The Royal Bank of Canada (RBC) has won its case at the Court of Appeal (CoA) relating to the treatment of certain deferred consideration payments. RBC had lent significant sums to a Canadian oil company called Sulpetro but while RBC had, and has, a London branch the loan was between the Canadian banking corporation and the Canadian oil company. Such a transaction, with no nexus to the UK, would not be taxable in the UK as any profits wouldn’t be derived from a UK permanent establishment, typically a branch of an overseas company. RBC had never disclosed any element of this transaction in any UK filing, tax or otherwise, as it considered it outside of the UK’s taxing powers.
Sulpetro set up a UK subsidiary and this subsidiary was granted a licence to explore and exploit the Buchan oil field on the UK Continental Shelf as this was required for UK regulatory purposes. Sulpetro eventually sold its rights in the Buchan oil field to BP but as part of that sale BP agreed to pay Sulpetro certain amounts where the price of oil was above $20 per barrel.
Sulpetro suffered financial difficulties and was unable to pay its debts to RBC. As part of the insolvency the future right of receipt to the payments from BP (and its successor where it subsequently sold the rights in the field) were assigned to RBC.
HMRC reviewed the tax return of BP’s successor in the Buchan oil field (Talisman Energy) and discovered the payments to RBC. HMRC then raised assessments against RBC’s London branch stating that the payments were taxable in the UK as they were derived from oil extraction activities on the UK’s continental shelf, holding that taxing rights had been granted to the UK by way of the UK/Canada tax treaty. RBC appealed but lost its case at both lower tax tribunals.
The CoA has now overturned the lower tax tribunal decisions finding that the lower tribunals had misinterpreted the tax treaty between the UK and Canada. The CoA found that while the treaty granted taxing rights to the state where the oil extraction activities take place the income has to be from the extraction activities and that a taxpayer must have some ongoing ownership of the land or extraction rights for the income to be considered ‘from’ oil extraction.
The CoA found that RBC never had any ownership interest in the extraction rights on the UK continental shelf and when considering how similar payments would be treated when considering intellectual property rights for the income to be considered ‘from’ property then ownership or an interest in that property was necessary. The CoA also reviewed the French language version of the treaty that had equal force to the English language version and the commentary to the OECD model convention that the UK/Canada tax treaty was based on. This analysis helped support the notion that ownership was necessary when considering whether income was ‘from’ oil extraction activities. The CoA found that the income RBC earned was from banking activities as the payments were to compensate it for the bad debt it suffered when Sulpetro went into financial difficulties. As the payments were considered banking transactions then they had no nexus to the UK and were outside of the UK’s taxing powers.
The decision can be found at: Royal Bank of Canada v The Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
Please contact us if you have any question on corporation tax and the international treatment of transactions. The above case highlights that this can be a complex area.
