Standing in the way of development: The Uganda-Netherlands Double Tax Agreement

Authors: Joseph O. Olwenyi, Caroline Avan, Henrique Alcenca

Home to the 4th largest oil reserves in sub Saharan Africa, Uganda is on the verge of joining the club of oil producing countries. But to reap sufficient fiscal benefits from the project and avoid massive tax avoidance, it will have to quickly address the issue of its unbalanced tax agreement with the Netherlands, according to a recent Oxfam’s report.

The COVID-19 pandemic is stretching governments’ budget capacities all over the world – and has exposed how much we all need that our healthcare systems are adequately funded. There is no way around it: this requires proper fiscal revenues for governments.

According to a recent UNCTAD report, illicit financial flows are depriving the African continent of almost 89 billion $ each year – unfavorable tax treaties and their abuse by multinational corporations are part of that, as already evidenced by the Mauritius leaks in 2019. Despite efforts to curb this issue by the OECD-led BEPS project, reduced taxation through delocalization of investments remains stark and contemporary, and deprive developing countries of public revenues that could be used to fund essential services.

In Uganda – where 1 out of 5 persons live in poverty, and whose health and social protection systems have been chronically underfunded - the promises of the massive oil discoveries made in 2006 on Lake Albert are immense. The TOTAL-led project (in partnership with Chinese CNOOC – China National Offshore Oil Corporation) has already been put under the spotlight for its impacts on human rights (Oxfam Human Rights Impact Assessment). Pushing forward with the project – in line with its strategy of investing in regions where “cheap petrol” can be produced (according to CEO of TOTAL Patrick Pouyanné), the French major is now en route for an investment decision into Uganda to be made by the end of 2020.

Dutch investments in Uganda: appearances and reality

Considered by many in civil society a tax haven – the Netherlands, with its extensive treaty network, has established itself as a major conduit country for international investors. Home to more than 14 000 letter box companies (without staff, physical offices or any real economic activity), the vast majority of investments made into the Netherlands are immediately channeled out to other countries. Extractive companies have a long history of using the Netherlands as an intermediary to minimize their tax bills – as evidenced by the case of Rio Tinto in Mongolia.

Coincidentally – or perhaps not, Dutch companies appear to be massively present in the Ugandan economy as they represent – according to IMF data – more than 39% of the stocks of Foreign Direct Investments in the country.

But this is just a façade as 95% of those investments actually originates from third countries and are artificially routed through the Netherlands only to benefit from its legal framework. And there is a good reason for that: the 2004 double tax agreement between Uganda and the Netherlands provide for unrivalled advantages.

One of the perks of the agreement is that dividends – when repatriated to Dutch companies holding more than 50% of the shares of the dividend-paying Ugandan entity – are simply not taxed at all – while under Ugandan Tax Law, a 15% rate would have applied in the absence of a double tax agreement. The particularly unbalanced nature of this tax agreement has been noted by many – including the IMF and Global Financial Integrity.  

In 2016, LSE researchers unequivocally concluded that in the case of this particular agreement – “when private sector tax advisers were asked what would happen if the Dutch treaty were cancelled, they stated that investors would simply restructure, and were unlikely to withdraw their investments.” After all, oil is not found everywhere in the world.

Oil is coming to Uganda

Located on the eastern shores of Lake Albert, oil reserves are to be exploited through four different contracts, in which TOTAL owns 66.67% of the shares – while CNOOC holds 33.33%. Those figures do not reflect the complex history of ownership transfers between different oil companies – which came to a brusque halt in August 2019 as a deal between Tullow and TOTAL fell apart when faced with a profound disagreement with the Ugandan tax administration over the amount of Capital Gains tax to be paid. As of April 2020, all pending disputes have been resolved and the deal – deemed as highly favorable to buyer TOTAL by analysts - moved forward. The project is now on rails: TOTAL’s CEO reassured its shareholders during their general meeting in May 2020 that all final decisions will be taken by the end of 2020 – unlocking all remaining investments to commercialization of Ugandan oil. But in the meantime – the world has turned upside down with the COVID-19 pandemic and oil prices have plunged: the Ugandan government cannot afford tax leakages on this project.

Future government’s revenues will be impacted by the Tax Agreement

Oxfam’s investigations have revealed how both partners have structured their investments in Uganda through Dutch registered companies. For TOTAL at least, this is not an isolated practice as 25% of its Exploration & Production subsidiaries are registered in the Netherlands, and ultimately attached to the parent company through different Dutch holdings companies. The company defends its choice: it also carries out operational activities and technical support to overseas branches in the Netherlands. The possibility to maintain statutory accounts in US dollars – as is not the case in France, is also mentioned as a deciding factor by TOTAL.

Contracts – which contain crucial information on projects’ fiscal terms - are not in the public domain in Uganda. However copies were leaked over the years – enabling Oxfam to develop a complete financial analysis for one of the contracts. Assuming a barrel price at 50 USD, both partners will save 287 million USD over the project’s 25 years of exploitation for only one exploration area (EA1)– by simple virtue of the lack of imposition on dividends. This amount is a minimum estimate – and on only one out of the four contracts. But on its own, it already represents almost 6% of all government’ expected revenues, as well as 2% of Uganda’s annual health budget.

Call for renegotiation of the Tax Agreement

Civil society organizations in Uganda have been calling out the government on the detrimental effects of this Tax Agreement. “This situation calls for urgency to address the loopholes in the Double Taxation Agreements signed by the government so as to mobilize adequate domestic revenue.” says Ms. Jane Nalunga, Executive Director at SEATINI Uganda.

The Dutch and Ugandan governments have signaled their willingness to renegotiate the agreement and have been discussing a new agreement since September 2019. Should the tax rate on cross-border dividends be increased to 10% - in line with the other agreements Uganda currently has in place, the country will win back an estimated 174 million $  during the 25 year timeline of the project. This amount is a very partial estimate related exclusively to this project: given the magnitude of Dutch investments in all sectors of the Ugandan economy, the real losses are much larger.

Other countries have used a more drastic option and decided to repel tax agreements with notorious tax havens: Mongolia has teared up its agreement with the Netherlands, and Zambia terminated its agreement with Mauritius.