A letter of credit (L/C) may be used to help resolve a dispute between an oil company and the Ugandan government.

The dispute centres on capital gains tax that the Ugandan tax authorities say should be paid by Heritage Oil, a former joint partner with Tullow Oil in the Kingfisher oil field.

Tax claim

Tullow announced in August that it had completed the purchase of Heritage's 50 per cent stakes in blocks 1 and 3A for up to US$1.45 billion.

The Ugandan tax authorities claim that Heritage should pay 30 per cent capital gains tax on the sale.

Repossession

Heritage disputes this claim and argues that it is not legally obliged to pay the amount, although it has paid around one-third of the sum claimed by the tax authorities.

One aspect of the dispute is that the Ugandan government has repossessed the Kingfisher oil field, which lies within the block 3A exploration area.

L/C as security

As a result, it has become unclear as to how Tullow can proceed to apply for an oil production license for the field.

Heritage says that possible solutions to the dispute could involve a L/C or a guarantee from a bank to provide security for the remainder of the amount claimed by the tax authorities whilst the dispute is resolved.

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