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Norwegian drilling company wins important tax appeal

  • Press Releases 9 May 2011 9 May 2011

In a judgment eagerly awaited by British Gas and Petrobras, which have offshore drilling interests in Tanzania, a Norwegian drilling company represented by Kibuta Ongwamuhana of Ako Law, has won the battle to be taxed normal corporation tax rather than 15% withholding tax on gross income.

Odfjell Invest II Limited is incorporated in Bermuda and wholly owned by Odfjell Drilling based in
Norway. Odfjell was contracted by Ophir Energy Plc to drill three offshore gas wells. British Gas has substantial interest in Ophir. In July 2010 Odfjell Invest acquired the Deepsea Stavanger from Daewoo (South Korean company) and sailed it to Tanzania in September 2010. The vessel is a sixth generation oil rig suitable for use in deep waters. Over the past six months it was being used to drill three deep sea gas wells about 14 nautical miles off the southern coast of Tanzania.

Although the company registered a branch in accordance with Tanzania law, and was using
substantial equipment which under international tax jurisprudence is accepted as giving rise to a
permanent establishment, the Tanzania tax authority refused to tax the activities of Odfjell Invest as a
permanent establishment preferring to impose a flat 15% withholding tax on gross drilling fees paid by Ophir under the contract arguing that both the branch and the activities did not amount to a permanent establishment. The TRA position was based purely on a term of the contract which showed that the drilling program would last 120 to 140 days (not sufficient for normal residence which requires presence of at least 183 days).

In a ruling delivered on 5th May 2011, the Tax Appeals Board endorsed the drilling company’s position that it has a permanent establishment in Tanzania and ought to be paying corporation tax rather than the withholding tax preferred by the tax authority. The Tax Appeals Board accepted that both the registration of a branch in Tanzania and the use of substantial equipment give the company a permanent establishment. The income of a permanent establishment is taxed as if it is an independent taxable entity.

The Tax Appeals Board has also ordered the tax authority to restore the VAT registration of the drilling company which it had cancelled in October 2010 and to vacate the withholding tax claim of USD$11.25 million made against the company, of which USD$1.5 million has been paid.

The UK company British Gas and the Brazillian company Petrobras who themselves have richly
significant gas exploration blocks in Tanzania awaiting drilling will have followed the events of Odfjell Invest with acute concern as they plan their own offshore drilling programs. It comes as a huge relief that this can be done without burdensome taxes that had threatened to impede offshore gas exploration operations.