Tullow Oil on Wednesday saw its shares rise 5.2 per cent on the London Stock Exchange, but in releasing full-year results the company, operating in Ghana, Kenya and Uganda, announced a US$671 million write down because of unsuccessful drilling in some of its African operations. However, Tullow recorded an operating profit of US$1,9 billion.
Analysts point out that Tullow has been under intense pressure to deliver on its drillings given that its earlier projections for oil production in Uganda and Kenya had been way off the mark – forcing these governments, which had based their budgets on Tullow’s figures, to revise their planned expenditure.
Although Tullow announced encouraging news for its operations in Kenya, where it said test results could lead to commercial production, the company is basically on the defensive in East Africa.
It is embroiled in litigation in Uganda. The parliamentary Public Accounts Committee report has blamed Tullow president Elly Karuhanga, a high court judge and a Member of Parliament for causing a loss over more than US$15 million to the government, which had an interest in a cement company.
This is coming in the wake of two tax disputes between Tullow and the Ugandan government that has resulted in the oil company taking legal action in London and Washington.
The first arbitration, which is pending, is in London where the oil company is seeking arbitration over a Ugandan government capital gains tax of $404 million following Tullow’s purchase of Heritage Oil interests in Uganda for $1.5 billion.
The second case that has been referred for arbitration involves a Ugandan government demand for an 18 per cent value added tax (VAT) on machinery imported into the country for exploration, according to papers lodged at the International Center for Settlement of Investment Disputes (ICSID) in Washington.
The World Bank established the autonomous international ICSID in 1965 and is considered a “leading international arbitration institution devoted to investor-state dispute settlement”.
The ICSID case, which is also pending, is dragging Tullow into an area that is coming under intense scrutiny by international bodies that want to ensure that tax systems do not unduly favor multinational enterprises, leaving citizens and small businesses with bigger tax bills.
An Organization for Economic Cooperation and Development (OECD) study commissioned by the Group of 20 (G20) leading emerging economies – the Addressing Base Erosion and Profit Shifting (BEPS) – finds that some multinationals use strategies that allow them to pay as little as five per cent in corporate taxes when smaller businesses are paying up to 30 per cent.
OECD research also shows that some small jurisdictions act as conduits, receiving disproportionately large amounts of Foreign Direct Investment compared to large industrialized countries and investing disproportionately large amounts in major developed and emerging economies.
“These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system,” said OECD Secretary-General Angel Gurría. “As governments and their citizens are struggling to make ends meet, it is critical that all tax payers – private and corporate – pay their fair amount of taxes and trust the international tax system is transparent. This report is an important step towards ensuring that global tax rules are equitable, and responds to the call that the G20 has made for the OECD to help provide solutions to the global economic crisis.”
The OECD says that many of the existing rules, which protect multinational corporations from paying double taxation, too often allow them to pay no taxes at all.
It says these rules do not properly reflect today’s economic integration across borders, the value of intellectual property or new communications technologies. These gaps, which enable multinationals to eliminate or reduce their taxation on income, give them an unfair competitive advantage over smaller businesses. They hurt investment, growth and employment and can leave average citizens footing a larger chunk of the tax bill.
“The practices multinational enterprises use to reduce their tax liabilities have become more aggressive over the past decade. Some, based in high-tax regimes, create numerous offshore subsidiaries or shell companies, each time taking advantage of the tax breaks allowed in that jurisdiction. They also claim expenses and losses in high-tax countries and declare profits in jurisdictions with a low or no tax rate,” says the OECD.
The report does not cal for optimal tax rates, suggesting instead that each government decides its own.
In the coming months, OECD will draw up an Action Plan, developed in cooperation with governments and the business community, which will further quantify the corporate taxes lost and provide concrete timelines and methodologies for solutions to reinforce the integrity of the global tax system.
Chris Jordan, a, a tax specialist at ActionAid, which is looking at tax avoidance in Zambia said: “International corporate tax avoidance is like a cancer eating away at both rich and poor countries. As we’ve seen with Starbucks and Amazon, many multinationals are not paying their fair share of tax and this hurts ordinary people in the UK and in the developing world.
“We know that business can be a force for good in Africa, but this is massively undermined when a company doesn’t pay its fair share of tax.”