Attorney General queries Uganda Revenue Authority over Shs 11bn oil money

August 23, 2017 Keywords : ILLICIT FINANCIAL FLOWS - “STOP THE BLEEDING” Newsletters Uganda

The interpretation of what constitutes oil revenues that the Uganda Revenue Authority has to remit to the national petroleum fund is at the centre of debate after the auditor general found the taxman had remitted less than what was expected, writes EDWARD SSEKIKA.

Uganda Revenue Authority (URA) has not remitted Shs 11bn in “oil revenues” to the Petroleum Fund, the latest audit report into the fund by the Office of the Auditor General reveals.
According to the auditor general’s report on the financial statements of the Petroleum Fund for the period 30th June to 31st December, 2016, the tax body, ought to have remitted Shs 11.3 billion collected as Pay as You Earn (PAYE), Value Added Tax (VAT) and Withholding Tax from petroleum activities.
The report, released in June this year, is the first audit report into the finances of the petroleum fund that has been made public.
“It was, however, noted that monies collected by Uganda Revenue Authority (URA) under the Income Tax Act from income derived from petroleum operations such as Pay as You Earn (PAYE), Value Added Tax (VAT) and Withholding Tax is not being remitted to the Uganda petroleum fund. This contravenes the Public Finance and Management Act 2015,” the auditor general’s financial report reads.

The Public Finance Management Act, 2015 describes “petroleum revenue” as tax paid under the Income Tax Act on income derived from petroleum operations, government share of oil production, signature bonus, surface rentals, royalties, proceeds from the sale of government share of production, any dividends due to government, proceeds from the sale of government’s commercial interests and any other duties or fees payable to the government of Uganda from contract revenues under a petroleum agreement.
In the report, the auditor general, according to his assessment, argues that the description of “petroleum revenues” is restrictive since it leaves out income derived from petroleum operations like Pay as You Earn (PAYE), import duties and VAT payments from petroleum activities.
However, in URA’s opinion, PAYE is not taxed on revenues derived from petroleum operations, but it is categorized as employment income paid by the employees and as such it is excluded from petroleum revenues.
“Arising out of the above, it was established that Shs 11.3bn collected through the commercial banks and remitted to the consolidated fund should have instead been transferred to the Petroleum Fund,” the report pointed out.
The auditor general notes that the management of URA promised to remit the money to the Petroleum Fund. In the report, the auditor general advises URA to seek advice from the solicitor general to clarify on whether or not PAYE from employees of oil companies and their sub-contractors, as well as VAT, are part of the petroleum revenues.

SHS 271BN FUND

The auditor general’s report reveals that by the end of December 2016, the fund had a total of Shs 271.5bn. This includes the Shs 922.3 million the fund received from Tullow Oil and Total E&P in rental fees.
“For the six months ending December 31, 2016, the fund received non-tax revenue worth Shs 922.3 million ($270,900 dollars) as surface rental fees from Tullow Uganda Operations Pty and Total E&P Uganda,” the report reads.
Of this, $113,400 dollars was paid by Total E&P Uganda for the development areas of Ngiri, Jobi-Rii and Gunya and $157,500 was paid by Tullow Uganda Operations Pty Ltd for the areas of Ngege, Kasemene, Wahrindi, Nzizi- Mputa, Waraga and Kigogole-Ngara.

“The Petroleum Fund does not own any property, plant, equipment in its books of account. There are no expenses on the fund, except bank charges,” the Auditor General says in the report.
The petroleum fund is maintained in two separate accounts in Bank of Uganda. One of the proceeds is denominated in the local currency and the other in United States dollars.

The signatories to the Petroleum Fund are: Keith Muhakanizi, Patrick Ocailap (deputy secretary to the treasury) and Lawrence Ssemakula, the accountant general.
The Public Finance Management Act, 2015, places an obligation on the auditor general, to audit the financial statements of the fund. The auditor general noted: “From the fund’s cashbooks and bank statements, I ascertained that there were no expenses made from the fund, except bank charges.”
Under section 56 of the Public Finance Management Act, 2015 the minister of Finance is responsible for the overall management of the petroleum fund. Under Section 60 of the PFMA, the accountant general is responsible for maintenance of proper books of account and proper records of the petroleum fund; and preparation and submission of semi-annual and annual financial statements for the petroleum fund that are free from material misstatement whether due to error or fraud.
Under the Public Finance Manangement Act, withdrawals from the fund can only be authorized by parliament through an Appropriation Act and warrant from the auditor general to the Consolidated Fund to support the annual budget and or to the Petroleum Revenue Investment Reserve Account.

OIL FIRMS LOSE SHS 136BN

In a separate audit report – the annual report of the auditor general on the Financial Statements of Government of Uganda for the Financial Year Ended 30th, June, 2016 - the auditor general approved Shs 3.1 trillion as recoverable costs.
Recoverable costs are those project investments that the oil companies are allowed to recover before sharing the profit from the sale of the oil.
According to the report, international oil companies stand to lose at least $39 million (approximately Shs 136.8bn) in recoverable costs for failure to comply with the provisions of production sharing agreements.

In the report, the auditor general, John Muwanga, reviewed costs recovery statements submitted by the oil companies for the period 2004 – 2011. Uganda discovered commercially viable oil reserves in 2006 after years of exploration.
“I reviewed cost recovery statements relating to the period 2004-2011 in the sum of $983,063,050 (an estimated Shs 3.4 trillion) and made the following observations; a sum of $39,094,724 (approximately Shs 136.8 billion) was determined unrecoverable because of non-compliance with the provisions of the PSAs,” the report reads in part.

The production sharing agreements [oil agreements] signed between government and the oil companies spell out the type of costs which are recoverable and those which are not. For instance, recoverable costs include all exploration, development, production and operating expenditures.

However, in the report, the auditor general does not specify which companies are affected by non-compliance. The production sharing agreements signed between the government of Uganda and oil exploration and production companies provide that the government auditor will review the cost recovery statements submitted by the companies to ascertain whether there was compliance with the provisions of the agreement.

According to the report, a sum of $902,382,526 (approximately Shs 3.1 trillion) was considered compliant with the provisions of the production sharing agreements and is, therefore, recoverable from future oil earnings. This means, once oil production starts, oil companies will recover Shs 3.1 trillion as costs they have incurred in oil exploration so far.

“A sum of $41,585, 800 (approximately Shs 145.5bn) was determined unclaimable in accordance with the production sharing agreement (PSA) provisions as commercial oil and gas reserves were not discovered in the licensed exploration areas.
Under the production sharing agreement model, oil firms recover their investment after making discoveries, and production starts. However, where oil companies donot make any discoveries, no recoverable costs accrue to the oil companies.
For instance, Cnooc Uganda Limited hit a dry well in Kanywataba prospect in Ntoroko district while Neptune also hit dry wells. Therefore, the money they injected could not be recovered from government.

The auditor general is required to scrutinize the expenditures made by oil companies and give final approval of recoverable expenditures. As an example, at the end of 2008, the auditor general had approved $492.5 million as recoverable costs out of $510 million spent by oil companies in the five areas licensed for exploration.
The auditor general has now embarked on the audit of recoverable costs for the period 2012-2015.

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