A critical analysis of the taxation of income arising to contractors in relation to the execution of engineering, procurement, construction a

ABSTRACT

Globally, the past two years have been successful years in oil and gas exploration with discoveries almost

doubling those made in 2017.1 Notwithstanding Africa’s endowment in vast natural resources, including

substantial oil and gas reserves, one of the most dramatic finds in Africa has been Mozambique’s natural

gas developments. Mozambique is set to become one of the largest and most dominant natural gas finds

in the world. These developments have attracted the attention from countries around the world, the UAE,

in particular, taking the lead.

Engineering, procurement, construction and installation (“EPCI”) contracts, are a common form of

contract in the oil and gas sector, which is used to undertake large scale oil and gas projects. The nature of

these contracts consists of significant local (in-country work) and foreign (out-of-country work) elements.

Due to the complex nature of EPCI contracts, one of the major areas of dispute in the taxation

environment are the uncertainties around the taxation of profits arising to contractors under these

contracts.

The taxpayer and the Revenue Authorities have different views as to where the income arising from EPCI

contracts is to be taxed. The taxpayer takes the stand that only such income from the project as is relatable

to activities in the host state, should be taxed in the host state. The Revenue Authorities contend that

EPCI contracts are to be considered as one and indivisible, and hence the entire income from the contract

is liable to be taxed in the host state. Based on an examination of recent judgments passed by the

Authority of Advanced Rulings (“AAR”) and various Tax Courts, currently, there seems to be no

certainty regarding the taxation of income arising to contractors under an EPCI contract and this has in

turn resulted in a number of contractors having to pay excessive taxes.

This dissertation seeks to analyse the tax treatment of income arising to contractors, from supplies and

services under an EPCI contract in the context of the oil and gas sector entered into between Mozambique

and the United Arab Emirates (“UAE”), in Mozambique.

The purpose of this analysis is to determine how these profits should be taxed, in light of the

Mozambique-UAE Treaty2 and Mozambican domestic legislation. In other words, the question that this

dissertation seeks to answer is, whether profits arising from an EPCI contract in the oil and gas sector,

should be taxed as a whole in Mozambique, or per the various components of the EPCI contract.