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How joint ventures are taxed in oil and gas sector
Ms Veronica Yvonne Mawanda. PHOTO /courtesy
What you need to know:
Uganda Revenue Authority may require the joint venture parties to register for taxes as a partnership if they operate to share profits and obtain a tax identification number through which taxes will be paid.
According to the African Energy Chamber publication 2022, over 70 percent of the overall oil and gas production from Africa is estimated to be from partnerships/Joint Ventures (JV) between international oil companies and National Oil Companies. JVs provide an opportunity for two or more parties to pool capital, share risk, transfer knowledge and best practices to deliver a joint assignment. International firms may enter partnerships depending on commercial terms, quality, delivery timelines, required labour standards, technical standards or environmental, health and safety requirements for the work.
Uganda’s National content laws for the oil and gas sector require goods and services provided in the sector to be provided by a Uganda company and if not available in Uganda to be provided by a JV formed between a Ugandan company and foreign entity.
Both upstream and midstream laws recognise that certain suppliers require JVs for goods and services to be delivered. The JVs should be approved by the Petroleum Authority of Uganda (upon review of certain aspects such as experience, technical and financial competence, active participation by parties of the JV, ability to transfer skills and knowledge to Ugandans, etc) and registered on the national supplier database.
The Petroleum laws do not prescribe the forms that JVs must take. The parties will determine what works for them based on the duration of the project, responsibility, other risks to be considered and exit strategy. There are two common forms of joint ventures, namely the contractual and incorporated JV.
Contractual joint venture
The contractual joint venture is where the JV parties enter into a contract under a consortium agreement. The JV parties agree the responsibilities, assets required and risks to be incurred by each party in order to provide and goods and services in the industry.
For tax purposes, Uganda Revenue Authority (URA) may require the JV parties to register for taxes as a partnership if they operate to share profits and obtain a tax identification number through which taxes will be paid. Where the contractual JV arrangement is based on a revenue share, each party will pay their own income taxes arising from the contract within the industry.
Incorporated Joint venture entity
A JV entity is where the JV parties set up a new entity (it may be a company or a partnership) which will be the one to enter contracts in the industry. The new JV entity is legally liable to enter into the contract and provide goods and services in the industry.
For taxation, where a JV company is formed by the parties to undertake the contract, the JV Company will be subject to income tax on the net taxable profit at a rate of 30%. The post-tax distributions paid from the JV Company to the Ugandan company which is a shareholder that controls more than 25percent in the JV Company will be exempt from income tax of 30 percent (and advance withholding tax 15 percent).
The JV parties can also form a partnership which should be registered for taxes and file returns. The partnership is tax transparent (that is not subject to tax) and taxes will be paid by the JV partners based on the allocated profit share.
The joint venture arrangement can be structured in a manner that offers the most preferred tax benefit to both sides of the JV parties. It is therefore important to make use of tax and legal advisors to advise you on the legal and tax obligations to be complied with by the JV when forming JVs in the oil and gas industry.
The author Veronica Yvonne Mawanda is the tax manager, oil and gas at PwC Uganda.
