Illicit Financial Flows Risk Factors in Uganda’s Oil and Gas Sector - A Call to Action

Posted on: 2023-11-17 10:07:00

Illicit Financial Flows (IFFs) are becoming a real challenge to resource mobilization for financing development in Uganda and Africa at large. IFFs refer to movements of money and value from one country to another that are illegitimately earned, illegitimately transferred, and/or illegitimately utilized. According to a report by Trust Africa and the Mail & Guardian, Africa is estimated to be losing approximately USD 50 billion in illicit financial flows every year. Uganda alone is estimated to be losing about UGX 2 trillion per year and it is feared that the situation could get worse with the commencement of commercial oil production.

Uganda has, since the confirmation of the existence of commercially viable oil in 2006, taken steps to ensure that; the resource is well governed; and the right revenues are generated from it and spent in a transparent and accountable manner. In this regard, the country has put in place a comprehensive legal and policy regime for the regulation of the upstream and midstream petroleum operations as well as, the management of oil revenues. An elaborate institutional framework has also been put in place to facilitate the collection, administration, and management of oil revenues for the benefit of all citizens. However, the challenge that the country has to manage is with respect to guarding against and/ or minimizing external petroleum revenue leakages, and in particular to ensure that oil companies pay their fair share of revenues as provided for under the law. Failure to manage illicit financial flows will undermine the country’s ability to generate the required revenue from its petroleum wealth which will perpetuate underdevelopment and poverty.

This press statement by the Civil Society Coalition on Oil and Gas in Uganda (CSCO) therefore highlights the challenge of illicit financial flows, proposes mechanisms that can minimize the vice, and makes a call to action to address the challenge.

Impact of IFFs

IFFs undermine the efforts of countries to boost their domestic revenues, and consequently, their ability to provide basic public goods and services. Related to this, IFFs undermine the enjoyment of fundamental rights and freedoms and most especially, the progressive realization of economic, social, and cultural rights. IFFs also greatly restrict the ability of countries to achieve Sustainable Development Goals (SDGs). Moreover, by perpetrating illicit financial flows, multinational corporations enjoy a free ride while Small and Medium Enterprises (SMEs) as well as vulnerable groups such as the poor, women, and youth bear the greatest brunt of the tax burden as the government increasingly relies on PAYE and VAT. In this way, IFFs promote and encourage regressive forms of taxation. This ultimately undermines the legitimacy of the tax system and in some cases that of the ruling regime especially where there is state capture. As has been seen in several other countries, such a situation is a huge precursor for violence and unrest.

IFFs in the context of Uganda’s Oil and Gas Sector

While Uganda has taken several critical steps to safeguard its oil revenues and ensure that the oil sector is properly governed, illicit financial flow risk factors still exist. First, the major international oil companies currently involved in Uganda’s oil sector are registered in tax havens, and some have concealed ownership structures that pose a high illicit financial flows risk. Secondly, existing Production Sharing Agreements (PSAs) give international oil companies an undue advantage over the State to the extent that they contain stabilization clauses aimed at restricting the State’s capacity to tax the companies. Thirdly, although Uganda currently has rather comprehensive transfer pricing rules aimed at reducing incidences of tax avoidance as a result of price manipulation in transactions between related companies, these are difficult to enforce due to secrecy, information unavailability, and limited institutional capacity. The other illicit financial flow risk factor in the country’s oil and gas sector is grand corruption which has been observed to be both systemic and systematic. Finally, there is still limited capacity to prevent crimes arising from misreporting and other related issues.

Call to Action

In light of these risks and the potential impact of illicit financial flows on Uganda, the relevant actors and agencies are called upon to undertake the following actions;

Government of Uganda

• Expedite the ongoing renegotiation of existing Double Taxation Agreements, especially the one with the Netherlands ahead of the much-anticipated oil production. For each of these treaties, the government of Uganda should insist on the inclusion of anti-treaty abuse provisions to the effect that multinational companies including those engaged in petroleum activities in Uganda cannot benefit from the agreement where the principal purpose of the transaction is to avoid payment of taxes.

• Specific to the Netherlands Uganda Income Tax Treaty, it is proposed for the government of Uganda to insist on revision of the current withholding tax rates on payment of dividends to at least 10%. The rate should apply uniformly irrespective of the level of ownership in the Ugandan paying entity.

• Consider urgent and immediate ratification of the OECD Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS). BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no tax locations where there is little or no economic activity. This undermines the fairness and integrity of the tax system because businesses that operate across borders use BEPs to gain a competitive advantage over enterprises that operate at the domestic level.

• Boost the capacity and ability of government agencies such as the URA, IG, BoU, OAG, and FIA, to detect and limit the extent of Illicit Financial Flows. This can be achieved through the skilling of existing staff and the hiring of staff specialized in the early detection of the different forms of IFFs especially those that occur in the context of oil and gas operations.

• Support the work of anti-corruption agencies such as the Inspectorate of Government, Director of Public Prosecutions (DPP), the Police, and OAG in the investigation and prosecution of high-level corruption that is often perpetrated by highly placed and well-connected individuals. This form of support involves ensuring less political interference in the work of anti-corruption agencies, the appointment of members of the Inspectorate of Government (IG) on time, and the allocation of sufficient resources for the effective functioning of these agencies.

• Introduce a non-conviction-based asset recovery legal regime under the Anti-Corruption Act, of 2009. Unlike the current conviction-based regime, this makes it easier for the IG and DPP to recover assets purchased using proceeds of corruption in a timely manner. More importantly, a non-conviction-based approach should be complemented by an equally comprehensive mutual legal assistance framework to facilitate the cross-border and offshore recovery of proceeds of corruption.

• Enact a dedicated Extractive Industries Transparency Initiative (EITI) law to support the operationalization of EITI standards following Uganda’s recent admission as a member country. The EITI law should among other things put in place a framework for transparency and accountability in the disclosure of extractives revenues including those from the petroleum sector.

• Publish past, present, and future Production Sharing Agreements (PSAs) that the government of Uganda has entered into with various oil companies over the years.

International Oil Companies

• Comply with, and embrace principles relating to responsible tax and business practices such as those developed by the UN and OECD. As part of this initiative, oil and gas companies must provide public information about their tax strategies and business practices.

• Embrace existing global reporting standards for businesses, provide regular updates, and publicize all oil and gas and other related tax and revenue payments made to the government of Uganda with respect to their operations.

• Respect environmental and social laws, regulations, and standards in the course of oil exploration, development, and production activities. Companies should invest in more environmentally and socially sustainable initiatives instead of seeking to make savings out of non-compliance. Failure to do this will expose the state to the costs of rectifying environmental and social damage caused by the companies. Given the amount of costs involved, this will greatly impact the realized revenues.

With this, we hereby call upon the Petroleum Authority of Uganda, Uganda Revenue Authority, Office of the Auditor General, Uganda Registration Services Bureau, the Ministry of Energy and Mineral Development, Civil Society Organizations, Development Partners, and all the relevant stakeholders to handle this matter and these red flags with the seriousness they deserve, if Uganda is to optimally benefit for the oil and gas resources.