UK vs Royal Bank of Canada, June 2020, First-tier Tribunal, Case No [2020] UKFTT 267 (TC), TC07751

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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 has 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 UK 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.

Judgement of the Tax Tribunal

The tribunal dismissed the appeal.

This appeal essentially involves three issues:

(1) whether the UK/Canada double tax treaty allocates taxing rights to the UK in respect of the Payments;

(2) if it does, whether the Payments fall within the scope of the UK taxing provisions;

(3) whether the assessments were made out of time under the “discovery” assessment provisions.

“Conclusion on Issue 1
65. The Payments fell due as part of the consideration given by BP (and subsequently Talisman) for the right to work the Buchan field. The oil actually won under the licence held by SUKL all became the property of BP (and subsequently Talisman) as a result of their agreeing to make the Payments. I do not consider the intricacies of the actual licensing arrangements affect this, or the natural conclusion that the royalty rights as originally created under the SPA between Sulpetro and BP (and subsequently novated so as to arise between Sulpetro and Talisman) were “rights to variable payments as consideration for the right to work mineral deposits” for the purposes of Article 6(2). The only question then is whether the assignment of the right to receive those payments from Sulpetro to the Bank, whether before or as a result of the assignment approved by the Court Order made in Sulpetro’s receivership in October 1993, affects this analysis. I do not consider that it does, on the simple basis that the fundamental nature of the payment rights (as consideration for the right to work the Buchan field) remains unaffected by the identity of the holder of the rights or the history of how the rights came to be vested in it.
66. It follows that I consider the taxing rights over the Payments are allocated to the UK under Article 6(2) of the Treaty.”

On Issue 2

“102. It follows that I consider the Payments to be taxable in full as ring fence profits of a deemed permanent establishment of the Bank in the UK.
103. Standing back and reviewing the situation in the round, it would appear somewhat unexpected at first sight that a bank that was simply doing its best to realise every asset of an insolvent debtor towards making good the loss it had suffered in its banking business with that debtor should find itself suffering corporation tax overseas on a deemed oil exploitation business. However, once one bears in mind the original purpose (both in the Treaty and the UK legislation) of subjecting profits derived from natural resources to tax in the state where those resources are situated, the picture appears more logical. The Bank would still be applying its net royalty receipts as income of its Canadian banking business, but those receipts would be reduced by the amount of UK tax properly payable on them.”

169. I consider the UK/Canada double tax treaty confers taxing rights on the UK in respect of the Payments (see [66] above).
170. I consider the UK legislation applies so as to charge the Payments to corporation tax (see [102] above).
171. I consider HMRC are not precluded from raising discovery assessments in respect of each year (see [162] and [168] above).
172. It follows that the appeal is DISMISSED.”


UKFTT 267 (TC)”]

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