KAMPALA, Uganda | The High Court of Uganda, on December 23, 2024, ordered the Uganda Revenue Authority (URA) to refund excess taxes collected from oil giant Heritage Oil and Gas Limited in a ruling that concluded a protracted legal battle over tax assessments. The dispute centered on the sale of Heritage’s oil exploration interests in Uganda’s Albertine Graben.

In 2010, Heritage sold its 50% stake in two oil exploration blocks to Tullow Uganda Limited for $1.45 billion. The Uganda Revenue Authority issued tax assessments amounting to $434.9 million, arguing that the transaction involved the sale of rights tied to immovable property in Uganda and was therefore subject to capital gains tax under Uganda’s Income Tax Act. Heritage contested the assessment, claiming the transaction involved contractual rights and exploration licenses, which it argued were movable property and not taxable as capital gains under Ugandan law.

Heritage further argued that $150 million in exploration costs it had incurred should have been accounted for in the tax computation. These costs included geological surveys, drilling, and other expenses critical to the exploration operations. Heritage claimed that the exclusion of these costs resulted in an inflated tax assessment.

After years of litigation, the High Court ruled that while the URA was correct in taxing the transaction, it had failed to factor in the exploration costs when calculating the capital gains tax. Justice Susan Abinyo emphasized that under Uganda’s tax laws, allowable costs directly related to improving the value of an asset must be included in the cost base. This principle ensures that tax is levied on the actual gain from a transaction, not on an inflated figure.

The court’s judgment emphasized that the exploration costs incurred by Heritage had significantly enhanced the value of the exploration licenses and should have been deducted from the taxable amount. Consequently, the URA was directed to refund the excess tax collected due to its failure to account for these costs.

The ruling clarified the nature of the transaction, noting that while it was subject to taxation under the Income Tax Act, the computation must be precise and adhere to legal requirements. Justice Abinyo stressed the importance of fairness in tax administration, particularly in Uganda’s oil and gas sector, where transactions are often complex and involve high financial stakes.

As Uganda moves closer to large-scale oil production, the judgment provides valuable guidance on the taxation of transactions in the sector. It reinforces the principle that while the government seeks to maximize revenue from its natural resources, it must also ensure compliance with legal standards and protect the rights of investors.