Royal Bank of Canada v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 February 2022 |
| Neutral Citation | [2022] UKUT 45 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 45 (TCC)
Mr Justice Zacaroli, Judge Thomas Scott
Upper Tribunal (Tax and Chancery Chamber)
Corporation tax – UK/Canada Double Taxation Convention Article 6 – Income relating to oil produced on UK Continental Shelf – Whether UK had taxing rights – Whether income liable to taxation as right to benefit from oil exploration or exploitation activity – Taxpayers appeal dismissed – CT 2009, s. 1313(2)(b).
The Upper Tribunal determined that payments described as “royalties” received by the appellant over a number of years were taxable in the UK as profits of a ring fence trade; and that the UK/Canada Double Taxation Convention did grant taxing rights over the income to the UK.
The Upper Tribunal upheld the decisions of the First Tier Tribunal (FTT) in Royal Bank of Canada [2020] TC 07751.
As covered in the FTT decision, due to the receivership of a company to which it had lent funds, the Appellant, Royal Bank of Canada (RBC) had become the recipient of funds described as “royalties”. These royalties were related to the production of oil from the Buchan Field on the UK Continental Shelf and had always been reported by RBC as taxable income in Canada.
In the period covered by the appeal the payments were being made by a company called Talisman Energy Inc (Talisman)., which had acquired the interest in the Buchan Field originally owned by the company to which RBC had lent funds many years before. HMRC had identified payments were being made to RBC through a review of Talisman's tax returns and had made discovery assessments on RBC for the years for which it believed it was entitled to do so.
The FTT had upheld HMRC's right to make such assessments, and this was not in question at the Upper Tribunal.
The Appeal to the UTT was on the substantive questions of whether the UK had taxing rights over the income under the UK/Canada Double Taxation Convention, and whether and to what extent the rights held by RBC were taxable as ring-fence income under CTA 2009, s. 1313.
The UT identified three issues raised by the Appeal:
- Whether the payments received by RBC were consideration for the right to work the Buchan Field, and the consequent right of the UK to tax the payments under Article 6.2 of the UK/Canada Double Taxation Convention as immovable property
- Whether the payments were chargeable to UK corporation tax under CTA 2009, s. 1313(2)(b) as rights to the benefit of the oil produced from the Buchan Field.
- Whether RBC was able to deduct the losses it made on the original loan from the payments in computing any UK taxable profit.
There were five grounds for appeal covering these three issues, all three of which had been decided in favour of HMRC at the FTT.
The first two grounds for appeal related primarily to interpretation of the treaty and covered the first issue. The third ground for appeal was essentially that the FTT had not understood the proper contractual relationship between the parties and covered both issues one and two. The fourth was a question of interpretation of CTA 2009, s. 1313 and was thus related to issue two, and the fifth was that the FTT had erred in not allowing a deduction for costs related to the original loan and thus covered issue three.
The Appellant's counsel contended that the FTT had ignored an argument he had put before them, which was essentially that another article of the Treaty (Article 13) made a distinction between “immovable property” and rights to drill for oil and assets produced therefrom; accordingly, the rights owned by RBC should not be regarded as “immovable property”. HMRC's argument was that Article 13, which dealt with capital gains, simply contained express provisions for oil licences, and did not override the provisions of Article 6 where immovable property was defined.
The UT rejected RBC's arguments. The Treaty had to be read as a whole. Moreover, treaty interpretation is based on “broad principles of general acceptation”. If RBC's counsel was correct, the UK would not be able to tax Canadian companies (without a UK PE) on income from UK oil rights, only on Capital Gains from such rights. The same would be true in relation to UK companies (without a Canadian PE) and Canadian oil rights. Such an outcome did not seem a likely intention of the parties to the Treaty. This ground for appeal failed.
Here, the argument for RBC was that the French language version of the treaty made it clear that the somewhat indirect right enjoyed by RBC to income from the Buchan Field was not of a type that would mean it was “immovable property”. The FTT should have given more weight to this argument.
HMRC contended that the French language did not constrain the meaning of rights as RBC contended. Further, as both language versions were equally authoritative, even if the French language version gave rise to ambiguity, the Vienna Convention on the interpretation of treaties would require the object and purpose of the treaty to be considered, which, in this case, was to tax income arising from oil rights.
The UT concluded that, at best, the detailed arguments put to them on the interpretation of the French language version were ambiguous, and that the FTT had not erred in its conclusion on the interpretation of the Treaty. The Vienna Convention did not need to be brought into play. This ground for appeal was dismissed.
The arguments here turned on how RBC had come to hold rights to the payments. Essentially, RBC's contention was that the only (relevant) party to have held rights to exploit the Buchan Field had been the original licensee. RBC's rights to income ultimately derived from a contract which had been for the purchase of shares in that licensee, not from working the Buchan Field.
HMRC's view was that the original licensee company was merely “a repository for the title of the licence”, and that much of the rights and benefit of the licence rested in the hands of the shareholder of the licensee company. The contract for the sale and purchase of the shares in the licensee also transferred those rights and benefits from which the payments to RBC derived.
The UT concluded that the reality of the transaction for the purchase of shares included the transfer of rights held by the shareholder, which included rights to benefit from oil exploration and production. RBC was, therefore, receiving payments derived from oil exploration rights. Accordingly, this ground for appeal failed.
Here, RBC's arguments were that the rights it did hold were not taxable under CTA 2009, s. 1313. It is worthwhile remembering that the “ring fence” provisions extend the provisions of Corporation Tax to (defined) activities that would otherwise not be subject to Corporation Tax. RBC contended that the rights fell outside of such activities. RBC's arguments relied to some extent on their being a trigger market price for crude oil, below which no payments would be due and that RBC did not have an interest in the oil itself.
The argument for HMRC was that an interest in the underlying oil was not required; RBC was benefitting from the oil production, and that was all that was needed.
The UT was satisfied that the link between the oil produced and the payments to RBC was clear and obvious, and the FTT had correctly concluded RBC was enjoying the benefit of the oil and was taxable under the ring fence provisions. This ground for appeal failed.
Counsel for RBC pointed out that at the time the payments had been assigned to RBC for a payment of CAD $1, it had been owed CAD $185m by the company falling into receivership. This sum had been written off by RBC. Accordingly, he argued that the FTT's contention that the only amount paid by RBC to secure the rights was CAD $1 was incorrect. The loan write off had been tax deductible in Canada, the payments received had been set against this write-off and the profits of the company had been correctly taxed in Canada; the same should apply in the UK.
HMRC contended that in determining the consideration paid for the payments, RBC could not go beyond the sum it had actually paid under the assignment agreement. Moreover, the loan write-off was in connection with its banking trade in Canada, not its ring fence trade, and, even if it had been, it was a capital, not a trading, expense. Finally, HMRC argued that the absence of a “real” permanent establishment (PE) rather than a “deemed” PE under ring fence rules precluded relief.
The FTT had essentially agreed with the first and third of HMRC's arguments and had denied relief for the loss accordingly. The UT found nothing to disturb that judgement, and further agreed with HMRC that the loan was in connection with its Canadian banking business, and there was no permanent establishment in the UK to which the write-off of the loan could be attributed; it was not linked to the payments received by RBC which gave rise to the deemed PE.
Accordingly, this ground for appeal was also rejected.
All grounds for appeal had failed and the appeal was dismissed.
The above is a summary of the principal arguments discussed in a lengthy judgement. The UT upheld the FTT's decision, and so the the wide reach of the ring fence provisions that FTT decision suggested has been confirmed.
The UT ensured it followed very closely the rules for the interpretation of tax treaties; as shown in the recent cases of Irish Bank Resolution Corporation Ltd (in Special Liquidation) v R & C Commrs [2020] BTC 26 and G E Financial Investments [2021] TC 08160, a treaty must be interpreted...
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