Royal Bank of Canada v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Falk,Lord Justice Nugee,Lady Justice Asplin |
| Judgment Date | 21 June 2023 |
| Neutral Citation | [2023] EWCA Civ 695 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: CA-2022-000812 |
[2023] EWCA Civ 695
Lady Justice Asplin
Lord Justice Nugee
and
Lady Justice Falk
Case No: CA-2022-000812
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE EDWIN JOHNSON AND UPPER TRIBUNAL JUDGE RUPERT JONES
Royal Courts of Justice
Strand, London, WC2A 2LL
Jonathan Peacock KC and Sarah Black (instructed by Norton Rose Fulbright LLP) for the Appellant
Jonathan Bremner KC and Michael Ripley (instructed by Solicitor and General Counsel to the Commissioners for HMRC) for the Respondents
Hearing dates: 17 and 18 May 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on 21 June 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction
This appeal concerns the corporation tax treatment of payments made to the Appellant, the Royal Bank of Canada (“RBC”), pursuant to rights acquired by it in 1993 from the receiver of a Canadian oil and gas corporation, Sulpetro Limited (“Sulpetro”). Sulpetro had been granted the rights under a sale and purchase agreement (“SPA”) that it had entered into in 1986 with BP Petroleum Development Limited (“BP”), the commercial effect of which was to transfer to the BP group Sulpetro's interest in the Buchan oil field, a field located within the UK sector of the continental shelf. The rights transferred by Sulpetro's receiver to RBC comprised a “royalty” in respect of production from Buchan, broadly equal to half of the amount by which the market value of each barrel of oil produced exceeded US$20.
HMRC's position is that the profits arising to RBC fall within the scope of UK corporation tax and are taxable as part of a deemed separate “ring fence” trade applicable to oil-related activities, to which a supplementary charge also applies. RBC's position is that the terms of the UK/Canada Double Tax Convention (the “Treaty”) do not permit the UK to exercise taxing rights over the profits, and that in any event the relevant domestic legislation does not render the profits chargeable to UK tax.
HMRC succeeded in both the First-tier Tribunal (“FTT”) and the Upper Tribunal (“UT”). RBC appeals with the permission of this Court.
As in the UT, Jonathan Peacock KC and Sarah Black appeared for RBC and Jonathan Bremner KC and Michael Ripley appeared for HMRC. I am grateful for the clear written and oral submissions of Counsel for both parties.
The facts
The facts are uncontroversial and can largely be taken from an agreed statement of facts, salient parts of which were recorded in the FTT decision as follows:
“3. The Appellant carries on a banking business in Canada and in other jurisdictions through branches and subsidiaries. The Appellant carries on business in the United Kingdom through a branch based in London.
4. In the early 1980s the Appellant advanced a secured loan (the ‘Loan’) [of $540 million Canadian Dollars (‘CAD’)] to Sulpetro Limited (‘Sulpetro’), a Canadian company engaged in oil exploration and exploitation activities. Sulpetro carried on its oil exploration and exploitation activities in (inter alia) the Buchan Field of the North Sea. The Buchan Field lies within the United Kingdom sector of the continental shelf (i.e. within the areas designated by Order in Council under section 1(7) of the Continental Shelf Act 1964).
5. A licence to explore and exploit the Buchan Field (the ‘Licence’) was granted by the United Kingdom government to Sulpetro (UK) Limited (‘SUKL’), a United Kingdom incorporated and resident subsidiary of Sulpetro. SUKL and Sulpetro agreed pursuant to an “Illustrative Agreement” that Sulpetro would incur all the development and exploitation costs in relation to the Buchan Field and, in return, Sulpetro would receive the Licence holder's share of the oil won from the Buchan Field.
6. Sulpetro entered into financial difficulties in 1985 and the Appellant appointed a receiver in 1987.
7. Sulpetro sold its interest in the Buchan Field to BP Petroleum Development Limited (‘BP’) a United Kingdom incorporated and resident company on 7 December 1986 under a Sale and Purchase Agreement (‘SPA’). [In fact, the FTT notes that the sale appears to have occurred on 22 December 1986.]
8. As set out in the SPA, Sulpetro transferred to BP: (1) “the Shares”, being 100% of the issued share capital in SUKL; and (2) certain “Tangible Assets”, “Sulpetro's Licence Interests” (being all beneficial rights and interests in the Licences held by Sulpetro) and certain Data. Under Clause 4.1 of the SPA the cash consideration paid by BP was allocated between (a) Sulpetro's Assets other than the Shares and Sulpetro's Licence Interests, (b) Sulpetro's Licence Interests and (c) the Shares in SUKL.
9. Under the SPA BP agreed, in addition, to make a series of “other payments”. These included (SPA clause 5.4) the payment of (what was described as) a royalty to Sulpetro in respect of (inter alia) all production from the Buchan field (the ‘Payments’). In broad terms, the Payments were payable where the market price per barrel of oil (less certain expenses) exceeded USD $20 per barrel. It is these Payments that are the subject of this appeal.
10. In 1993, Sulpetro was in financial difficulties and went into receivership. The Appellant was a creditor of Sulpetro. The receiver was discharged by court order from its obligations as receiver manager of all the undertaking, property and assets of Sulpetro. Pursuant to the court order the “BP Petroleum Limited royalty interest” (i.e. the right to the Payments) was assigned to the Appellant for nil consideration. Sulpetro was also dissolved from the register of Corporations in Canada for “noncompliance” on 4 October 1993.
11. The unrecovered debt at the time of the court order was approximately CAD $185 million. The Appellant treated the loan of CAD $185 million to Sulpetro as a bad debt which was written off in its accounting period ended 31 October 1993, with an equivalent tax deduction obtained by the Appellant in Canada. Since that time, Payments received by the Appellant have been accounted for as a recovery of the bad debt and, for Canadian tax purposes, the Appellant has treated the Payments as taxable income in the year the amounts were paid.
12. BP's interest in the Buchan field was subsequently transferred to Talisman Energy Inc. As a result of that transfer, Talisman took on (and BP divested itself of) the legal obligation to make the Payments pursuant to the SPA. Talisman has made the Payments to the Appellant in the accounting periods to which this appeal relates. The position, therefore, is that Talisman had a legal obligation to make the Payments and the Appellant has a legal right to receive the Payments.
13. No end-date was specified in the SPA for the Payments. As a result, the Payments will continue for as long as the Buchan Field is productive and the conditions for the making of the payment of the Payments are met.”
For convenience, I will adopt definitions used in the agreed statement of facts. The following additional factual details and clarifications are also worth adding:
a) RBC is a Canadian incorporated and tax resident company. Although it does have a London branch, there is no suggestion that the Loan or the Payments were in any way connected with that branch.
b) The licence interest granted to SUKL in respect of the Buchan field conferred a 12.7% interest in it (FTT decision at [16]). It is clear from the SPA that, at least at the date of the sale by Sulpetro, the operator of the Buchan field was BP (clauses 3.4 and 3.5).
c) As part of the completion steps contemplated by the SPA, the Illustrative Agreement was novated such that Sulpetro was replaced as a party by BP. However, the Licence remained held by SUKL.
d) The summary set out above appears to suggest that there were two separate receiverships. In fact, Sulpetro went into receivership in 1987 and the receivership ended in 1993, when its remaining assets were distributed to creditors and RBC wrote off the outstanding balance of the Loan as a bad debt.
e) The assignment of the rights to the Payments to RBC was made for a nominal consideration of $1 on 28 October 1993, pursuant to an approval given by a court order which also discharged the receiver.
f) As the summary above implies, Talisman also entered into a novation agreement under which it assumed the liability to make the Payments. It did so with effect from 1 July 1996.
g) It appears from the evidence that for lengthy periods prior to 2000 no Payments became due, because the oil price was generally below $20. Thereafter, the price was routinely above $20 and Payments were made accordingly.
h) Talisman has treated the Payments it made as deductible in computing its ring-fence profits from its UK oil exploitation trade.
i) As the FTT explains, the position regarding Talisman is in fact a little more complex than the summary indicates, including that it has since been acquired by Repsol SA. However, nothing turns on that.
HMRC became aware of the Payments when they were checking Talisman's tax return for 2013, and obviously became concerned about the impact of the deductions on the amount of tax collected. This led to discovery assessments on RBC for the years ended 31 October 2008 to 2011 and amendments to RBC's self-assessments for the years ended 31 October 2012 to 2015. The total amount of tax at stake for these periods, excluding interest, is around £19m. RBC's understanding is that any UK tax chargeable would in practice not be capable of being credited against the Canadian corporate tax that it is has already borne on the Payments, resulting (it says) in an effective tax rate of over 80%.
The contractual documents
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