By Jaston Binala.
Tanzania Revenue Authority (TRA) and the oil and gas multinational Royal Dutch Shell are deadlocked in a $520 million capital gain tax dispute that shows no sign of ending at the moment.
Royal Dutch Shell took over a 60% interest in three Indian Ocean gas blocks in Tanzania in 2015 when it bought British Gas (BG). TRA is demanding from the Tanzania branch of Royal Dutch Shell a total of Tsh. 1.144 trillion ($520 million) as capital gain tax from the transaction but the multinational has completely refused to pay this tax bill.
The refusal is contained in a tax appeal case filed at Tanzania’s Tax Revenue Appeals Tribunal (TRAT) in Dar es Salaam on 28th July, 2017 carrying case number 122/2017. The 17-month-old case has reached the hearing stage, according to court documents seen, but no hearing date had been set when this report was being written.
The gas blocks in the Indian Ocean (Ophir Tanzania Block 1, Ophir Tanzania Block 3, and Ophir Tanzania Block 4) were formerly owned by BG and two minority shareholders–the British company Ophir Energy and Singaporean company TEMESEK through its subsidiary Pavilion Energy.
Royal Dutch Shell acquired the blocks when it took over BG in 2015. TRA issued a capital gains tax bill to Shell BG Tanzania after this acquisition in line with the Tanzania Income Tax Act of 2008, as revised from time to time through annual Finance Acts.
The assessment was based on the market value of the assets, a factor of volumes and global natural gas prices, and Shell’s acquisition costs, according to the revenue authority. TRA also referred to a precedent set in 2013 when Ophir Energy sold its 20 percent stake in the blocks to the Singaporean company TEMESEK for $1.288 billion.
In 2015, Royal Dutch Shell took over BG’s 60% interest in the blocks as part of a worldwide £47 billion (about $63 billion) takeover of BG assets through the London Stock Exchange. In the takeover, the value of Tanzanian assets was not made clear. Royal Dutch Shell acquired a collection of BG’s farflung assets in Australia, Brazil, Egypt and Tanzania.
Shell BG Tanzania, which did not respond to emails requesting comment for this story, has refused to pay the tax bill. On July 28, 2017, the multinational filed tax dispute case number 122/2017 at Tanzania’s Tax Revenue Appeals Tribunal (TRAT) in Dar es Salaam, giving three main reasons for refusing to pay. Shell BG Tanzania says it will not pay the capital gain tax because “the TRA comparable market valuation approach used to the alleged tax liability is incorrect.”
The multinational also argues that “The TRA used incorrect market indicators to assess the adjusted required [sic] to account for market deterioration from 2013 to 2016,” and that “TRA used incorrect and overstated quantum of gas resources in its valuation of the BG assets.”
A certified tax consultant in Dar es Salaam, Howard Abel, says in Tanzania capital gain tax is paid by the seller of an asset, although the amount is withheld by the buyer of the asset who should later deposit the withheld ‘gain’ to the Tanzania Revenue Authority (TRA). In 2015 the capital gain tax rate in the country was 20% of retained profit after deduction of the seller’s purchase price of the asset being sold.
The blocks were not purchased when they were first awarded to Ophir, according to an official linked to the Tanzania Government. Zenofa Ngowi, a senior official in the Directorate of Oil and Gas Exploration at the State owned Tanzania Petroleum Development Corporation (TPDC), said Tanzania gives gas blocks to exploration companies free of charge; they only have to beat others during a tendering process by explaining what they intend to do in the blocks and how Tanzania would benefit from their investment.
Asset improvement costs are also deducted from the taxable income as well as the cost of sale, which may include brokerage fees, according to Abel.
A “Farm-out” Agreement signed on the 16th of April, 2010 between Ophir Energy and British Gas shows the planned project operational cost before the actual production of gas was capped at $575 million.
As justification for refusal to pay the tax bill through case number 122/2017 at the Tax Revenue Appeals Tribunal in Dar es Salaam, foreign media has quoted Shell as saying British Gas made no profit in the transfer of shares to Shell.
The report in Club of Mozambique quoted Shell arguing that it had allocated only 1.8 percent (the equivalent of $850 million) of the total price paid for BG as payment for the Tanzanian assets, and that BG’s Tanzania subsidiary had already spent about $1.5 billion, hence indicating a loss, not a gain.
When BG acquired the Tanzanian assets in 2010, Ophir Energy said at the time it would not receive cash payment from British Gas for taking the 60 percent stake but that the British multinational would in return take over 85% of development costs in the three blocks.
Under the circumstances Ophir Energy does not seem to have a capital gain tax liability for its 60% transfer of ownership to British Gas in 2010. In 2013 Ophir Energy paid capital gain tax when the Singaporean company TEMESEK bought a 20% interest in the blocks for $1.288 billion.
The British company Ophir Energy arrived in Tanzania as a foreign investor in 2005 by signing a Production Sharing Agreement (PSA) with Tanzania Petroleum Development Corporation (TPDC) and the Tanzania Government for offshore Block 1 in the country’s south eastern territorial waters of the Indian Ocean. The following year, the same signatories signed two more PSAs for Block 3 and Block 4 in the same area.
Following the signing of PSA agreements the investor registered the gas blocks as foreign companies based in Jersey. After relevant exploratory activities, including seismic surveys between 2005 and 2010, Ophir Energy told stakeholders at the African Upstream Conference in Cape Town, that Block 1, Block 3 and Block 4 in Tanzania contain 8, 086 MMbbl (8.086 billion barrels) of total unrisked oil reserves and 40,018 BcF (40.018 billion cubic feet) of unrisked gas reserves.
The Tanzania Government has come under pressure from opposition party politicians to demand capital gain tax from ownership transfers of the blocks. Jesca Kishoa, a Member of Parliament from Singida, in central Tanzania complained in Parliament in February, 2018 the nonpayment of capital gain tax to the tune of $500 million contravened the Finance Act of 2012.
David Silinde, the member of parliament for Momba constituency in Songwe regions on the CHADEMA party ticket later repeated the complaint in parliament and demanded a government explanation. The attorney General’s office told parliament the matter was being handled by the TRAT.
Shell BG Tanzania has not responded to questions by email and telephone on the capital gain tax payment deadlock . The TRA Director General, Mr. Charles Kicheere, also refused to comment on this matter during a telephone interview, saying he did not want to prejudice the judicial process at the Tax Tribunal.
This story was produced by TZ Business News. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.