A Critical Evaluation of the Upstream Petroleum Taxation Laws and Fiscal Regimes in Uganda

ABSTRACT Petroleum extraction is a lucrative source of tax revenue for many governments endowed with the oil resource. However, the design, development and implementation of legal and Fiscal regimes will determine whether a government maximises revenue from the oil resource and yet at the same time remain attractive to private investment This thesis has reviewed the laws and fiscal regime governing the upstream oil sector in Uganda with specific emphasis on taxation and revenue sharing. Following a comparative analysis of the said legal regime with those of Ghana, Indonesia and Norway the thesis recommends that in order for Uganda to achieve the economic objective of revenue maximisation as set out in the National Oil and Gas Policy, the law and fiscal terms as applied to the county's upstream oil sector should be amended to reflect a comprehensive bonus structure, ad valorem royalties to generate revenue as a percentage of the value of the oil produced, windfall taxes which are necessary to capture the larger economic rents generated by the oil production, and cost oil limits that vary with price in order to ensure that under higher prices, cost oil limits are lower and government is better protected in case of poor administration and corruption .

TABLE OF CONTENTS 

DECLARATION ............................................................................................... 1 

APPROVAL .....•.............•...................... : .......................................................... ii 

DEDICATION ................................................................................................ iii 

ACKNOWLEDGEMENTS ····························~··••n••••·········································· iv 

TABLE OF CONTENTS .....•.............................................................................. v 

LIST OF NATIONAL LEGISLATION ............................................................... ix 

LIST OF INTERNATIONAL INSTRUMENTS ••.•....••.•....•......••.....••.....•.....•.•....•. x 

LIST OF CASES···········································~················································· xi 

LIST OF ABBREVIATIONS ........................................................................... xii 

LIST OF FIGURE ......................................................................................... xiii 

ABSTRACT ·········••a••••················~·············{~'••·································(-2:;··········· xiv 

CHAPTER ONE ............................................................................................... 1 

GENERAL INTRODUCTION ····················s••········~······································~····· 1 

1.0 Background to the study .............................................................................. 1 

1.1 Statement of the problem ............................................................................ 4 

1.2 Research Questions ..................................................................................... 6 

1.3 Research Objectives .................................................................................... 6 

1.3.1 Main objective .......................................................................................... 6 

1.3.2 Specific objectives .................................................................................... 6 

1.4 Scope of the study ....................................................................................... 6 

1.4.1 Subject scope ........................................................................................... 6 

1.4.2 Geographical scope ................................................................................... 7 

1.4.3llme scope ............................................................................................... 7 

1.5 significance of the study .............................................................................. 7 

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1.6 Research Methodology ................................................................................. 9 

1.6.1 Research Design ..................................................................................... 10 

1.7 Literature Review ....................................................................................... 12 

1.7.1 Key learning Outcomes ............................................................................ 25 

1.7.2 Research gap .......................................................................................... 26 

1.8 Chapterisation ........................................................................................... 26 

CHAPTER TWO ··························~································································· 27 

A REVIEW OF THE PETROLEUM TAXATION LAWS AND FISCAL REGIMES 

GOVERNING TIHE UPSTREAM SUB SECTOR IN UGANDA ............................ 27 

2.0 Introduction .............................................................................................. 27 

2.1 Industry overview ...................................................................................... 27 

2.2 Upstream legal regime ............................................................................... 29 

2.3 Fiscal regime ............................................................................................. 30 

2.4 legal frameworks for Upstream Petroleum Taxation in Uganda ...................... 32 

2.4.1 Principle of ring fencing ........................................................................... 32 

2.4.2 Withholding taxes ................................................................................... 33 

2.4.3 Capital gains tax ..................................................................................... 33 

2.4.4 Value added tax ...................................................................................... 33 

2.4.5 Stamp duty ............................................................................................ 34 

2.4.6 Transactions ........................................................................................... 34 

2.5 CONCLUSION ............................................................................................ 36 

CHAPTER THREE ......................................................................................... 37 

A REVIEW OF PETROLEUM TAXATION LAWS AND FISCAL REGIMES OF 

SELECTED COUNTRIES AND INTERNATIONAL BEST PRACTICES 

RELATING TO THE UPSTREAM SUB SECTOR .............................................. 37 

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3.0 INTRODUCITON ........................................................................................ 37 

3.1 UPSTREAM PETROLEUM TAXATION ............................................................ 37 

3.1.1 Petroleum tax policy ............................................................................... 38 

3.2 A REVIEW OF INTERNATIONAL BEST PRACTICES IN RELATION TO UPSTREAM 

PETROLEUM TAXATION LAWS AND FISCAL REGIMES ....................................... 41 

3.2.1 CONCESSIONS ....................................................................................... 42 

3.2.2 CONTRACTUAL REGIMES ........................................................................ 43 

3.3 TAXATION AS AN INSTRUMENT FOR RESPONDING TO CHANGES IN OIL PRICE 

LEVEL AND PROFITABILITY UNDER THE DIFFERE~ LEGAL REGIMES .............. 46 

3.3.1 The concept of Progressive Taxation ........................................................ 47 

3.3.2 Overview of progressive taxes ................................................................. 48 

3.3.3 Tax and non-tax instruments used in the International petroleum Industry. 51 

3.4 A REVIEW OF PETROLEUM TAXATION LAWS AND FISCAL REGIMES OF 

SELECTED COUNTRIES IN RELATION TO THE UPSTREAM SUB SECTOR ............. 57 

3.4.1 INTRODUCTION ........................... : ......................................................... 57 

3.4.2 THE NORWEGIAN CONCESSIONARY SYSTEM ........................................... 58 

3.4.3 INDONESIAN CONTRACTUAL SYSTEM ..................................................... 60 

3 .5 CONCLUSION ............................................................................................ 64 

CHAPTER FOUR ........................................................................................... 65 

IMPLICATIONS OF UGANDA'S PETROLEUM TAXATION LAWS AND FISCAL 

REGIME GOVERNING THE UPSTREAM SUB SECTOR .................................. 65 

4.0 INTRODUCITON ........................................................................................ 65 

4.1 IMPLICATIONS .......................................................................................... 65 

4.1.1 Signature bonuses .................................................................................. 65 

4.1.2 Royalties ................................................................................................ 66 

4.1.3 Production Sharing/Profit-oil split.. ........................................................... 66 

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4.1.4 State participation ..................................... : ............................................. 67 

4.1.5 Cost recovery limits ................................................................................. 67 

4.1.6 Income Tax ............................................................................................ 68 

4.1.7 Tax stabilization provision ........................................................................ 69 

4.1.8 Tax waivers and exemptions .................................................................... 70 

4.2 CONCLUSION ............................................................................................ 70 

CHAPTER FIVE ························ft··································································· 71 

CONCLUSION ·······························································~······························ 71 

5.1 Summary .................................................................................................. 71 

5.2 Findings ..................................................................................................... 72 

5.3 Recommendations ..................................................................................... 74 

REFERENCES ...•........................................................................................... 77 

BIBLIOGRAPHY ............................................................................................ 77