by )ay of Dudicial re*ie) apply for an order pre*enting the re*enue from see7ing to
enforce the tax legislation in a sense contrary to assurance gi*en8 Reg+ V &nland Reen#e
Commissioners' ,( parte /reston L1&84M !(#( 8"4( 6ut the courts can only restrain the re*enue
from carrying out its duties to enforce taxation obligations imposed by legislation )here the
assurances gi*en by the re*enue ma7e it unfair to contend for a different tax conse2uence, as a
result of )hich unfairness, the exercise of its statutory po)ers by the re*enue )ould constitute an
abuse of po)er8 see per 9ord Templeman, at p( 8+4>( 3t is further established that if the taxpayer,
in see7ing ad*ance clearance, has not made a full disclosure of the rele*ant circumstances, the
re*enue is not acting unfairly, and therefore is not abusing its po)ers, if it goes bac7 on an
ad*ance clearance )hich it has only gi*en in ignorance of all the rele*ant circumstancesV;
=ence once an assurance is legal, the Tribunal does not see )hy Uganda ?e*enue !uthority
cannot be estopped( 3t all boils do)n as to )hether the taxpayer is see7ing for tax mitigation or
tax a*oidance as understood under S( &1 of the 3T!(
<here a representation or act is illegal, estoppel cannot operate( 3n %inister o$ "gric#lt#re and
)isheries %atthews L1&4'M 1 H6 148 at 144 #assels, 1 held that8
:(( an ultra *ires act done by a statutory body )hose po)ers is limited by the statute or statutes
)hich brought it into existence and subse2uently regulate its action is not an act at allV;
3n Golden Leaes Hotels and Resorts Limited and "pollo Hotel Corporation !ganda Reen#e
"#thority #i*il !ppeal +4 of 2''8, the #ourt of !ppeal held that the principle of estoppel can
neither be used as a s)ord nor a shield against a statutory pro*ision( The court cited the case of
?ork Corporation Henry Leethan = Sons Ltd+ L1&24M !ll( (?( ?ep 477 )here it )as held that8
:! body charged )ith statutory po)ers for public purposes is not capable of di*esting itself of
those po)ers or of fettering itself in their use, and an agreement by )hich it see7s to do so is ultra
*ires and *oid( Such an ultra *ires agreement cannot LbeM intra *ires by reason of estoppel, lapse
of time, ratification, ac2uiescence, or delay(((;
The #ourt of !ppeal also cited the case of %arine ,lectric Company Limited General Diaries
Limited L1&"7M !(#( +1' at +2' )here the =ouse of 9ords held8
:V()here the statute imposes a duty of a positi*e 7ind, not a*oidable by the performance of any
formality, for the doing of the *ery act )hich the plaintiffs see7s to do, it is not open to the
defendant to set up an estoppel to pre*ent itV an estoppel is only a rule of e*idence )hich under
the certain special circumstances can be in*o7ed by a party to an actionB it cannot therefore a*ail
59
such a case to release the plaintiff from an obligation to obey such a statute, nor can it enable the
defendant to escape from a statutory obligation of such a 7ind on his part( 3t is immaterial )hether
the obligation is onerous or other)ise to the party suing( The duty of each party is to obey the
la)V;
3n *+%+ ,nterprises and others !ganda Reen#e "#thority L2''8M U>#omm# 21 the court had
this to say8
:These nglish cases set out the accepted position of the la) )ithin this Durisdiction )ith regard to
the exercise of statutory po)ers( xercise of statutory po)ers and duties cannot be fettered or
o*erridden by agreement, estoppel, lapse of time, mista7e and such other circumstances( To hold
other)ise )ould be to suggest that an agreement bet)een the parties can amend an !ct of
5arliament, and thus change )hat 5arliament ordained by allo)ing the defendant@s ser*ants to
choose to act, or operate outside or contrary to the pro*isions of the la), )illCnilly( !nd that cannot
be(;
3n /ride ,(porters Ltd V !ganda Reen#e "#thority =##S 4+" of 2''+ 1ustice >eoffrey
Hiryab)ire stated that a statutory body li7e the Uganda ?e*enue !uthority )hen gi*en po)ers
under a statute cannot ha*e those po)ers fettered or o*erridden by estoppel or mista7e( =e
further )ent on to state that the act by the #ommissioner >eneral )as clearly ultra *ires and
cannot stand( Such an act amounted to no act at all under the la) and the doctrine of estoppel
is not applicable in this regard(
The applicants had problems by the respondent@s use of nglish, US and #anadian authorities(
They argued, )hich the Tribunal agrees )ith, that the said authorities are not binding but
persuasi*e( The Tribunal has combined some of the said authorities )ith those made by
Uganda courts( This is to confirm that the said authorities )ere not only persuasi*e but )ere
con*incing to the extent that they )ere applied by the Ugandan courts( 9i7e)ise )here )e cite
an authority, there should be no doubt that the Tribunal found the said authority con*incing(
#oming bac7 to the issue at hand, the 2uestion is, )as !rticle 2"(4 of the !2 5S! intra ires or
#ltra iresF The Tribunal has already held in issue 1(2 that it )as ultra *ires( <e referred to the
decision, inter alia, of =is 9ordship .adrama in *ampala ;issan !ganda Limited V !ganda
Reen#e "#thority !ppeal 7 of 2''&, L2'11M U>=# 8', )hich )e )ould li7e to repeat8
:/or emphasis 3 need to state that no tax can be imposed except under the authority of an !ct of
U5arliament neither can an authority )ai*e tax except under a la) enacted by 5arliament(;
60
=e further stated that8
:0isobedience to a statute enacted in public interest and couched in mandatory language in
terms of )hat it commands to be done renders anything done in disobedience of the statute null
and *oid(;
Therefore if !rticle 2"(4 of !2 5S! )as ultra *ires, no act at all, then the applicants cannot rely
on the doctrine of estoppel so as to create a tax liability(
=o)e*er the applicants argued that the respondent is estopped by the principle of legitimate
expectation( The applicants argued that8
:9egitimate expectation is LthusM firmly established as the public la) principle )here a state ,or its
agency- has represented that it )ill act in a particular manner ,contrary to a statutory rule and
e*en if acting ultra *ires- )here the indi*idual is entitled to expect that the state )ill 7eep its
)ords(;
9egitimate expectation arises from a conduct, practice or treatment )hereby one reasonably
expects a benefit to arise( 3n the Henyan case of Rep#0lic and others "ttorney General and
another L2''+M 2 ! 2+4 the court commenting on legitimate expectation stated8
:! legitimate expectation arises )here a person responsible for ta7ing a decision has induced in
someone )ho may be affected by the decision a reasonable expectation that he )ill recei*e or
retain a benefit or that he )ill be granted a hearing before the decision is ta7en(((;
3n the nglish case of Co#ncil o$ Ciil Serices !nions %inister $or Ciil Serice L1&84M !# "74
9ord /raser said8
:! legitimate expectation may arise from an express promise gi*en on behalf of a public authority
or from the existence of a regular practice )hich the claimant can reasonably expect to continue(;
=e continued that8
:9egitimate expectations such as are no) under consideration )ill al)ays relate to a benefit or
pri*ilege to )hich the claimant has no right in pri*ate la)s, and it may e*en be to one )hich
conflicts )ith his pri*ate la) rights(
3n re /reston L1&84M !# 18"4, it )as held that8
:(((unfairness in the purported exercise of a po)er could amount to an abuse or excess of po)er
if it could be sho)n that the #ommissioners had been guilty of conduct e2ui*alent to a breach of
contract or breach or representation(;
The principle of legitimate expectation arose from the need to ensure fairness in transactions
in*ol*ing public authorities and other persons( The applicants@ )hose right to an exemption,
61
arising from pri*ate contractual la) rights under the !2 5S!, being extinguished by the public
doctrine of estoppel, )ish to rely on the principle of legitimate expectation( The applicants
argued that :the exercise of a statutory po)er must be restricted )here to exercise it )ould
frustrate a legitimate expectation(; 3n essence, the respondent@s attempt to in*o7e the exercise
of the 3T! against the applicants should be restricted by the legitimate expectation the latter had
by *irtue of the purported exemption granted by !rticle 2"(4 of the !2 5S!(
The applicants attempted to merge the principle of estoppel )ith that of legitimate expectation
though they accept that the principles are not the same( The )ord Jestop@ is defined by Blacks
Law Dictionary ,supra- at p( 48& as :0( To bar or pre*ent by estoppel;( 3t is clear that Jestop@ is
used )hen referring to estoppel( <e thin7 that attempt by the applicants to use the )ord Jestop@
so as to merge the principle of estoppel )ith that of legitimate expectation is to attempt to effect
a Jmarriage of con*enience@ that is aimed at creating confusion in the application of the t)o
different principles( The principle of legitimate expectation is )ider than of estoppel( 3t is aimed
at ensuring fairness in the administration of public affairs by public bodies, )hile estoppel is a
rule of e*idence that can be used in pri*ate affairs( <hile estoppel is a shield, the doctrine of
legitimate expectation may be used as a s)ord(
6oth parties do not dispute that the principle of legitimate expectation is part of the la)s of
Uganda( <hat is in dispute is )hether the applicants can rely on it to a*oid paying taxes( The
principle of legitimate expectation is a common la) principle( S( 14 ,2- of the 1udicature !ct
allo)s the =igh #ourt, in the exercise of its Durisdiction, to apply subDect to )ritten la), common
la) and doctrines of e2uity( The =igh #ourt is a court of record( The la) that is applicable in
=igh #ourt is also applicable in the Tax !ppeals Tribunal(
!ccording to 1(9 #ald)ell8 :9egitimate xpectation and the rules of natural Dustice;, the concept
of legitimate expectation )as first implanted in administrati*e la) by 9ord 0enning in Shmidt
Secretary o$ State $or the Home Department L1&+&M 2 #h( 14&, in a case )here alien students of
:Scientology; )ere refused extensions of their entry permits )ithout being gi*en a fair hearing(
3n his Dudgement, 9ord 0enning proffered the *ie) that the application of rules of natural Dustice
depended on :((()hether he has some right or interest or 3 )ould add, some legitimate
expectation, of )hich it )ould not be fair to depri*e him )ithout hearing )hat he has to say(; 1(9(
62
#ald)ell stated in this )ay, the :notion )as introduced )ithout any analysis or fanfare(; 3n a
dissenting opinion, in Breen "malgamated !nion o$ ,ngineering'L1&71M 2 G(6( 174 ,#!- 9ord
0enning declared that8 :if a person has some right or interest or some legitimate expectation of
)hich it )ould not be fair to depri*e him )ithout a hearing or reasons gi*en then these should
be afforded him(((; The doctrine of legitimate expectation )as nurtured by 9ord 0enning(
3t is apparent that the doctrine of legitimate expectation arose sometime around 1&+&( !s to ho)
a common la) doctrine that arose in the late 1&+'s can be applicable to current Uganda ,)hich
got independence in 1&+2-, none of the counsel addressed the Tribunal on that( =o)e*er, since
the Tribunal notes that both counsel are agreeable on its application in Uganda, it )ill not roc7
the boat any further( !fter all, it is a principle arising from natural Dustice )hose principles cannot
be exhausti*ely articulated(
The applicants argued that they are entitled to fair treatment by the respondent in respect of the
promise to grant them an exemption( 3n &RC ;ational )ederation o$ Sel$ ,mployed and Small
B#siness L1&81M ST# 2+' at 27&, 9ord Scarman said8
:the modern case la) recognises a legal duty o)ed by the ?e*enue to the general body of
taxpayers to treat taxpayers fairly, to use their discretionary po)ers, so that, subDect to the
re2uirements of good management, discrimination bet)een one group of taxpayers and another
does not arise, to ensure that there are no fa*ourites and no sacrificial *ictims( The duty has to be
considered as one of se*eral arising )ithin the complex care and management of a tax, e*ery
part of )hich it is their duty, if they can to collect(;
.r( ?ichard 3nch, in paragraph 1'(4 of his )itness statement alludes to a tax exemption granted
to 6idco, another in*estor( The applicants feel that if exemptions are granted to other
companies, )hy should they be denied one if it is in the !2 5S!( Unfairness may arise from
unDustified une2ual treatment of taxpayers( =o)e*er, the circumstances to )hich an exemption
)as made to 6idco, the criteria and the la) under )hich it )as granted, are not clear( This )as
not substantiated to the satisfaction of the Tribunal for it to find that there )as unfairness in the
failure to grant an exemption to the applicants )hen one )as granted to 6idco(
The application of the principle of legitimate expectation is not absolute( 3n Co#ncil o$ Ciil
Serice !nions %inister $or the Ciil Serice .s#pra1 the court )as of the *ie) that the .inister
63
had sho)n that her decision had in fact been based on considerations of national security that
out)eighed the applicant@s legitimate expectation of prior consultation( 3n re /reston ,supra- the
court held8
:that a taxpayer cannot complain of unfairness, merely because the commissioners decided to
perform their statutory duties under section 4+' to ma7e an assessment and to enforce a liability
to tax( The #ourt cannot in the absence of exceptional circumstances decide to be unfair that
)hich the #ommissioners by ta7ing action against ha*e determined to be fair(;
3n order to apply the principle of legitimate expectation, the Tribunal has to determine )hether
there )as unfairness in the decision of the respondent, and )hether there are exceptional
circumstances(
The respondent merely enforcing its statutory duty to impose a liability to pay tax on the
applicants may not be unfair especially )here the liability is set by statute( There are a number
of court decisions as to the effect of #ltra ires acts on the application of the principle of
legitimate expectation( 3n "l )ayed and others "docate General $or Scotland L2''4M S(T(#
17'", the court noted8
:(((under our domestic la) a legitimate expectation can only arise on the basis of a la)ful
promise, representation or practice( There can be no legitimate expectation that a public body )ill
continue to implement an agreement it has no po)er to do so( 3n our opinion, the petitioners
could not ha*e had a legitimate expectation that the respondents )ould ha*e adopted a course of
action )hich )as out)ith their po)ers, and continued to maintain a contract )hich )as unla)ful(
<hile the petitioners may )ell ha*e had an expectation, it )as not, in the particular
circumstances of this case and according to our common la), a legitimate expectation(
!ccordingly, )e consider that the petitioner@s case based on a breach of legitimate expectation
must fail(;
3n R &nland Reen#e Commissioners e( parte %)* !nderwriting "gents Limited L1&8&M S(T(#(
87" at 8&2, the court stated that8
:*ery ordinary sophisticated taxpayer 7no)s that the ?e*enue is a taxCcollecting agency, not a
taxCimposing authority( The taxpayers@ only legitimate expectation is, prima facie that he )ill be
taxed according to statute, not concession or a )rong *ie) of the la)( ((( J%ne should be taxed by
la), and not be untaxed by concession@(;
The same court at p( 8&4 stated that8
64
:3t )as argued for the applicants in the present case that unfairness amounting to an abuse of
po)er could arise in any circumstances in )hich the ?e*enue had created a legitimate
expectation in the mind of the taxpayer about ho) his affairs )ould be approached if, after he
acted on that expectation, the ?e*enue resiled from the underta7ings it had pre*iously gi*en(
Such conduct )ould be unfair and an abuse of po)er and subDect to estoppel )ithin the principles
laid do)n in 5reston(
J9egitimate expectation@ has been considered in a number of authorities( ((( The correct approach
to Jlegitimate expectation@ in any particular field of public la) depends on the rele*ant legislation(
3n R "BG' e( p &mperial Chemical &nd#stries plc ,1&8+- +' T# 1, the legitimate expectation of the
taxpayer )as held to be payment of the taxes actually due( $o legitimate expectation could arise
from an ultra *ires relaxation of the rele*ant statute by the body responsible for enforcing it( There
is in addition the clearest possible authority that ?e*enue may not Jdispense@ )ith rele*ant
statutory pro*isions(((
(((
3 accept )ithout hesitation that ,a- the ?e*enue has no dispensing po)er, and ,b- no 2uestion of
abuse of po)er can arise merely because the ?e*enue is performing its duty to collect taxes
)hen they are properly due(;
3n Rep#0lic ;ational ,nironment %anagement "#thority e(Bparte So#nd ,C#ipment Limited
L2'1'M eH9?, the court stated that ,p( 8C&-8
:! legitimate expectation cannot arise )here the respondent had acted contrary to, i(e( the la)(((
The la) can not allo) an indi*idual to retain a benefit )hich is the subDect of the legitimate
expectation, if creating or maintaining the benefit is beyond the po)er of the public body or
officer(;
3n Rep#0lic >he Disciplinary Committee = another ,(Bparte /ro$+ /a#l %#sili Wam0#a L2'1"M
eH9?, the court stated8
:3 )ould add that for an applicant to cite legitimate expectation, the promise made must be )ithin
the Durisdiction of the party ma7ing it( !n illegal promise cannot be relied upon to form a claim for
legitimate expectation(;
3n Regina Secretary o$ State $or ,d#cation and ,mployment, ,( parte Beg0ie 2''' 1 <(9(?(
1114, the court in dismissing the appeal held that8
:the courts )ould not gi*e effect to a legitimate expectation if it )ould re2uire a public authority to
act contrary to the terms of a statute(;
The abo*e authorities are selfCexplanatory and do not need any further comments from the
Tribunal(
65
The Tribunal has had the opportunity to read the abo*e authorities( 3t notes that the said
authorities are from court decisions outside Uganda( The applicants are apprehensi*e of the use
of authorities from abroad( The said decisions are mostly persuasi*e( There are hardly any
Uganda court decisions because the principle of legitimate expectation has not been addressed
extensi*ely before( =o)e*er there is nothing )rong in relying on decisions from else)here
especially )here they are *ery persuasi*e( 3n "ttorney General %#sal# %#sene and others
,supra- the Supreme #ourt noted8
:<e are of the considered opinion that the decisions in HATTER and BEAUREGARD from U(S(!
and #anada, respecti*ely, are *ery persuasi*e and ought to be applied in interpreting !rticle
128,7- of the #onstitution(;
3f the Supreme #ourt sees no problem in applying authorities from courts of other Durisdictions in
interpreting the #onstitution, the Tribunal li7e)ise sees no problem in relying on authorities from
other Durisdictions(
3n his letter of 17
th
September 2'1', xhibit !"', the .inister of nergy and .ineral
0e*elopment )rote to .r( !idan =ea*y the #hief xecuti*e %fficer of Tullo) %il 5lc in respect of
the ac2uisition of =eritage@s interest and the farmdo)n of Tullo)@s interest inter alia as follo)s8
:,iii- The transfer from Tullo) to Total and #$%%# )ill attract capital gains tax as )ill be assessed
by the #ommissioner, Uganda ?e*enue !uthority in accordance )ith the 9a)s of Uganda(;
.r( !idan =ea*ey ac7no)ledged receipt of the said letter in his letter of 1&
th
September 2'1'(
=e did not obDect to the payment of capital gains tax( =e merely stated that :Tullo) )ill re2uire
clarification of the tax due by Tullo) on its sale to Total and #$%%#(((; 3n a letter of 1
st
%ctober
2'1' to the .inister, .r( >raham .artin stated that8
:Tullo) has been see7ing confirmation that the exemption from taxes enshrined in the !2 5S!
)ill be respected( This sanctity of contract is of critical importance to Tullo) and its ne) partners(;
/rom the abo*e correspondences, the applicants cannot say that they did not expect to pay
capital gain taxes in accordance )ith the la)s of Uganda( ?ather they preferred to abide to
sanctity of contract( ! contract cannot o*erride a statute( !ny expectation to the contrary )ould
not be in line )ith the la) and is not legitimate(
66
*en in the S5!s the applicants made )ith Total and #$%%#, the applicants )ere a)are about
the obligation to pay capital gains tax( Under #lause 11(2,b- of the S5!s dated 2&
th
.arch 2'11
it )as pro*ided that Tullo) shall be responsible for and :shall pay any or all Tax in the nature of
income, turno*er, capital gains or similar taxes payable on or in respect of the transactions
contemplated by this !greement(((; =ence it cannot be said that Tullo) did not expect to pay
capital gains tax(
The Tribunal notes that the respondent is a tax collecting body( 3ts mandate is to collect taxes
according to the rele*ant statutes and la)( The applicants see7 to cite an expectation arising
from !rticle 2"(4 of the !2 5S! that they )ill not purportedly pay capital gains tax from a sale
of their interests in 6loc7 !2( The said promise )as done in contra*ention of the 3T!( =ence it
)as not la)ful( The Tribunal does not see any unfairness in the decision of the respondent to
implement the 3T! pro*isions against the applicants( The applicants, only legitimate expectation
is that they should be taxed according to the 3T! and not a )rong interpretation of the la)( !ny
such promise or representation under !rticle 2"(4 of the !2 5S! cannot be relied upon to form
a claim for legitimate expectation( ! promise made on an illegal claim cannot form the basis of a
legitimate expectation( 3t is an illegitimate expectation )hich the Tribunal cannot uphold(

6efore the Tribunal can lea*e issue 1(4, it noted that the applicants cited the international la)
principle of pacta s#nt seranda )hich re2uires those entering into contracts to honour their
obligations( William W+ Bishops' 2r+ D&nternational LawA Cases and %aterialsE 2
nd
dition p( 1""
states that8 :%ne of the most fundamental rules of international la) is that treaties must be
performed in good faithB the rule of pact s#nt seranda+; The applicants ha*e not con*inced the
Tribunal that the !2 5S!s are international agreements or treaties( The #onstitution re2uires
international agreements to be ratified by the cabinet( The applicants ha*e also not con*inced
the Tribunal that they are international bodies( 3n the absence of any satisfactory submission,
the Tribunal )ill not labour much to address the application of pacta s#nt seranda in this
application(
/.2 REINVESTMENT RELIEF2 INVOLUNTARY DISPOSAL
67
The applicants called a number of )itnesses )ho ga*e testimony to the effect that Tullo) did
not )ish to dispose of ++(+7A but 4'A of its interests( !ccording to !<1, .r( >raham, Tullo)
ac2uired =eritage@s interests in !1 and !"! )ith the intention of selling them( 3t had )ished
to sell 4'A of its interests in each of the 5S!s( =o)e*er the >%U )ould not gi*e its consent to
a sale to only one party( There )as pressure from the >%U for the Tullo) to brea7 the monopoly
in oil exploration( .r( >raham informed the Tribunal that Tullo) )as forced to sell an extra
1+(+7A of its interests( Tullo) sold ++(+7A of its interests in each of the 5S!s to #$%%# and
Total on 21
st
/ebruary 2'12, each purchaser ta7ing ""(""A of the interests( There )as no
official communication that Tullo) should sell ++(+7A of its interests( =o)e*er there )ere
se*eral meetings )ith >%U officials at different le*els )here it )as indicated that Tullo) should
retain a third of its interests(
.r( .c0ade, the #hief %perating officer of Tullo), testified that the >%U indicated to the senior
Tullo) executi*es that a 4'A farmdo)n )ould not be acceptable to it( The >%U )anted to
a*oid a monopoly( =e testified that .r( ?ichard 3nch emailed to him about a con*ersation he had
)ith .r( HiiIa, the 0irector of conomic !ffairs, that the >%U )ould not allo) a 4'A split( .r(
.c0ade contended that the disposal of 1+(+7A )as therefore an in*oluntary disposal( =e
testified that Tullo) )as planning to rein*est considerable sums from the farmdo)n proceeds in
assets of a li7e 7ind )ithin one year from the disposal of the =eritage interests( .r( .c0ade told
the Tribunal that the intention to sell 4'A of its interest )as not expressed in any form of board
resolution( /urthermore, he testified that there )as no correspondence bet)een >%U and
Tullo) that indicated that the latter )anted to sell 4'A of its interest( =e stated that there )as a
draft S5! )hich )as on a 4'84' basis made in /ebruary 2'1'( .r( .c0ade admitted that he did
not clearly understand )hat a reCin*estment relief )as(
!<", .r( ?ichard 3nch, the =ead of Tax at Tullo), also told the Tribunal that Tullo) had intended
to sell 4'A of the interests in !1, !2, and !"!( =o)e*er before the >%U )ould grant the
necessary consent, it re2uired Tullo) to sell a further 1+(+7A of its interest( =e stated that in a
meeting of the 2
nd
/ebruary 2'1' )ith .r( 9a)rence HiiIa the 0irector of conomic !ffairs, he
told him that >%U )as not going to allo) a sale of only 4'A of Tullo) interests and it )anted a
single distinct operator for each 5S!, )ith each ta7ing ""(""A interests(
68
The respondent@s first )itness, ?<1 .r( ?ubondo, testified that the >%U did not indicate to
Tullo) )ho to sell to, but the >%U )anted to a*oid a monopoly in the !lbertine >raben( =e
stated that Tullo) decided on the percentages to sell in the three !s(

The respondent@s second )itness, .r( HaDubi obDected to the applicants@ entitlement to
rein*estment relief( .r( HaDubi stated that the respondent did not get any e*idence of an
in*oluntary disposal( 3n order for an in*oluntary disposal to ta7e place, it must be done against
one@s )ill( Tullo) )as )illing to sell its interests( There )as no e*idence to sho) that Tullo) )as
forced to sell the extra 1+(+7A of its interest( !ccording to .r( HaDubi, )hat )as re2uired to
pro*e in*oluntary disposal )ould be a letter, a decree or something in )riting( Secondly, the
proceeds of in*oluntary disposal should be rein*ested in an asset of a li7e 7ind( This should be
done )ithin one year of the disposal( =e contended that the transaction )as concluded in .arch
2'12 and Tullo) had not reCin*ested in an asset of a li7e 7ind(
=a*ing read and listened to the e*idence and perused the submissions, the Tribunal notes the
follo)ing in respect to in*oluntary disposal( S( 44,1- ,#- of the 3T! reads that no gain or loss
shall be ta7en into account in determining chargeable income in relation to an in*oluntary
disposal of an asset to the extent to )hich the proceeds are rein*ested in an asset of a li7e 7ind
)ithin one year of the disposal( !s the respondent noted for S( 44 of the 3T! to apply, the
follo)ing conditions must be satisfied8
1( There has to be an in*oluntary disposal,
2( There has to be a rein*estment,
"( The rein*estment must be in an asset of a li7e 7ind,
4( The rein*estment must be made )ithin one year of disposal(
3n order to determine )hether the applicants made an in*oluntary disposal one has to discern
the intention of the !ct( There is no definition of in*oluntary disposal under the 3T!( =o)e*er, the
definition of the term can be obtained by using rules of statutory interpretation( Blacks Law
Dictionary &
th
dition p( 4"& defines a Jdisposition@ as :the act of transferring something to
another@s care or possession, esp( by deed or )illB the relin2uishing of property( J3n*oluntary@ is
defined ,at p( &'8- as :not resulting from a free and unrestrained choiceB not subDect to control
by )ill(; #ombining the said definitions, an in*oluntary disposal )ould arise out of one parting
69
)ith the possession or transferring o)nership of something resulting not out of his or her choice
or free )ill( 3n !R" V Bank o$ Baroda F &ndia =#TC''C##C#!C'4C2''4, the court noted that :This
letter does not sho) that the shareholder had a free )ill to decide )hat time to float shares e*en
ha*ing regard to mar7et conditions(; Ta7ing this into mind, as counsel for the applicants noted
an in*oluntary disposal does not ha*e to be done using force( ! disposal to be in*oluntary does
not need to in*ol*e coercion( The presence or absence of the element of free )ill or choice is an
important ingredient in determining )hether there has been an in*oluntary disposal(
3n Woolwich B#ilding Society V Commissioners o$ &nland Reen#e +4 T# 2+4 )here in*oluntary
disposal )as broadly interpreted, the court noted that8
:3t, is, in my *ie), necessary for the plaintiffs to do more than point to the pro*isions of the statute(
They must sho) that the #ro)n by its ser*ants )as exercising, or threatening to exercise, po)ers
under the statute in such a )ay as to constitute compulsion in la)( ! threat of proceedings for a
pecuniary benefit does not ma7e a payment thereafter in*oluntaryB for the payer might ha*e
defended the proceedings and relied upon the unla)fulness of the demand ,<illiam <hiteley 9td(
* The Hing and <errin * The #ommon)ealth-( 6ut a payment made under pressing necessity to
a*oid a seiIure of goods, or to obtain the release of goods unla)fully detained, or to pre*ent
some interference )ith or )ithholding of a legal right, is compelled and not *oluntary and is
reco*erable in an action for money had and recei*ed(;
! disposal may be a result out of a pressing necessity to pre*ent interference or enDoyment of
one@s legal rights or o)nership(

! disposal can arise out of t)o circumstances( /irstly, it is a result of third party acts or through
acts of >od( xamples in point are )here an asset is stolen or destroyed by fire or hit by
lightening( The o)ner )ho had insured the item may obtain indemnity from the insurance
company( The second circumstance may arise )here the taxpayer disposes of the item but
does not ha*e a choice( To amount to an in*oluntary disposal, it is sufficient to sho) that a party
though un)illing to dispose of an interest or had any intention to dispose of it, had no option but
to dispose of it,
=a*ing discussed )hat amounts to an in*oluntary disposal the 2uestion is, did the applicants
disposal of 1+(+7A of their interests amount to an in*oluntary disposalF The Tribunal notes that
there )as no official communication from the >%U to the applicants to sell ++(+7 A of their
70
interests( 6y official communication, it is understood to mean a letter or correspondence from
>%U( There )as no board resolution( There )ere also no minutes of a meeting to sho) that the
applicants and >%U agreed that the former should sell the extra 1+(+7A of their interests( 3n
fact, if there )as a meeting )here the parties agreed so, the Tribunal thin7s the sale )ould not
amount to an in*oluntary disposal( .r( >raham testified that :there )ere se*eral meetings )ith
go*ernment officials at different le*els )here it )as indicated that the applicants should retain a
third of their interests(; <ith due respect to .r( >raham@s testimony, though >%U is a legal
entity it is not a physical one( .eeting >o*ernment is a myth( %ne can only meet its officials and
agents( .r( >raham did not inform the Tribunal )hich go*ernment officials the applicants met
and )ho represented the applicants( The Tribunal )ill ignore the said e*idence from .r(
>raham(
3n the )itness statement of .r( >raham, he )ent at length to sho) that Tullo) did not )ish to
sell more than 4'A of their interest( This sho)ed that Tullo) had the intention of selling 4' A of
their interest( The said e*idence )as not rebutted( .r( 3nch testified that he met .r( 9a)rence
HiiIa the 0irector of conomic !ffairs, )ho informed him that the >%U )ould not allo) a 4'A
split( The >%U )anted the applicants to maintain ""(""A interest( There )as an email to that
effect by .r( 3nch to .r( .c0ade( .r( 9a)rence HiiIa did not testify and rebut the said testimony(
3f the said testimony is uncontro*erted it should be ta7en as the truth( Under S( 1"" of the
*idence !ct, no particular number of )itnesses shall be re2uired for the proof of any fact( .r(
3nch@s e*idence if unchallenged may suffice( There is no need to loo7 at minutes of meetings or
board resolutions( The Tribunal notes that the applicants testified that they )ould not sell their
interest )ithout >%U consent( 9oo7ing at the circumstances of the case, it can be seen that the
sale of the 1+(+7A of their interest )as not out of the applicants@ choice or free )ill( The Tribunal
feels that such a disposal amounted to an in*oluntary disposal(
The tribunal has already noted for an in*oluntary disposal to entitle one to a rein*estment relief,
three other conditions ha*e to be satisfied( The Tribunal )ill summarise the three conditions in
one sentence( The taxpayer ought to ha*e made a rein*estment, in an asset of a li7e 7ind,
)ithin one year from the date of disposal( 0id the applicants meet these conditionsF
71
The Tribunal notes that the respondent issued assessment S!E9T%E24+& of US$ "&',&24,4+'
and assessment S!E9T%E247' of US$ 84,&&&,++' on TU9 and TU%5 respecti*ely on the 18
th
%ctober 2'1'( %n the 1
st
0ecember 2'1', the applicants obDected to the assessments( %n the
24
th
/ebruary 2'11, the respondent made an obDection decision( %n the 24
th
.arch 2'11, the
applicants filed an application for re*ie) before the Tax !ppeals Tribunal ,T!T- challenging the
obDection decision( The S5!s bet)een Total, #$%%# and the applicants )ere made on the
2&
th
.arch 2'11( So by the time the assessments )ere issued and the matter filed in the
Tribunal the sale of the applicants@ interests had not ta7en place(
3n order to ascertain the date )hen the applicants disposed of their interests, one has to loo7 at
the S5!s they entered )ith #$%%# and Total on the 2&
th
.arch 2'11( Under #lause 2(1 of both
S5!s the transfer as bet)een the parties shall be deemed effecti*e on and from the ffecti*e
0ate( ffecti*e 0ate )as defined under #lause 1(1 to mean :''('1 hours ,United Hingdom time-
on 1
st
1anuary 2'1';( #lause 4 of the !greement dealt )ith the completion of transfer( Under
#lause 2(2 of both S5!s, the obligations of the parties under #lause 2(1 and #lause 4 )ere
conditional on the satisfaction of the .inister@s consent ha*ing been duly obtained( =ence the
effecti*e date of the transaction and completion of the transfer )ere subDect to the .inister@s
consent( The .inister@s consent in respect of the farmdo)n of interest and transfer of
operatorship ,xhibit !48- )as obtained on the 14
th
/ebruary 2'12( 3n the said letter the .inster
loo7ed for)ard to the applicants closing the transaction(
<e already stated that completion of the transfer )as pro*ided for under #lause 4 of the S5!s(
Under #lause 4(2 of the S5!8
:3mmediately upon the fulfilment of Tullo)@s obligation under #lause 4(1 the purchaser shall pay to
them the interim consideration, minus the deposit ,)hich Tullo) shall become entitled to retain
absolutely-, by means of a direct transfer(((;
The only )ay the completion of the transfer could be seen )as by payment of the interim
consideration( !ccording to .r( >raham the applicants e*entually sold ++(+7A of their interests
in each of the 5S!s to #$%%# and Total on 21
st
/ebruary 2'12, each purchaser ta7ing ""(""A
of the interests( 3n a letter dated 21
st
/ebruary 2'12, xhibit !4&, .r( oin .e7ie )rote to the
.inister of nergy and .ineral 0e*elopment indicating the completion of the farmdo)n,
payment of taxes and transition of operations( This could ha*e been immediately after the date
72
the purchasers paid the consideration( This date )as not disputed by the respondent( =ence the
Tribunal )ill ta7e the 21
st
/ebruary 2'12 as the date of the completion of the transfer or
disposal( The applicants filed the application before the Tribunal, on the 24
th
.arch 2'11, at a
time )hen the transaction had not ta7en place( The respondent issued assessments on the 2
nd
$o*ember 2'12 against the applicants totalling to US$ 4+7,271,&74( The Tribunal started
listening to the applicants@ case on the 2+
th
$o*ember 2'12( The applicants closed their case on
the 28
th
$o*ember 2'12( The applicants had one year from the 21
st
/ebruary 2'12, )hich period
lapsed on the 1"
th
/ebruary 2'1", as to ma7e a rein*estment in asset of a li7e 7ind( !t the time
the applicants closed their case, they )ere )ithin the time period to ma7e a rein*estment in an
asset of a li7e 7ind( =ence it )as premature for the applicants to adduce e*idence of a
rein*estment in an asset of a li7e 7ind( The applicants by the nature of this application could not
fulfil the last three conditions( 3n the interest of Dustice the Tribunal )ill extend period by the
applicants to ma7e a rein*estment of an asset of a li7e 7ind )ithin a period of one year from the
date of the transaction(
/. ( COMPUTATION OF TAX LIABILITY.
0)1 WHAT DID THE APPLICANTS DISPOSE OF3
%ne of the most contentious subCissues )as )hat did the applicants dispose of( This is because
the description of )hat )as disposed of determines the gain or loss made and ultimately the tax
liability( The applicants argued the issue of undi*ided interests )as not an agreed one, it should
be struc7 out( 3ssues can be added at any time of a trial as long as they do not cause preDudice
to any parties( The Tribunal notes that both parties ha*e addressed the said issue( Since it is a
bone of contention and forms a basis in calculation of the gain or loss it cannot be ignored(
The applicants contended that they purchased the =eritage@s 4'A interests in exploration areas
!1 and !"! )ith the intention of selling them( They argued that )hat they sold first )as
=eritage interests and then their original interests in !2( The applicants used a Jlast in first out@
approach( The respondent obDected to the applicants@ approach and argued that the interests
sold by the applicants )ere indi*isible( =ence if the interests are indi*isible, they argued, that
the applicants are not in a position to :pic7 and choose; )hich interests they sold( They argued
73
that :it is not possible to treat portions of an undi*ided interest as separate and distinct assets;(
The respondents contended that the best approach )ould be one of :first in first out;(
3n the case of Heritage Oil and Gas Limited !ganda Reen#e "#thority T!T !pplication 2+ of
2'1', the Tribunal noted that )hat )as sold can only be ascertained by loo7ing at the four
corners of the pages comprised in the Sale and 5urchase !greement ,S5!- ( <hat did the
parties agree to buy and sellF 3n Stanton Drayton Commercial Limited 1&8" !# 4'1 the =ouse
of 9ords focused on )hat )as in the agreement( !t page 4'8, the court noted8
:The *endor Lagle StarM )ill sell and the purchaser Lthe taxpayer companyM )ill purchase all the
securities in the said portfolio at the price of LpoundsM ",&"7,&+2 to be satisfied by the allotment by
Lthe taxpayer companyM to Lagle StarM of 2,4+1, 22+ ordinary shares of 24p each in Lthe taxpayer
companyM, the issue price of each share for the purpose of satisfying the consideration being
1+'p(;
=ence in order to determine )hat )as sold one has to loo7 at the S5!s of the parties(
There )ere four S5!s dated 2&
th
.arch 2'11 in respect of the sale of the interests( T)o )ere for
the sale by Tullo) to Total and t)o to #$%%#( #lause 2(1 of all the S5!s ,xhibits !1& and
!2'- bet)een the applicants, #$%%# and Total read8
:SubDect as herein pro*ided, Tullo) hereby agrees to sell and transfer all of its legal and
beneficial right, title and interests in and to the interest free from all ncumbrances )hatsoe*er
relating thereto ,subDect to the pro*isions of the 3nterest 0ocuments- )ith full title guarantee to
5urchaser for the consideration referred to in #lause "(1 and 5urchaser hereby agrees to
purchase and ac2uire the interest(;
#lause 1(1 of the first t)o S5!s in respect of the sale of interests in only 6loc7 2 to #$%%# and
Total define interest as8
:means an undi*ided eight point three three three three three percent( ,8(""""A- legal and
beneficial participating interest in 6loc7 2, in and under the interest documents and all rights and
obligations attaching thereto, including, but )ithout limitation, such interest in the 3nterest
5roperty and the 3nterest 0ataB;
#lause 1(1 of t)o of the S5!s in respect of the sale of interests in 6loc7s 1, 2 and "! defines
interest as8
74
,a- an undi*ided thirty three point three three three three percent( ,""(""""A- legal and beneficial
participating interest in 6loc7 1,)hich shall comprise the =eritage %il 6loc7 1 3nterest and the
5reCxisting 6loc7 1 3nterest-B
,b- an undi*ided t)enty fi*e per cent( ,24(''''A- legal and beneficial participating interest in
6loc7 28 and
,c- an undi*ided thirty three point three three three three per cent( ,""(""""A- legal and
beneficial participating interest in 6loc7 "! , )hich shall comprise the =eritage %il 6loc7 "!
3nterest and the 5reCexisting 6loc7 "! interest-B
in and under the 3nterest 0ocuments and all rights and obligations attaching thereto, including,
but )ithout limitation, such interest in the 3nterests 5roperty and the 3nterests 0ataB
!ccording to the first set of the S5!s, Tullo) sold 8(++++A of its interest to #$%%# and Total(
3n the second set of S5!s Tullo) sold its ++(++++A in 6loc7 1 and 6loc7 "!( 3n 6loc7 2 Tullo)
sold 4'A of its interest( The total interests Tullo) sold )ere ++(+7A as )as adduced in
e*idence(
3n order to determine )hat )as included in the interests, #lause 2(1 defined :3nterests 0ata; as
follo)s, it
:means all data, reports and other information held by Tullo) relating directly to the 3nterests and
forming part of the property Dointly o)ned by Tullo) and each party to each 1oint %perating
!greement in accordance )ith its terms, but excluding all internal communications )ithin Tullo)
and internal memoranda, reports, interpretations and documents created for Tullo)@s ,or its
affiliates@- o)n use and excluding the 3nterest 0ocumentsB;
#lause 2(1 also defined :3nterest 0ocuments; as to8
:mean the agreements, letters and other documents specified in Schedule1, 5art 1B;
3t then defines 3nterest 5roperty as to8
:means all of the property related to the 3nterests including any platforms, pipelines, plant,
machinery, )ells, facilities and all other offshore and onshore installations and structures(;
3n totality the interests sold included interests in data, documents and property(
The applicants alleged that they sold =eritage %il 6loc7 1 and "! interests first and then 5reC
xisting 6loc7 1 and "! interests( =eritage %il 6loc7 interest )as defined in all the S5!s by
clause 1(1 as8
75
:=eritage %il 6loc7 1 3nterest; means an undi*ided t)enty fi*e per cent( ,24('''A- legal and
beneficial participating interest in 6loc7 1 ac2uired by Tullo) from =eritage %il prior to the date
hereof(
:=eritage %il 6loc7 "! 3nterest; means an undi*ided t)enty fi*e per cent( ,24('''A- legal and
beneficial participating interest in 6loc7 "! ac2uired by Tullo) from =eritage %il prior to the date
thereof(;
5reCxisting 3nterests )ere defined as8
:5reCxisting 6loc7 1 3nterest; means an undi*ided eight point three three three ,8(""""A- legal
and beneficial participating interest in 6loc7 1 held by Tullo) and not ac2uired from =eritage %ilB
:5reCxisting 6loc7 "! interest; means an undi*ided eight point three three three three ,8(""""A-
legal and beneficial participating interest in 6loc7 "! held by Tullo) and not ac2uired from
=eritage %ilB;
! close perusal of #lauses 1(1 and 2(1 sho)s that the applicants purportedly sold all the
=eritage %il interests first and then the preC existingEoriginal 6loc7 1 and 6loc7 "! interests(
!ccording to the S5!s in respect of the sale of interests in 6loc7 1, 2 and "! all the interests
,1''A- ac2uired by Tullo) from =eritage )ere sold to #$%%# and Total( %ut of the ++(+7A
interest sold by Tullo) to the #$%%# and Total 4'A )as =eritage interest and 1+(+7 A )as
preCexisting interests(
Taxpayers are allo)ed to arrange their affairs in such a )ay that they pay less tax( &n Leene V
&RC L1&28M !(#( 217 it )as stated by Oiscount Sumner that8
:it is trite la) that =is .aDesty@s subDects are free, if they can, to ma7e their o)n arrangements, so
that their cases may fall outside the scope of the taxing !cts( They incur no legal penalties and,
strictly spea7ing, no moral censure if, ha*ing considered the lines dra)n by the 9egislature for the
imposition of taxes, they ma7e it their business to )al7 outside them(((;
=o)e*er for one to arrange his affairs in such a )ay he must comply )ith the la)( =ence the
applicant@s interpretation of their sale can be acceptable as long as it is in line )ith the la)(
=o)e*er, S( &1 of the 3T! allo)s the #ommissioner to reCcharacterise a transaction( S( &1 of the
3T! reads8
,1- /or the purposes of determining liability to tax under this !ct, the #ommissioner mayC
,a- reCcharacterise a transaction or an element of a transaction that )as entered into as part
of a tax a*oidance scheme8
76
,b- disregard a transaction that does not ha*e a substantial economic effectB or
,c- reCcharacterise a transaction the form of )hich does not reflect the substance(
,2- ! :tax a*oidance scheme; in subSection ,1- includes any transaction, one of the main
purposes of )hich is the a*oidance or reduction of liability to tax(
5rof( 0(1( 6a7ibinga Reen#e Law in !ganda page 1+4 defines tax a*oidance as8
:V( some act by )hich a person arranges his affairs that he is liable to pay less tax than he
)ould ha*e paid but for the arrangement( #onse2uently the situation )hich he brings about is
one )hich he is legally in the right, except so far as some rule may be introduced that puts him in
the )rong(;
!ccording to S( &1,2- if the #ommissioner feels the transaction entered into by a taxpayer has
been entered into )ith the intention of reducing tax liability, he or she may exercise his po)ers
under S(&1 ,a- of the !ct and reCcharacterise it( Under S( &1,1- ,b- the #ommissioner may reC
characterise a transaction )here the form does not reflect the substance(
The respondent@s contention can be summarised as t)ofold( The first argument as stated in the
e*idence of .r( HaDubi is that the applicants structured their transaction in a )ay that they
created a Jfictitious loss@( The second contention is to the effect that )hat the applicants sold as
indicated in the S5! )ere indi*isible( Undi*ided interest is defined by Black Law Dictionary 8
th
dition p( 82& as :an interest held under the same title by t)o or more persons, )hether their
rights are e2ual or une2ual in *alue or 2uantity(; The applicants sold )hat )ere intangible
assets, so ho) could they ha*e determined )hat )as sold(

The po)ers to reCcharacterise under S( &1 of the 3ncome Tax !ct are discretionary( The Tribunal
cannot interfere )ith the #ommissioner@s exercise of his po)ers unless he exercised them
illegally, irrationally or )ithout procedural impropriety( 3n >winom#hangi /astoli V *a0ale District
Local Goernment Co#ncil' *atarishangwa 2ack = Bee0wa<#0a %ary L2''+M 1 =#6 "' Hasule
!g( 1( ,by then- held inter alia thatB
:2(3llegality is )hen the decision ma7ing authority commits an error of la) in the process of
ta7ing the decision or ma7ing the act, the subDect of the complaint( !cting )ithout Durisdiction
or ultra *ires, or contrary to the pro*isions of a la) or it@s principles are instances of illegality(
"( 3rrationality is )hen there is such gross unreasonableness in the decision ta7en or act done,
that no reasonable authority, addressing itself to the facts and the la) before it, )ould ha*e
77
made such a decision( Such a decision is usually in defiance of logic and acceptable moral
standards(
4( 5rocedural impropriety is )hen there is failure to act fairly on the part of the decision ma7ing
authority in the process of ta7ing a decision( The unfairness may be in the nonC obser*ance
of the rules of natural 1ustice or to act )ith procedural unfairness to)ards one to be affected
by the decision( 3t may also in*ol*e failure to adhere and obser*e procedural rules expressly
laid do)n in a statute or legislati*e instrument by )hich such authority exercises Durisdiction
to ma7e a decision(;
The Tribunal has to as7 itself, )hether the #ommissioner@s disregard of the Jlast in first out@
method, and his use of the Jfirst in first out@ method )as illegal, or )as it so irrational, or tainted
)ith procedural illegality(
<hen one peruses Sections &1,1-,a- and &1,2- of the 3T! one cannot a*oid feeling that the
framers of the 3ncome Tax !ct )anted to empo)er the #ommissioner to shift goal posts )hen a
tax payer is about to score( 3n other )ords, )here a taxpayer uses mechanisms )hich may
reduce its tax liability, the #ommissioner is empo)ered to disregard them as long as it is plainly
clear the taxpayer )anted to reduce its liability( 3t tilts the ground in determining tax liability in
fa*our of the #ommissioner( The Tribunal feels that )here the la) is clear it has to apply it as it
is(
S( &1,1- ,a- of the 3T! allo)s the #ommissioner to reCcharacterise a transaction )here there is a
tax a*oidance scheme( 3t is not in dispute that the effect of the S5!s selling the purportedly
=eritage interests first )ould be to restructure the payments and expenditures in such )ay that
the gain for taxation purpose is minimal hence the tax liability )ould reduce( This )ould be as
opposed as to )hen the payments and expenditures incurred in all the three bloc7s is e*enly
distributed or the Jfirst in first out@ method is considered( %ne cannot deny that the applicants@
purported sale of =eritage@s interest first in 6loc7s 1 and "! is an ingenious )ay of reducing tax
liability( This is because )hen =eritage sold its interests in 6loc7s 1 and "! to Tullo) on the 2+
th
1anuary 2'1' they ceased being =eritage@s interests( They become Tullo)@s interests( 3n #lause
+(1,a- of the S5!s, Tullo) )arrants to the 5urchaser that it is the legal and beneficial o)ner of
the interest )ith the right to sell and transfer them to the purchaser( <e ha*e to call a spade a
spade and not a big spoon( !t the time, t)o years later, )hen Tullo) sold its interests it )as not
holding po)ers of attorney for =eritage( The la) deals )ith actualities and not suppositions( !t
78
)hat point of time do the interests cease being =eritage interests and become Tullo) interests,
is it 2 years, 1' years or ne*erF 3t should be at the time the sale is done and the transaction is
completed( 6et)een 2'1' and 2'12 )hen the interests of =eritage )ere ac2uired and )hen
Tullo) sold its interest a lot of )ater had flo)ed under the bridge( %ne cannot say that at time of
sale the le*el of oil exploration, de*elopment, and the mar7et forces in respect of oil in 2'12
)ere the same as in 2'1'( %il exploration is not static but dynamic( !ll these factors go to
determine the nature of interests that )ere sold(
Under the S5!s, the applicants sold interest data, interest property and interest documents( The
applicants sold indi*isible interests( <hat the applicants sold )ere intangible assets( 3ntangible
is defined by Blacks Law Dictionary 6
th
,dition p( 82" as8
:adD( $ot capable of being touchedB impalpableB 3$#%?5%?!9(
V n( Something that lac7s a physical formB an abstraction, such as responsibilityB esp(, an asset
that is not corporeal, such as intellectual property;
!n intangible asset )ill al)ays remain intangible( 9abeling it does not ma7e it tangible( 3n crossC
examination )hen .r( 3nch )as as7ed8 :)hen you ac2uired 1''A is there any )ay you could
split and say this is for Tullo), this if for =eritageF; =e ans)ered, :$o;( The story )ould ha*e
been different if the applicants had sold a 6loc7( /or instance if the applicants had sold 6loc7 1
to #$%%# and 6loc7 " to Total it )ould be clear )hat the applicants sold( =o)e*er the
applicants sold interests( !n interest is not something that is tangible( /or one to contend that
)ith specificity )hat interests )ere sold )ould be tantamount to splitting atoms to determine
)hich protons )ere sold( !n example of ho) difficult it is to specify )hat intangible interests
)ere sold is )here one purchases one litre of unleaded petroleum and t)o litres of leaded
petroleum mixes them and then sell one and half litres of petroleum( The said person cannot
say that he sold one litre unleaded petroleum and a half a litre of leaded petroleum( To ma7e
such an allegation )ould be to descend in the realm of conDectures and abstracts( The la) does
not deal )ith illusions and fallacies( Therefore for the applicants to argue that they sold
=eritage@s interest first and then their preCexisting interests later is untenable( /or contractual
purposes parties may ma7e the terms of the contracts as they )ish, freedom of contract(
=o)e*er for tax purposes, the Uganda ?e*enue !uthority has the po)ers to reCcharacterise a
transaction to reflect the reality of the transaction( 3n Weiss Stearn, Supreme #ourt ,United
States-, 2+4 U(S( 242, 1udgment dated 2+
th
.ay 1&24 the court noted that8
79
:Guestions of taxation must be determined by *ie)ing )hat )as actually done, rather than the
declared purpose of the participants, and )hen applying the pro*isions of V income la)sV )e
must regard matters of substance and not mere forms(;
3f the Uganda ?e*enue !uthority did so, the Tribunal )ill not fetter its discretion(
3n the US authority of 2ohn *+ %c;#lty and another Commissioner o$ &nternal Reen#e, T(#(
.emo(, 1&88 N 274, the 2
nd
petitioner sold an undi*ided interest ac2uired from her exChusband,
?obert, to the 1
st
petitioner, 1ohn, the current husband( The 2
nd
petitioner, 6abette, ac2uired the
exChusband@s interest in the house for the purpose of selling it to the 1
st
petitioner, and )as
merely a conduit or agent for the exChusband( The court noted that she too7 the title in her o)n
name, and then )aited for + months before deeding the oneChalf interest to the 1
st
petitioner(
0uring that time, she )as the o)ner, and could ha*e disposed of the residence as she pleased(
The court stated that :3n appropriate circumstances a court )ill ignore the form of the transaction
according to its substance(; The court noted that :)here )e find the parties clearly intended the
form they chose, and )here that form had an ob*ious tax purpose;( The court further noted that8
:.oreo*er, 6abette@s and 1ohn@s reporting of the sale does not comport )ith their Jconduit or
agent@ theory( =ad 6abette been a true conduit or agent, she )ould not ha*e been considered the
o)ner of ?obert@s interest at all, and )ould ha*e had no gain, or e*en any sale, to report( ?obert
)ould be deemed to ha*e sold the half interest to 1ohn(;
The court held that8
:! taxpayer )ho o)ns t)o undi*ided one half interests in property, recei*ed at different times,
and disposes of an undi*ided oneChalf interest is deemed to ha*e disposed of 4' percent of each
of the hal*es he o)ned(;
The Tribunal is mindful of the fact that the abo*e case is an authority from the US( The Tribunal
finds the said authority persuasi*e( The abo*e authority dealt )ith undi*ided interests in
immo*eable property li7e the matter before the Tribunal( 9i7e in the abo*e authority, Tullo)
o)ned the purportedly interest of =eritage for a period of t)o years( 0uring that time it could
ha*e disposed of the interest as it )ished( Tullo) chose the form it )ished, )hich had an
ob*ious tax purpose( 3f the Tribunal )ere to consider that Tullo) )as an agent for =eritage,
Tullo) )ould ha*e no gain or loss to report of( The court )ould find it appropriate to ignore the
form of the transaction and loo7 at the substance( The ac2uisition of Tullo) of different interests
at different times shall be deemed to ha*e been disposed proportionally to the number of bloc7s
it o)ned(
80
S( 4' ,1- of the 3T! re2uires that a tax payer@s method of accounting to conform to generally
accepted accounting principles( Uganda already adopted 3nternational !ccounting Standards(
3nternational !ccounting Standard 2, in*entories, 3$1" is titled :5rohibition of 93/% as a cost
formula;( 3t reads8 :The Standard does not permit the use of the lastCin, firstCout ,93/%- formula
to measure the cost of in*entories(; =ennie Oan >reuning, 0arrel Scot and Simon Terbanche in
&nternational )inancial Reporting Standards notes that8
:3!S 2 does not allo) the use of lastCin, firstCout ,93/%- because it does not faithfully represent
in*entory flo)s( The 3!S6 has noted that the use of 93/% is often tax dri*en and concluded that
tax considerations do not pro*ide a conceptual basis for selecting an accounting treatment( The
3!S6 does not permit the use of an inferior accounting treatment purely because of tax
considerations(;
3n the circumstances, the Tribunal shall not use the 93/% method as a cost formula( This means
that the Tribunal shall not accept the notion that the interests Tullo) sold first )ere those of
=eritage( The Tribunal also finds that the respondent@s use of the Jfirst in, first out@ ,/3/%- is
irrational li7e in the Jlast in last out@ ,93/%- method( 3f the interests )ere indi*isible then ho)
could the respondent determine )hich interests )ere purchased first and )hich interests )ere
sold first( There is no reasonable Dustification as to )hy the respondent applied the /3/%
method(
0))1 COMPUTATION OF CAPITAL GAIN ON TRANSFER OF INTEREST
3n order to apply the pro*isions of the 3T!, one needs to understand ho) the oil and gas sector
)or7s and the stage at )hich the oil operation in Uganda had reached at the time of the transfer
of interests( 3t )as an agreed fact that oil had been disco*ered in Uganda( =o)e*er, there is no
e*idence that oil production had started( %il exploration and production are upstream acti*ities(
%nce oil is disco*ered, the considerable ris7 in*ol*ed in oil exploration is remo*ed( The costs
in*ol*ed in exploration are carried for)ard in the future )here they can be reco*ered from
re*enue deri*ed from production from the reser*es( =ence the income tax pro*isions ha*e to
ta7e into account the costs carried for)ard and to a*oid a situation )here there may be double
deductions, losses incurred and excess costs(
81
The 3T! pro*ides for special pro*isions for the taxation of petroleum operations in 5art 3K! of the
!ct( 5art 3K! inter alia, deals )ith the transfer of an interest in a petroleum agreement( The
rele*ant Section dealing )ith capital gain or loss in a transfer of interests in a 5etroleum
!greement is S( 8&> of the 3T! )hich reads8
:<here a contractor, in this 5art referred to as the :transferor contractor; disposes of an interest
in a petroleum agreement to another contractor or a person that as a result of the disposal )ill
become a contractor in relation to those operations, in this 5art referred to as the :transferee
contractor
,a- any excess costs under S( 8&,2- attributable to the interest at the date of disposal, are
deductible by the transferee contractor, subDect to the conditions prescribed in that sectionB
,b- the transferee contractor continues to depreciate any allo)able contract expenditure
attributable to the interest at the date of disposal in the same manner and on the same basis
as the transferor contractor )ould if the disposal had not occurredB
,c- the cost base for the purposes of calculating any capital gain or loss on disposal of an interest
in a petroleum agreement )ill be determined in accordance )ith 5art O3 of this !ctB
,d- 3n a subse2uent disposal of the )hole or part of the interest disposed of under paragraph ,c-,
the cost base for purposes of calculating any capital gain or loss on disposal is the amount of
the transferor contractor@s capital gain or loss on the prior disposal of the interest if any, less
the sum ofC
,i- the excess costs up to the date of disposal that are deductible by the transferee contractor
under paragraph ,a-B
,ii- the depreciation of capital expenditure incurred up to the date of disposal that is
deductible by the transferee contractor under paragraph ,b-B and
,e- the amount of the transferor capital loss on the disposal of the interest, if any, is treated as
income of the transferee contractor on the date of the transfer of the interest(;
S(8&! ,1- of the 3T! defines petroleum operations to mean :exploration operations, de*elopment
operations and production operations authorised under a petroleum agreement(; %ne )onders
)hether a transfer of interests under an S5! can be called an exploration operation, a
de*elopment operation or a production operation under a petroleum agreement( The Tribunal
does not thin7 so( <hat is defined as exploration, de*elopment or production can be discerned
from the acti*ities )hose expenditures are gi*en in the ight Schedule of the !ct( ! #ontractor is
defined under S(8&! to mean a person )ith )hom the >o*ernment enters into a petroleum
agreement and includes a licensee( S( 8&> deals specifically )ith :Transferee #ontractor; and
82
:Transferor #ontractor; )hich it defines to mean one )ho disposes and the person )ho )ill
become a contractor as a result of the disposal respecti*ely( ! transfer of interest does not
in*ol*e exploration, de*elopment or production( ! transfer of interests under a 5S! by an S5!
cannot be considered as a petroleum operation under S( 8&#( S( 8& 6 ,"- pro*ides that income
earned by a contractor from acti*ities other than petroleum operations shall be taxed in
accordance )ith the !ct( =ence, )hile 5art 3K! deals )ith petroleum operations and includes a
transfer of interest under a petroleum agreement, the la) in the 3T! 5art O3, in respect of capital
gains applies as modified by S( 8&> of the 3T!( That is transferee contractors and transferor
contractors are taxed in accordance )ith 5art O3, as modified by 5art 3K!( The Tribunal does not
see any inconsistency in applying 5art O3 of the 3T! in respect of the initial disposal as it )as
pro*ided by 5art 3K!( The inconsistency should be in respect to computation of the gains and
not application of the parts(
5art 3K! of the 3T!, S( 8&> deals )ith computation of the cost base and allo)able deductions(
S( 8&> ,a- pro*ides for the deduction of any costs at the date of disposal( 3t pro*ides for the
computation of the cost base )here there is a transfer of original interests under S(8&>,c- and
for subse2uent disposal under S( 8&> ,d- of the 3T!(
3t is not in dispute that there )ere t)o disposals of interests in the transaction )hich before the
Tribunal( The first disposal )as the transfer of interest ac2uired by Tullo) directly from the >%U
)hich )as an initial disposal of original interests( The second disposal )as Tullo)@s transfer of
the interests ac2uired from =eritage to #$%%# and Total )hich is a subse2uent disposal(
S(8&> deals )ith different computations for the calculation of the cost bases for initial disposals
and for subse2uent ones(
041 In)$)4, 5)!"%!4,2 5)!"%!4, %& %r)6)n4, )n$r!$!
3n respect of the initial disposal or a disposal of original interests, S( 8&> ,c- pro*ides that the
cost base for purposes of calculating any capital gain or loss shall be determined in accordance
)ith 5art O3 of the 3T!(
5art O3 of the 3T! deals )ith gains and losses on disposal of assets( S( 4& of the 3T! reads8
83
:This 5art applies for the purposes of determining the amount of any gain or loss arising on the
disposal of an asset )here the gain is included in gross income or the loss is allo)ed as a
deduction under this !ct(;
S( 4' of the 3T! specifically deals )ith gains and losses on a transfer of an asset( 3t reads8
:,1- The amount of any gain arising from the disposal of an asset is the excess of the
consideration recei*ed for the disposal o*er the cost base of the asset at the time of the
disposal(
,2- The amount of any loss arising from the disposal of an asset is the excess of the cost base of
the asset at the time of the disposal o*er the consideration recei*ed for the disposal(;
S( 42 of the !ct deals )ith the determination of cost base( The rele*ant sections read8
:,1- SubDect to this !ct, this Section establishes the cost base of an asset for the purposes of this
!ct(
,2- The cost base of an asset purchased, produced or constructed by the taxpayer is the amount
paid or incurred by the tax payer in respect of the asset, including incidental expenditures of
a capital nature incurred in ac2uiring the asset, and includes the mar7et *alue at the date of
ac2uisition of any consideration in 7ind gi*en for the asset(
V
,+- Unless other)ise pro*ided in this !ct, expenditures incurred to alter or impro*e an asset
C)hich )ould not ha*e been allo)ed as deductions are added to the cost base of the asset(;
The cost base of the original interests is therefore determined ta7ing into consideration S( 42 of
3T!( S( 42 of the 3T! allo)s in the calculation of the cost base to include incidental expenses of a
capital nature incurred in ac2uiring the asset )hen disposing original interests(
S( 8&> ,a- modifies 5art O3 of the 3T! by allo)ing excess costs under S( 8&# ,2- attributable to
the interest to be deducted from the cost base at the time of disposal( S( 8&# ,2- of the 3T!
reads8
:<here, in any year of income, the total deductions of a contractor in relation to petroleum
operations underta7en in a contract area exceed the cost oil for that year of income arising from
those operations in the contract area, the excess shall be carried for)ard to the next follo)ing
year of income and is deductible for that year of income against the cost oil for that year of
income arising from petroleum operations in the contract area until the excess is fully deducted or
the petroleum operations in the contract area cease(;
3t is in dispute )hether excess costs are deducted only )hen oil production starts( The !ct does
not define excess costs( S( 8&# ,2- of the 3T! merely refers to them )hen it states that :)here in
84
any year of income the total deductions of a contractor in relation to petroleum operations
exceed the cost oil for that year of income;( 3t further states that the excess shall be carried
for)ard to the follo)ing year of income(
S( 8&! of the 3T! defines cost oil to mean a contractor@s entitlement to production as cost
reco*ery under a petroleum agreement( #ost oil means an entitlement( 3t is argued that a
contractor has no entitlement until )hen production has started( !n entitlement is defined by
Blacks Law Dictionary 8
th
dition p( 47" as :an absolute right to a ,usu( monetary- benefit, such
as social security, granted upon meeting a legal re2uirement(; xploration expenditures are by
their *ery nature incurred prior to the commencement of commercial production The !ct is silent
as to )hen the entitlement arises( 3s it )hen oil is disco*ered or )hen oil production starts or
)hen costs are deducted and the excess is carried for)ardF S( 8&! ,1- defines reco*erable
costs to mean a cost of a contractor that is reco*erable under a petroleum agreement( !rticle 1'
of the !2 5S! and !rticle 12 of the !1 and !"! 5S! state that the licencees shall carry
for)ard to subse2uent years all unreco*ered costs until full reco*ery is completed( !ccording to
the 5S!s, is any unreco*ered costs excess costsF %nce again the 5S!s are also silent as to
)hen the right to cost reco*ery becomes absolute( <hile the applicants@ argument points to
excess oil being due )hen oil production starts the respondent refers to them as any
unreco*ered costs(
S( 8&# of the 3T! states that excess costs may be deducted against cost oil until excess is fully
deducted or the petroleum operations in the contract area cease( 5etroleum operations ha*e
been defined to include exploration, production and de*elopment( !ccording to the said Section,
petroleum operations need not cease at production le*el, they may e*en cease at exploration
le*el( This means excess costs are deductible before production starts( xcess costs )hich are
in effect deductible or allo)able costs are accumulated along the *alue chain until deducted or
oil the oil operation ceases( 3f there is no oil production the contractor losses the opportunity to
reco*er the deductible costs(
S( 8&# ,2- should be read together )ith S( 8&> ,a-( S( 8&> ,a- states that any excess costs
attributable to the interest at the date of disposal( The )ord :attributable; is defined by O($ord
"dance Learners Dictionary +
th
dition p( +" to mean :probably caused by the thing
85
mentioned;( !ccording to S( 8&>,a- if there are any excess costs that can be traced to the
interest at the time of disposal they should be deducted( The time of disposal, as )as in the
case of the applicants )as at exploration le*el( There is nothing that prohibits the respondent
from deducting excess costs deductible by the transferee contractor from the cost base )hen
production has not started( !s long as the excess costs can be attributable to the interest at the
date of transfer or disposal of interest, the S( 8&# ,2- pro*ides for them( 3n reality excess costs
are reco*ered against cost oil )hen oil production starts( /or purposes of *aluation, )hat are
deemed excess costs are allo)able or deductible costs e*en )hen oil production has not
commenced( They can be considered as an asset(
!s to )hat excess costs may mean one has to loo7 at the intention of the 5arliament( 3n
interpreting statutes, courts may use a purposi*e approach )here the term used is unclear( 3n
Crane Bank !ganda Reen#e "#thority =#TC''C#!C18C2'1' his 9ordship Hiryab)ire stated
that8
:The position of the la) is that if any doubt arises from the )ords used in the statute )here the
literal meaning yields more than one interpretation, the purposi*e approach may be used, to
determine the intention of the la) ma7er in enacting of the statute( ,See 1ustice #houdry in the
case of U>!$0! ?O$U !UT=%?3TW O( S5H =%T9 ,1&&+- 9T0 ,#! $o( 12 of 2''8-(
The purposi*e approach has been used in se*eral cases( 3n the case of Sussex 5eerage ,1844-
8 ? at 1'47, it )as held that
:3f the )ords of the statute are in themsel*es precise and unambiguous, then no more can
be necessary than to expound those )ords in their natural and ordinary sense( The )ords
themsel*es alone do in such case best declare the intention of the la) gi*er but if any
doubt arises from the terms employed by the legislature, it has al)ays been held a safe
means of colleting the intention to call in aid the grounds and cause enacting the statute
and to ha*e recourse to the preamble )hich according to 0ire #1 is Ja 7ey to open the
minds of the ma7ers of the !ct and the mischiefs they intend to redress(;
9ord >riffiths in the case of 555? O( =!?T L1&&"M 1 !99 ? 42 at p 4', also held that8
:The days ha*e long passed )hen the courts adopted a strict constructionist *ie) of
interpretation )hich re2uired them to adopt a literal meaning of the language( The court
must adopt a purposi*e approach )hich see7s to gi*e effect to the true purpose of the
legislation and are prepared to loo7 at much extraneous material that bears on the
bac7ground against )hich the legislation )as enacted(;
86
Since the application of the term Jexcess costs@ may ha*e different effects depending on its
interpretation, the Tribunal )ill use the purposi*e approach to ascertain )hat )as the intention
of 5arliament(
Blacks Law Dictionary 8
th
dition page 222 defines a capital gain as :the profit realised )hen a
capital asset is sold or exchanged(; 3t defines capital gains tax at page 14&+ as a tax on income
deri*ed from the sale of a capital gain( The purpose of capital gains tax is to collect income tax
from that gain( Under S( 42 ,+- of the 3T!, :expenditures incurred to alter or impro*e an asset
C)hich )ould not ha*e been allo)ed as a deduction are added to the cost base of the asset(;
Under 5etroleum Sharing !greements a contractor is entitled to reco*er his cost( !t the time the
3T! )as enacted, in 1&&7, petroleum operations and transfers of interests under the 5S! had
not been anticipated( 3t does not ma7e economic sense to compute the cost base of an asset
and exclude costs )hich the contractor )ill reco*er )hen production starts(

The result of the modification of 5art 3K! on 5art O3! is to allo) the taxman to compute the cost
base as the amount in*ol*ed in ac2uiring the asset plus incidental costs of a capital nature
incurred( xcess costs that ha*e been incurred at the time of the disposal of the interest should
be part of the cost base( 9i7e)ise excess costs that ha*e been incurred are allo)able
deductions as prescribed in S( 8&# ,2- of the 3T!(
S( 8&> ,a- deals )ith the disposal of original interests( The disposal of Tullo)@s preCexisting
interests )hich )ere not purchased from =eritage )ould be considered as such( S( 8&> ,a-
pro*ides that any excess costs under S( 8&,c- attributable to the interest at the date of the
disposal are deductible by the transferee contractor( S( 8&> defines a transferor contractor as
one )ho disposes of an interest in a petroleum agreement and the Jtransferee contractor@ as a
person )ho recei*es the interest or )ho as a result becomes a contractor in relation of the
operations( /rom the said definitions it is clear that the applicants )ere transferor contractors
)hile #$%%# and Total are transferee contractors( Therefore any excess costs are at the date
of disposal are deductible by #$%%# and Total, as transferee contractors(

87
0))1 S78!97n$ 5)!"%!4,
5art 3K! modifies 5art O3 of the 3T!( 3n respect of subse2uent disposals of interests under
petroleum agreements, S( 8&> ,d- under 5art 3K! of the 3T! pro*ides that8
:in a subse2uent disposal of the )hole or part of the interest disposed under paragraph ,c-, the
cost base for the purposes of calculating any capital gain or loss on disposal of the interest is the
amount of the transferor contractor@s capital gain on the prior disposal of the interest if any, less
the sum of N
,i- the excess costs up to the date of disposal that are deductible by the transferee contractor
under paragraph ,a-B
,ii- the depreciation of capital expenditure incurred up to the date of disposal that is
deductible by the transferee contractor under paragraph ,b-B and;
The effect of S( 8&> ,d- is to modify the application of 5art O3 of the 3T! in respect to the latter@s
application to subse2uent transfer of interests of petroleum agreements( <hat is peculiar about
S( 8&> ,d- is that it computes the capital gain or loss on a disposal of an interest using the gain
by the transferor contractor on a prior disposal of an interest )hich is unrelated to the gain made
in the subse2uent transfer(
)))1 COMPUTATION OF THE APPLICANTS. TAX LIABILITY
The Tribunal ha*ing found that the exemption granted to the applicants in respect of !2 cannot
holdB that the doctrines of estoppel and legitimate expectation do not help the applicants and
ha*ing discussed the rules that apply to the transfer of interests of petroleum agreements, ha*e
to apply )hat )as discussed in computing the applicants@ tax liability ta7ing into consideration
the e*idence adduced(
041 R#)"$!
3t is not in dispute that the applicants disposed of their interests in !1, !2 and !"! to
#$%%# and Total for US$ 2,&"",""',4''( <hat )as in dispute )as )hether the applicants
disposed of =eritage@s interests first and later their preCexisting interests( The Tribunal
concluded that the 93/% accounting method, preferred by the applicants, )as inappropriate( The
respondent had proposed as an alternati*e the application of the /3/% accounting method( 3n
88
discarding the applicants@ 93/% accounting method, the Tribunal noted that )hat the applicants
sold )ere intangible interests( 3t is not feasible to separate intangible interests ac2uired at
different times( %ne cannot treat portions of undi*ided interest as separate and distinct assets(
Therefore if the Tribunal cannot tell )hether the applicants sold their last interests purchased
first, nor is it in a position to say that it )as the interests purchased first that )ere sold first(
There is no legal basis for the Tribunal to hold that it should apply the /3/% accounting method(
The Tribunal shall apply the a*eraging method or )hat is more or less an e2uitable
apportionment method( The Tribunal shall apportion the interests of )hat )as ac2uired at
different times and sold proportionally( This method )as applied in the case of 1ohn *+ %c;#lty
et al+ Commissioner o$ &nternal Reen#e ,supra- p( + )here the court held that ,)hich )e
repeat-8
:! taxpayer )ho o)ns t)o undi*ided oneChalf interests in property, recei*ed at different times,
and disposes of an undi*ided one halfC interest, is deemed to ha*e disposed of 4' percent of
each of the hal*es he o)ned(;
Similar to the matter before us, the abo*e case in*ol*ed the sale of an intangible interest in
immo*eable property( The Tribunal notes that the abo*e case )as from a US Tax court )hich
ma7es it persuasi*e( To ignore decisions from other Durisdictions may lead to the Tribunal
groping in legal dar7ness in an area )here there are no decisions from courts of record in
Uganda( <hat is good for a goose in the US or UH is good for the gander in Uganda( The
Tribunal notes that accounting methods and taxation principles used in some of these
Durisdictions are similar to those applied in Uganda(
081 E:"n!!
6efore the Tribunal can compute the gain of the applicants, it has to ascertain )hat expenses
)ere incurred by the applicants and )hich of these should be brought into the cost base as
permitted by the tax la)(
3n the agreed documents, the applicants@ financial statements for the years ending "1
st
0ecember 2''& and "1
st
0ecember 2'11 )ere tendered in as exhibits !&, !1', ! 21 and !22(
The financial statements for the year ended "1
st
0ecember 2'11, xhibit !21, sho)ed TU9@s
89
costs included in the capital gains calculations for 6loc7s 1, 2 and "!( These include interest
expense of US$ +4,&81,44", final completion payment of US$ 1",+"+,'4", stamp duty on
ac2uisition US$ 14,4'',''', guarantee arrangement and commitment fees of US$ 4+,44&,84'
and legal fees on =eritage ac2uisition as US$ 1,'72,&14( 3nterest on loan to ac2uire =eritage
)as put at US$ 1'",'17,4'1(
0uring the trial, the applicants@ )itness, .r( 3nch, testified on the expenditures incurred by the
applicants( =e testified that the applicants sold their interest at a cost base of US$ 1("4 billion(
The applicants incurred costs of US$ 12& million for the preCexisting interest( =e said the cost
base for the preCexisting interest in !1 )as US$ 28,272,4'1( The applicants incurred an
economic cost of US$ 1'' million and guarantee fees of US$ 4+,'+1,'48( .r( 3nch testified that
the total cost )as US$ 84',4'8,"44 for the =eritage interests in respect of 6loc7 !1 and US$
+2",428,772 for !"!( =e testified that the applicants incurred a loss of US$ 174,477,241(
The applicants tendered in exhibit !4' ,iii- a computation of the capital gains tax( The
applicants@ exhibit put =eritage ac2uisition costs at US$ 84',4'8,"44 for !1, US$ +2",428,772
for !"! bringing it to a total of US$ 1,4+",&"7,11+( /or the preCexisting interests, the total
amount )as US$ "2',444,814( xhibit !4',iii- put the guarantee fees at US$ 4+,'+1,'48
comprised of guarantee arrangement fees of US$ "1,8'',''' and guarantee commitment fees
of US$ 14,2+1,'48( 3ncidental expenses )ere bro7en do)n into US$ 4+,'+1,'48 for guarantee
fees, legal fees of US$ 1,"42,221, stamp duty of US$ 14,4'',''' totalling to US$ +1,&'",27&(
The total costs incurred by the applicants )ere put at US$ 11",42&,'&+( The exhibit put a loss
on 6loc7 " at US$ 2',&87,&"'(
3n his e*idence, the respondent@s )itness, .r( .oses HaDubi, mentioned some of the expenses
incurred by the applicants asB guarantees fee of US$ "1,8'',''' comprising of guarantee
committee fees of US$ 1',82&,241, legal fees of US$ 447,"&7 and stamp duty of US$
14,4'','''( ! sum of US$ ""&,&&&,++' )as disallo)ed by the respondent because it )as
reco*erable )hen commercial production begins( The excess costs of =eritage )ere put at US$
14',''','''( 3ncidental expenses )ere put at US$ +1,&'","87( .r( HaDubi put the cost base of
!1 at US$ 74+,142,777 and for !2 at US$ 44",4&7,222(
90
3n its submission, the respondent alleged that it allo)ed incidental costs as follo)s8 guarantee
arrangement fees of US$ "1,8'',''', guarantee committee fee of US$ 1',82&,241, legal fees
of US$ 44&,"18 and stamp duty of US$14,4'','''( The respondent submitted that it recei*ed
further information from the applicants that increased the incidental costs to US$ +1,&'","87
)hich reduced their tax liability to US$ 4+7,271,&74(
The respondent disallo)ed items including interest of US$ 11",42&,'&+, Tullo)@s preCexisting
costs of US$ "2',444,814, loss from 6loc7 " of US$ 2',&87,&"' and rein*estment relief of US$
&",124,&4'( 3n total it disallo)ed US$ 448,'88,7&1( 3n disallo)ing the preCexisting petroleum
operations costs of US$ "2',444,814 from being included in the applicants@ cost base the
respondent argued that such expenses are only deductible against cost oil pursuant to S( 8&# of
the 3T!(
The respondent submitted that t)o items )ere disallo)ed )hich are not in disputeB interest
expense of US$ 11",42&,&"', a loss of US$ 2',&87,&"' resulting from !"! and non
recognition treatment of US$ 1+4,721,'''( =o)e*er, a perusal of the applicants@ exhibit !4' ,iii-
sho)s that an interest expense of US$ 11",42&, '&+ and loss of US$ 2',&87, &"1 )ere included
in their computation( The financial statements of the TU9, xhibit !22, put the interest expense
from =eritage at US$ +4,&81,44" )hich the Tribunal )ill consider as an incidental expense( The
Tribunal shall not include the loss of US$ 2',&87,&"' because the transfer in 2uestion arose
from 6loc7 " )here there )as no transfer of interest, and is not subDect of the application before
us(
<hen the Tribunal compares the expenses presented by the parties it notices that there are
discrepancies in the figures ad*anced( /or instance there are differing amounts on the
guarantee fees, legal fees and incidental expenses incurred( <hen one compares exhibit !4'
,iii- )ith the illustrationEchart presented by the respondent in its submission one cannot fail to
notice the glaring differences in the figures( !part from the financial statements, there are no
supporting documents attached to the exhibit !4' ,iii- to substantiate the expenses incurred by
the applicants( There are no clear brea7do)n expenses of the cost base in exhibit !4' ,iii-( The
cost base of !1 !2 and !" )as put at US$ 84',4'8,"44, US$ +2",428,772 respecti*ely
totalling to 1,4+",&"7,11+( The applicants bro7e do)n the amounts to base price, settlement
91
account and =eritage ac2uisition costs( There are no expenses called Jbase price@, Jsettlement
account@ and Jac2uisition costs@( Some of the information the applicants claimed to ha*e been
a*ailed by email, but to )homF xhibit !4' ,iii- is neither signed nor bore a stamp of a firm of
certified accountants or auditors( The ma7er of the said exhibit is not 7no)n( The failure by the
applicants to present clear e*idence in support of their expenditures led the Tribunal to ignore
some of expenditures incurred(
The Tribunal has already noted that the applicants presented financial statement for the years
ended "1
st
0ecember 2''& and "1
st
0ecember 2'11 i(e( exhibits !&, !1', ! 21 and !22(
=o)e*er the transactions in 2uestion, that is the transfer of interests in 6loc7s 1, 2 and "!, too7
place in 2'12( The applicants closed their case on 28
th
$o*ember 2'12( !t least the applicants
should ha*e tendered in an audited accounts of the rele*ant period of 2'12, up to the closure of
their case( !n updated statement of expenses incurred by the applicants )ould ha*e been
reflected in the said accounts so as to enable the Tribunal properly calculate the gain( The
Tribunal expected the applicants to submit an independent auditors@ special report on the
expenses incurred in the absence of audited accounts( !rticle 4 of the 5S!s for !1, !2 and
!" ma7es pro*ision for an ad*isory committee( Under !rticle 4("(4, the #ommittee is supposed
to ensure that the accounting of costs and expenses and maintenance of operating costs are
made in accordance )ith the !greement, accounting principles and procedures generally
accepted in the international petroleum industry( The records of the said committee on expenses
)ere not a*ailed to tribunal( $o reason )as gi*en as to this omission( The Tribunal has po)ers
to summon any )itness and the applicants ought to ha*e ta7en ad*antage of this(
S( 18 of the T!T !ct places the burden of proof on the applicants to pro*e that a taxation
decision is excessi*e or should ha*e been made differently( The applicants ha*e not discharged
the burden in respect of the exact expenses incurred by them( The Tribunal cannot rely on
hypothetical figures to ascertain the expenses incurred by the applicants(
The respondent presented to the Tribunal different figures from the applicants as regards the
expenses incurred( 3t is not denied nor is it in dispute that the applicants incurred expenses( 3f
the Tribunal )ere to ignore the figures that )ere presented by the respondent, a miscarriage of
Dustice )ould be occasioned to the applicants( The expenses or that portion that has been
92
admitted by the respondent )ould not be added in the computation of the gain( The Tribunal )ill
allo) the figures presented by the respondent as expenses incurred by the applicants as
admissions under Sections 1+, 17 and 28 of the *idence !ct( The Tribunal )ill also ta7e into
consideration the figures presented by the applicants in exhibit !21, the financial statements
ending "1
st
0ecember 2'12 of TU9( Those figures presented by the applicants that are the
same as the respondent@s shall be considered in computing the gain(
!lso in respect of the expenses incurred by the applicants, the Tribunal notes that the
respondent@s computation do not indicate )hether the expenses computed )ere in proportion to
the interests sold( The applicants sold ++(+7A of their interests and therefore the expenses
used in the computation should ha*e been ++(+7A of )hat )as incurred( !s prudent re*enue
collectors, the Tribunal )ill ta7e it that, the respondent used this )eighted costs approach in
computation of the gain( That is the expenses incurred by the applicants corresponded to the
interests sold in each bloc7(
0#1 G4)n 8; $' 4"",)#4n$! 4n5 $' $4: "4;48,
=a*ing found that the applicants are liable to pay tax on the gain they obtained from the transfer
of their interests in 6loc7s 1, 2 and "!, the Tribunal no) has to go into the mathematics of the
tax due( The tribunal ta7es into consideration that the applicants sold preCexisting interests and
interests ac2uired from =eritage( The Tribunal )ill also ta7e into consideration that the income
recei*ed )as not in dispute( <hat )as in dispute )as the accounting method used and
expenses incurred by the applicants( The Tribunal has already discarded the 93/% method of
accounting proposed by the applicants( This )as because the said interests )ere intangible
assets( %ne cannot treat intangible assets as if there are tangible assets( The respondent
proposed the /3/% method of accounting )hich the Tribunal found inappropriate( 3n situations
)here a party cannot state )ith precision )hich interests )ere sold, the rules of e2uity and
fairness ha*e to be considered( The rules of e2uity demand that interests ac2uired at different
times but sold at the same time should be di*ided proportionately( The Tribunal shall use the
a*eraging method or e2uitable apportionment in computing the gain obtained by the applicants(
This )as applied in the case of 2ohn *+ %c;#lty et al+ Commissioner o$ &nternal Reen#e
,supra- )hich also in*ol*ed immo*eable property( 3t )as noted that a :! taxpayer )ho o)ns t)o
93
undi*ided oneChalf interests in property, recei*ed at different times, and disposes an undi*ided
oneChalf interest, is deemed to ha*e disposed of 4'A of each of the hal*es he o)ned(; The
Tribunal thin7s that this is good la)( The Tribunal notes that there )ere pre Nexisting or original
interestsEholdings and those ac2uired from =eritage( 3n order to ensure a fair and e2uitable
allocation of interests sold, the Tribunal )ill deem that e2ual proportions )ere sold from each
holding( The Tribunal also notes that Tullo) did not sell 1''A of its total interests( 3t only sold
++(+7A of its interests( Therefore ""(""A )as sold from each holding
3n its computation, the respondent used the illustration belo) to calculate the gain of the
applicants using the /3/% method(
T48, 1< C%+"7$4$)%n %& $' 64)n 8; $' r!"%n5n$
B,%#= > !%,5 In$r!$ T%$4,
C%n!)5r4$)%n
COST BASE
G4)n T4: 4$ (0>
S)6n4$7r
8%n7!
C%!$ 84! 4! "r
S.?@G051
In#)5n$4,
:"n!!
S. -2021
T%$4, C%!$ 84!
TUL
!1
1+,+7A
4'A
5reC
existing
/rom
=%>9
$ 248,""2,"''
$ 774,''','''
$ &&,&&&
$ C
$C
$ 74+,142,777
$C
$ 2+,&81,481
$ &&,&&&
$ 77",1"4,24&
$ 248,2"2,"''
$ 1,8+4,74'
$ 78,'2&,412
!"!
1+(+7
4'A
5reC
existing
from
=%>9
$ 1&1,++4,&''
$474,''','''
$ ++,+++
$C
$C
$ 44",4&7,222
$C
$2','18,418
$ ++,+++
$47",+14,74'
$ 1&1,4&&&,2""
$ 1,"84,24&
$ 47,8&4,'47
!2 4'A $ 84',''',''' $C $C $ 84',''',''' 244,''','''
S78
T%$4,
$
2,+4&,&&8,2''
$ 1++,+++ $ 1,2&&,74',''' $ 47,''',''' $ 1,"4+,&1+,+++ $ 1,"'",'81,4"" $ "&',&24,4+'
TUOP !2 1+(+7A $ 28",""2,2'' SC $C $ 28",""2,2'' $ 84,&&&,++'
TOTAL ++(++A $
2,&"",""',4''
$ 1++,++7 $ 1,2&&,74',''' $ 47,''',''' $ 1,"4+,&1+,++7 $ 1,488,41",7"4 $ 474,&24,12'
The Tribunal has computed the gain and the tax arising from the transfer of interests in the
5S!s of 6loc7s 1, 2 and "!, using a similar tabulation as that of the respondent )hich as set out
belo)8 The percentage of interests considered as originalE preCexisting interests and the ones
94
considered as purchased from =eritage )as ""(""A each using the a*eraging method or
e2uitable apportionment instead of the 93/% and /3/% methods( ach )as half of the ++(+7A
interest transferred in !1 and !"( The expenses )ere computed ta7ing into consideration the
proportion of interests sold( The tabulation )as computed from the e*idence adduced in the
Tribunal(
T48, 2 C%+"7$4$)%n %& $' 64)n 8; $' Tr)87n4,
B,%#= > !%,5 In$r!$ T%$4,
C%n!)5r4$)%n
COST BASE
G4)n T4: 4$ (0>
S)6n4$7r
8%n7!
C%!$ 84! 4! "r
S.?@G051
In#)5n$4,
:"n!!
S. -2021
T%$4, C%!$ 84!
TUL
!1
""(""A
""(""A
5reC
existing
/rom
=%>9
$ 41+,+++,14'
$ 41+,+++,14'
$ 1&&,&&8
$ C
$C
$ 4&7,4"4,184
X 74,''',''' ,6-
$C
$ 17,&87,+44
X 2",4'4,242 ,!-
$ 1&&,&&8
$ +1",&28,'&1
$ 41+,4++,142
$ C &7,2+1,&41
$ 124,7+1,2+"
!"!
""(""A
""(""A
5reC
existing
/rom
=%>9
$ "8",""2,&4'
$ "8",""2,&4'
$ 1"",""2
$C
$C
$ "+&,'+4,814
X 74,''',''' ,6-
$C
$ 1","44,+7&
X 2",4'4,242 ,!-
$ 1"",""2
$ 48',&14,74+
$ "8",1&&,+18
$ C &7,482,7&+
$ 84,+84,'47
!2 4'A $ 84',''',''' $C $C $ 84',''',''' $ 244,''','''
S78
T%$4,
$ 2,+4&,&&8,2'' $ """,""' $ 1,'1+,4'',''' $ 78,"4",8"7 $ 1,'&4,177,1+7 $ 1,444,821,'"" $ 4++,44+,"1'
TUOP !2 1+(++A $ 28",""2,2'' SC $C $ 28",""2,2'' $ 84,&&&,++'
TOTAL ++(++A $ 2,&"",""',4'' $ """,""' $ 1,'1+,4'',''' $ 78,"4",8"7 $ 1,'&4,177,1+7 $ 1,8"8,14",2"" $ 441,444,&7'

$ote ,!- is the increase in the incidental expenditure arising from the rectification of legal fees,
guarantee fees and interest expense(
$ote ,6- is the addition of the excess costs that )ere deducted by the respondent yet )ere not
substantiated(
3n its computation, the tribunal has put the expense of the signature bonus for the preCexisting
interest at US$ 1&&,&&8 for !1 and US$ 1"",""2 for !"!( 3n its computation, the respondent
had put the signature bonus at US$ &&,&&& and US$ ++,+++ for !1 and !2 respecti*ely( 3f the
preCexisting interests )ere 1+(+7A )hen they increase to ""(""A the signature bonus doubles(
95
<here the interests )ere 4'A and are reduced to ""(""A, the expenses incurred in the cost
base and incidental expenses are proportionately reduced( This means the cost base and
incidental expenses are reduced by a third( The )eighted costs approach or the costs incurred
in proportion to the interests has the effect of reducing the cost base( The effect of using the
a*eraging or e2uitable proportion method increases the gain in bloc7s !1 and !"! and
hence the tax liability of the applicants( Using the abo*e illustration the applicants@ tax liability
before preC in*estment )ould be US$ 441,444,&7'(
3n TU9@s financial statements, xhibit !22, it is indicated that the legal fees incurred )ere US$
1,'72,&14( The respondent put it at US$ 44&,"18( That is a difference of US$ +1",4&+( The
respondent submitted that the guarantee arrangement fees )ere US$ "1,8'',''', guarantee
commitment fees )ere US$ 1',82&,241 totalling to US$ 42,+2&,241( The financial statements
of TU9 put the guarantee arrangement and commitment fees at US$ 4+,44&,84'( That is a
difference of US$",&2',+'&( The said financial statements had an interest expense of US$
+4,&81,44" )hich the respondent did not consider( =o)e*er the said interest expense is an
incidental expense( The total of the abo*e differences ,i(e( +1",4&+ and ",&2',+'&- plus the
interest expense of US$ +4,&81,44" is US$ 7',414,748( TU9 sold interests ""(""A of its
interests from each bloc7( The sale from both 6loc7s 1 and "! constituted ++(+7A( ++(+7A of
US$ 7',414,748 is US$ 47,'1',4'4( =ence the abo*e expenses should be proportionate to the
interest transferred in the said bloc7( !ccordingly half of US$ 47,'1',4'4 )hich is US$ 2", 4'4,
242 )as added to the cost base of !1 and !2( See $ote ,!- on the incidental expenses in
the cost base of !1and !"!(

The Tribunal agrees )ith the respondent@s decision to disallo) the applicants from using a loss
of US$ 2',&87,&"' on !" to reduce their gain on the sale of their !"! interests because the
said loss related to a separate contract area, !"(

The respondent submitted and .r( HaDubi testified that Tullo) had incurred costs of US$
14',''',''' as excess costs( =o)e*er he did not tell the Tribunal ho) he came to arri*e at the
said figure( There is no report from the Doint ad*isory committee, nor any audited report to
substantiate the excess costs incurred( The respondent also submitted that it disallo)ed preC
existing costs of US$ "2',444,81& on the ground that they should be deducted against cost oil(
96
=o)e*er there is no e*idence to sho) that the applicants e*er presented the said figure to the
respondent, nor is there any e*idence to substantiate the said costs( There is no e*idence that
the said exploration costs of US$ "2',444,81& claimed to ha*e been incurred by the applicants
on !1, !2 and !"! )ere audited( 3t is not clear )hich amount of reco*erable costs )ere
sold to Tullo) by =eritage( 3n the absence of any certified excess costs the Tribunal )ill not
allo) the deduction of US$ 14',''',''' by the respondent from the cost base( The Tribunal
has made adDustments as indicated in the table abo*e by adding US$ 74,''',''' to the
incidental expenses of 6loc7s 1 and "!( 5lease see note ,6- in the cost base of !1 and !"(
The respondent, in its submission, admitted that the applicants furnished further information that
increased the incidental costs to US$ +1,&'", "87 )hich resulted in a further reduction of tax
liability from US$ 474,&24,12' to US$ 4+7,271,&71( That is a reduction of US$ 8,+42,14&( The
respondents did not furnish the Tribunal )ith the further information that )as gi*en to it by the
applicants( =ence the Tribunal did not include the said information in the tabulation( =o)e*er
the Tribunal )ill reduce the tax liability of the applicants before the preCin*estment relief from
US$ 441,444,&7' by US$ 8,+42,14& to US$ 442,7&",821( The said tax liability has been arri*ed
at by ma7ing adDustments according to the e*idence adduced before the Tribunal( The amounts
may not necessarily be the actual ones incurred by the applicants( =o)e*er the Tribunal has to
ma7e its ruling on the e*idence presented(
051 PrA)n*!$+n$ r,)&
The Tribunal has already noted that the applicants )ished to transfer 4'A of their interests(
=o)e*er the applicants disposed of a further 1+(+7A of their interests )hich )as held to be an
in*oluntary disposal( 1+(+7A of ++(+7A interests transferred is 24A( =ence the applicants are
entitled to a tax relief of 24A( 3f the tax liability of the applicants before the preCin*estment relief
is granted is US$ 442,7&",821 then the relief )ould amount to US$ 1"4,+&8,444 and the tax
liability )ould be reduced to US$ 4'7,'&4,"++ after the grant(
The respondent submitted that the applicants should reCin*est the relief in an asset of a li7e
7ind( The reCin*estment must be made )ithin one year of the disposal( The Tribunal already
noted that at the time the disposal too7 place the applicants still had time to reCin*est in an asset
97
of a li7e 7ind( The transfer of interests too7 place on the 21
st
/ebruary 2'12( The applicants had
up to the 21
st
/ebruary 2'1" to reCin*est in an asset of a li7e 7ind( The applicants closed their
case on the 28
th
$o*ember 2'12( They had about three months remaining to rein*est in an
asset of a li7e 7ind(
S( 44,1- ,c- of the 3T! re2uires the proceeds to be rein*ested in an asset of a li7e 7ind )ithin one
year from the date of disposal( S( 44 ,"- mentions a replacement asset( The respondent argued
that the use of proceeds to fund preCexisting obligations under the 5S!s is not an ac2uisition of
a replacement asset as re2uired by S( 44,"- of the 3T!(
The applicants are re2uired to rein*est in an asset of a li7e 7ind by S( 44,1- ,c- of the 3T!( The
)ord Jli7e@ is defined by O($ord "danced Learners Dictionary +
th
dition p(++ as :similar to
sbEsth(((; The )ord similar is not synonymous )ith the )ord same( %ne may ha*e similar
products that are not the same( ! similar product may not be the same as a replacement( Using
that definition, S( 44,1- ,c- of the 3T! re2uires a taxpayer to in*est in an asset of a similar 7ind( 3t
does not ha*e to be the same asset(
3n order to find out )hat assets of a li7e 7ind the applicants )ould be re2uired to rein*est in, one
)ould need to 7no) )hat they sold to #$%%# and Total( ! perusal of the 5S!s, sho) that the
applicants transferred their interests )hich )ere defined to be8
:mean an undi*ided ((( legal and beneficial participating interest in ((((, in and under the interest
documents and all rights and obligations attaching thereto, including, but )ithout limitation, such
interest in the 3nterest 5roperty and the 3nterest 0ataB;
3n totality, the interests sold included interests in data, documents and property( The applicants
did not only sell their rights to explore and produce oil( The Tribunal does not thin7 that the
applicants )ould be interested in reCin*esting in data or documents but in property( Under the
5S!s J3nterest 5roperty@ )as defined to mean8
:means all of the property related to the 3nterests including any platforms, pipelines, plant,
machinery, )ells, facilities and all other offshore and onshore installations and structures(;
=ence if the applicants )ere to in*est in an asset similar to the interest property, they )ould be
in*esting in an asset of a li7e 7ind(
98
=a*ing ta7en note that the applicants had three months remaining to rein*est from $o*ember
2'12, the Tribunal shall extend the time for the applicants to furnish the respondent )ith
e*idence of a rein*estment in a li7e 7ind to a tune of US$ 1"4,+&8,444( The applicants had one
year from /ebruary 2'12 to /ebruary 2'1" to reCin*est in asset of a li7e 7ind( Since the
applicants closed their case in $o*ember 2'12, they still had three months to /ebruary 2'1" to
reCin*est in an asset of a li7e 7ind( Therefore the Tribunal )ill gi*e them an extension of three
months from the date of the ruling(
/.4 CONCLUSIONS AND ORDERS OF THE TRIBUNAL
=a*ing ta7en into consideration the e*idence adduced, the submissions of all parties the
Tribunal )ishes to summarise it findings as belo)8
1. In r!"#$ $% EA2
1(1The Tribunal finds that !rticle 2"(4 of the !2 5S! )as intended to co*er capital gains
tax arising from the disposal of interests in the 5S!(
1(2The Tribunal further finds that !rticle 2"(4 of the !2 5S! is in*alid under the tax la)s of
Uganda and therefore the applicants are not entitled to an exemption from the payment
of capital gains tax(
1("The Tribunal also finds that the applicants cannot rely on the principle of legitimate
expectation as their expectation )as not legitimate(

2. In r!"#$ %& 4,, $' PSA!.
2(1The Tribunal also finds that the respondent is allo)ed to reduce the cost base by the
excess costs incurred by the applicants in the subse2uent transfer of their interests(
=o)e*er the respondent did not satisfy the Tribunal on ho) it arri*ed at the amount of
the excess costs incurred by the applicants and adDustments )ere made accordingly(
99
2(2 The Tribunal finds that the applicants did not discharge the burden placed on them to
pro*e to the satisfaction of the Tribunal the actual expenses they incurred in order for
them to be allo)able( =o)e*er the Tribunal too7 into consideration the expenses
admitted by the respondent and those that )ere pro*ed to its satisfaction to compute
and ma7e adDustments to the gain made by the applicants(
2(" The Tribunal finds that the Jlast in first out@ ,93/%- and :first in first out@ ,/3/%- accounting
methods proposed by the parties ha*e no legal basis( The Tribunal applied the a*eraging
method or e2uitable proportions in apportioning the different interests that )ere
transferred by the applicants(
(. In r!"#$ %& $' rA)n*!$+n$ r,)&.
"(1The Tribunal finds that the disposal of 1+(+7A of their interest by the applicants )as
in*oluntary(
"(2 The Tribunal finds that the applicants are entitled to a reCin*estment relief of up to 24A
of the interests they disposed of(
"("The Tribunal also finds that the applicants are still entitled to an extension of time to
furnish e*idence of reCin*estment in an asset of a li7e 7ind(
6asing on the abo*e findings the Tribunal orders that8
1- The applicants pay capital gains tax of US$ 4'7,'&4,"++ basing on the e*idence
adduced before the Tribunal being the amount after the preCin*estment relief( The total
amount of capital gain tax before the preCin*estment relief )as US$ 442,7&",821(
2- The applicants )ill deduct the statutory "'A paid from the US$ 4'7,'&4,"++ and the
balance outstanding shall attract an interest of 2A per month from the date of this ruling
till payment in full(
"- The applicants are entitled to a reCin*estment relief of US$ 1"4,+&8,444(
100
4- The applicants shall furnish the respondent )ith e*idence of reCin*estment in an asset of
a li7e 7ind to the tune of the abo*ementioned amount in clause " )ithin three months
from the date of this ruling( The said reCin*estment in an asset of a li7e 7ind should ha*e
been made in the period bet)een 21
st
/ebruary 2'12 and 21
st
/ebruary 2'1"( 3n the
e*ent the applicant does not comply )ith this order the said relief or that amount of relief
)hich has not been pro*ed )ill crystallise into capital gain tax on the expiration of the
said period and )ill attract interest of 2A per month till payment(
4- Under S(1&,c- of the Tax !ppeal Tribunal !ct the portion in respect of the reCin*estment
relief is remitted to the respondent to effect as stated herein abo*e(
+- The Tribunal orders that the applicants pay t)oCthirds ,2E"- of the costs of this application
to the respondent( The Tribunal notes that the applicants )ere successful in some issues
approximately a third and are entitled to a reduction in the costs(
9astly, the Tribunal )ishes to than7 counsel of all the parties for the time and effort ta7en in the
preparation and presentation of their cases( !s the respondent had noted in their submission,
that this is the biggest case ,in monetary terms-, in*ol*ing the largest transaction of US$ 2(&
billion, in the legal history of Uganda( 6oth parties obtained representation from )ithin and
across the continent, )hich the Tribunal allo)ed in order to get to the bottom of the problem( <e
can say )e ha*e not been disappointed( The preparation by both parties )as meticulous )ith a
lot of effort put in( The submissions by the parties, though hefty, in*ol*ed a lot of research( The
applicants, as taxpayers are commercial enterprises aiming at profit maximisation are entitled to
challenge any tax assessments imposed on them( The respondent, as a re*enue collecting
body, should not consider it as inappropriate or attempts at :manipulation of figures; )hen its
assessments are challenged( 3n its collection of taxes the respondent should not attempt to 7ill
the hen that lays golden eggs( The tas7 of the Tribunal is clearly to resol*e any tax dispute in
accordance )ith the la), )hich )e ha*e done(
0ated at Hampala this VVVVVVVVV(day ofVVVVVVVVVV2'14
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#hairman .ember .ember
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