Tullow sues Heritage Oil over Ugandan taxes dispute

Source: Heritage Oil

Heritage Oil Plc (LON:HOIL) has received Particulars of Claim filed in the High Court of Justice in England by Tullow Oil (LSX:TUL) seeking $313,447,500 for alleged breach of contract as a result of Heritage's refusal to reimburse Tullow in relation to a recent payment made by Tullow of $313,447,500 to the Uganda Revenue Agency (URA). 

Heritage believes that the claim has no basis and will vigorously and robustly defend it. Heritage has also reserved its other rights against Tullow and against the Government of the Republic of Uganda

The URA purported to issue Agency Notices under the Ugandan Income Tax Act designating Tullow, as agent for HOGL, for payment of an alleged tax liability resulting from HOGL's sale of its interests in Blocks 1 and 3A to Tullow (the "Sale"). The Sale completed on 26 July 2010 for a cash consideration of $1.45 billion, including $100 million for a contractual settlement, of which HOGL received $1.045 billion in cash. The URA made a purported demand that Tullow pay the amount of $313,447,500 under the Agency Notices and Tullow has informed HOGL that it paid the entire amount to the URA on 7 April 2011. 

Tullow is purporting to claim against HOGL under the tax indemnity provisions and against Heritage under the guarantee provisions of the Sale and Purchase Agreement between the parties dated 26 January 2010 (the "SPA"). 

Heritage believes the claim is misguided for the following simple reasons: 

The decision to pay the URA $313,447,500 was made without HOGL's knowledge or consent, contrary to the very clear provisions under the SPA as supplemented by a supplemental agreement made between HOGL, Heritage and Tullow prior to completing the Sale on 26 July 2010 (the "Supplemental Agreement"). The Supplemental Agreement is explicitly clear that it is for HOGL alone to manage the tax dispute with Government yet Heritage and HOGL consider that Tullow's agreement to pay the URA was made contrary to the terms of this agreement, for Tullow's own commercial reasons. 

HOGL is disputing that any tax arises in Uganda from the Sale. Heritage's and HOGL's position remains, based on comprehensive advice from leading tax experts in Uganda, the United Kingdom and North America, that the Sale is not taxable under Ugandan law. 

The payment was not made in compliance with the Ugandan tax provisions relating to agency notices, even if the Agency Notices are assumed to be valid, which Heritage and HOGL does not accept. 

Tullow explained the commercial rationale for making the payment to the URA in a letter to HOGL dated 17 March 2011, which stated that, "If Tullow were to refuse to pay … the Government would not permit the farm-down to proceed."

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