A UK PE of the Royal Bank of Canada had (through its Canadian head office) advanced loans of CAD $540 million in the early 1980s to Sulpetro Limited (“Sulpetro”), a Canadian company, to help fund the exploitation by its group of companies of rights to drill for oil, largely in the Buchan field of the North Sea. The Sulpetro group sold its interest in the Buchan oil field to the BP group in 1986, in exchange for various sums including an entitlement to contingent royalty payments on production from the oil field (linked to the excess of the market price of the oil in question above a benchmark level) (“the Payments”).
Sulpetro was already in financial difficulties at the time of the sale to BP and ultimately went into receivership in 1993, by which time some Payments had started to be made due to the rise in oil prices. After the remainder of its assets were realised, Sulpetro still owed the Bank some CAD $185 million and its rights to all future Payments were formally assigned to the Bank with the approval of the Canadian courts for nominal consideration.
BP later sold its interest in the Buchan field to another UK company, Talisman Energy (UK) Limited, as a result of which Talisman Energy assumed the obligation to make the
Payments. The Payments made by it have been accounted for as a deduction from its ringfence profits of its UK oil exploitation trade.
The Bank treated the Payments received by it as income of its banking business in Canada (which it has accounted for as a partial recovery of the bad debt it had previously
recognised in respect of its loan to Sulpetro), and not reported it in any UK tax return. Although it has at all times had a permanent establishment in the UK, this transaction did not involve it.
The tax authorities (HMRC) were checking Talisman Energy’s corporation tax return for 2013 when they became aware of the Payments being made by Talisman to the Bank. An assessment of additional taxes for FY 2008 – 2015 was issued. According to the HMRC, the Bank ought to account for UK corporation tax on the Payments it received during the relevant years, as part of a ring-fence activity carried on through a deemed UK permanent establishment.
Not agreeing with the assessment of additional taxes, an appeal was filed by Royal Bank of Canada with the UK Tax Tribunal. The tribunal dismissed the appeal and Upper Tribunal later upheld the decision. The Court of Appeal allowed the Royal Bank of Canada’s appeal and held that the rights that BP acquired and for which it was paying Sulpetro did not amount to a “right to work” the Buchan Field. Furthermore, the Payments were not made “as consideration for” any right to work. Having decided that the UK did not have the right to tax the Payments under the UK/Canada Convention, the Court of Appeal did not have to consider the correct construction of section 1313.
An appeal was then filed by the tax authorities with the Supreme Court.
Judgment
The Supreme Court upheld the decision of the Court of Appeal and dismissed the appeal of the tax authorities.
The Court held that the Royal Bank of Canada was not subject to UK tax on the payments because Sulpetro had never held the “right to work” the oil field in its own name. Legally, it was Sulpetro (UK) that held the government licence and undertook the extraction obligations, even though Sulpetro provided the funds and effectively controlled operations. Because only a true holder of the relevant resource rights can confer a “right to work,” and because Sulpetro merely funded and directed its subsidiary rather than possessing the licence itself, the Court concluded that the payments did not fall under Article 6(2). A dissenting judge, would have allowed HMRC’s appeal by emphasizing Sulpetro’s economic reality as de facto operator of the field. Nonetheless, the majority found that the Royal Bank of Canada’s receipts could not be seen as “consideration for” a “right to work” and therefore lay outside the UK’s taxing jurisdiction under the treaty.
In light of my conclusion on Issue 1, I would dismiss the appeal. The Illustrative Agreement did not confer on Sulpetro the right to work the natural resources in the Buchan Field, and hence the Payments made for the transfer by Sulpetro to BP of those rights when the Illustrative Agreement was novated, were not “consideration for” the right to work.