Uganda prepared to tax windfall profits from oil revenues
By Ali Ssekatawa
In October 2022, international oil companies reported record profits because of high crude oil prices. Exxon Mobil broke records with its profits in the third quarter, raking in US$19.7b in net income, a nearly US$2b increase from its second quarter.
TotalEnergies SE posted a sharp jump in its third quarter net income of $9.86b compared with US$4.77b for the same period in 2021 and US$9.8b in the third quarter of 2022. CNOOC Ltd also reported that its profits nearly doubled in the third quarter with a net income surging 89% to 36.88 billion Yuan (US$5.11b) and revenue over quarter rose to 108.8b yuan.
The Dutch major Shell also posted third quarter adjusted net income of US$11.5b up from US$9.45b registered in the previous quarter. Halliburton Co. surpassed its profit expectations amid a tight market and reported profits of 60 cents per-share profit which was a 2.5% increase from the previous year.
The increase in revenues from the oil and gas projects has led to countries to impose a windfall tax on the profits to cater for deficits in budgets and other sectors of the economy. On September 30th, 2022, the Council of the European Union agreed to impose a “temporary solidarity contribution” on businesses in the crude petroleum, natural gas, coal, and refinery sectors on profits that are “above a 20% increase of the average yearly taxable profits since 2018.”
In August 2022, President Joe Biden quipped that, “Exxon made more money than God this year.” He further remarked that his administration would impose higher taxes on oil companies that record “windfall” profits without reinvesting in production.
What Is a Windfall Tax?
A windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits. Windfall taxes are primarily levied on companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses.
How does windfall tax work?
World over, oil and gas companies are the biggest targets for windfall tax. This is due to the fact these companies have the potential to make abnormal/ “windfall” profits as a result of increase in crude prices.
A recent surge in crude oil prices because of a combination of factors, including a mismatch between energy demand and supply during the economic recovery from COVID-19, further amplified by the Russian war in Ukraine, has increased fiscal pressure on governments to support the post-COVID economic recovery.
The Uganda perspective
With foresight, Uganda enacted the Income Tax (Amendment) Act, 2021 and introduced the aspect of Windfall Tax. The previous tax law did not cater for volatility in oil prices. The amendments introduced a windfall tax where the international oil price equals $75 per barrel or more on any day of a year of income for specified contract areas. This will be paid in addition to corporate income tax, royalties, surface rentals and others.
Other African countries that have a windfall tax include Algeria and Ghana which also run Production Sharing Agreements. Like many countries world over, windfall tax is only charged when these companies make abnormal profits that must be redistributed to other sectors of the economy.
With crude prices projected not to decline below $70 per barrel soon, Uganda will stand to reap from this amendment and increase on its share of oil revenue that is clearly already far and above many of the PSAs negotiated with International Oil Companies. Uganda continues to benchmark best practices to optimally exploit its resources.
Ali Ssekatawa is the Director legal and Corporate Affairs at the Petroleum Authority of Uganda.