Judgment summary
This appeal concerned the allocation of taxing rights between the United Kingdom and Canada over payments derived from the exploitation of the Buchan Field in the North Sea. The payments originated from a sale and purchase agreement between Sulpetro Ltd, a Canadian company, and BP Petroleum Development Ltd, and were later assigned to Royal Bank of Canada (RBC) following Sulpetro's receivership (paras 1-8, 20-24).
HMRC assessed RBC to UK corporation tax on the payments, relying on Article 6(2) of the UK/Canada Convention, which extends the definition of immovable property to rights to variable or fixed payments made as consideration for the working of, or the right to work, natural resources. HMRC also relied on section 1313 of the Corporation Tax Act 2009 as the domestic provision imposing the charge (paras 5-8, 55).
The First-tier Tribunal and Upper Tribunal both found for HMRC. The Court of Appeal allowed RBC's appeal, holding that the rights Sulpetro held under the Illustrative Agreement did not amount to a right to work the Buchan Field and that the payments were not consideration for such a right (paras 7, 67-68).
The Supreme Court, by a majority of four to one (Lady Rose giving the leading judgment, with Lord Briggs dissenting), dismissed HMRC's appeal, agreeing with the Court of Appeal that the Illustrative Agreement did not confer on Sulpetro the right to work the Buchan Field and that the payments were not consideration for such a right within Article 6(2) (paras 98, 108, 123). The majority went on, obiter, to hold that had the payments fallen within Article 6(2), they would also have been taxable under section 1313(2)(b) of the CTA 2009 (paras 116-122). Lord Briggs dissented, finding that a realistic view of the arrangements showed that Sulpetro, and subsequently BP, had the right to work the relevant share of the Buchan hydrocarbons, and that the payments were consideration for that right (paras 124-145).
Background
Sulpetro Ltd was a Canadian resident company engaged in oil exploration. It set up a wholly owned UK subsidiary, Sulpetro (UK), which was granted a UK Government licence giving a 12.7% interest in the Buchan Field in the North Sea (paras 9-10).
Sulpetro (UK) and Sulpetro entered into the Illustrative Agreement in 1982, a common form of agreement used to reconcile the UK requirement that licences be held by UK resident companies with the need for overseas companies to fund and profit from exploration. Under it, Sulpetro provided all funds and equipment, and received all the oil won, while Sulpetro (UK) remained the licensee responsible to the Government (paras 11-14).
In December 1986, Sulpetro sold its assets, including the shares in Sulpetro (UK) and its rights under the Illustrative Agreement, to BP Petroleum Development Ltd under a sale and purchase agreement (the SPA). In return, BP promised to make variable payments (the Payments) calculated by reference to the volume and price of oil produced, once the oil price exceeded US$20 per barrel. The Illustrative Agreement was novated so that BP took Sulpetro's place (paras 15-19).
Sulpetro went into receivership in Alberta in 1987. In 1993 its right to the Payments was assigned to RBC, to which Sulpetro remained indebted, for one Canadian dollar, and Sulpetro was then dissolved (para 20). The Payments have been treated as income and taxed in RBC's hands in Canada (para 21). BP's interests, and the obligation to make the Payments, later transferred to Talisman companies (para 22). Payments were made from around 2000 onwards, when oil prices rose above US$20 per barrel, until the Buchan Field ceased production in 2017 (para 23).
HMRC issued discovery assessments from October 2014 for accounting periods from 2008 to 2015, treating the Payments as profits of a ring-fenced UK oil trade (paras 56-59).
Core dispute
The central question was whether the United Kingdom had the right under the UK/Canada Convention to tax the Payments received by RBC, and if so, whether that right had been exercised in UK domestic legislation.
This raised three issues: first, whether the rights Sulpetro acquired under the Illustrative Agreement amounted to the 'right to work' the Buchan Field within Article 6(2) of the Convention; second, if so, whether the Payments made by BP were 'consideration for' that right; and third, if the Payments fell within Article 6(2), whether they were caught by section 1313 of the Corporation Tax Act 2009, the domestic provision on which HMRC relied (paras 6, 71).
Court findings
The First-tier Tribunal held that the Payments fell within Article 6(2) of the UK/Canada Convention and were also caught by section 1313, so RBC was liable to UK tax (paras 60-62). The Upper Tribunal upheld this decision, holding that it was entitled to look at the reality of the transaction and that Sulpetro had, in substance, sold BP the right to work the oil (paras 63-66).
The Court of Appeal allowed RBC's appeal, holding that the fifth limb of Article 6(2) is confined to rights to payments held by a person with some continuing interest in the land, that the rights Sulpetro held under the Illustrative Agreement did not amount to a right to work the Buchan Field, and that the Payments therefore did not fall within Article 6(2) (paras 68, 92, 113).
The Supreme Court majority (Lady Rose) agreed with the Court of Appeal. It held that Sulpetro (UK), not Sulpetro, held the licence and the right to work granted by the UK Government, and that the separate legal personality of Sulpetro (UK) could not be disregarded, since the tax code generally operates on legal rather than economic reality and no Ramsay-type avoidance argument was raised (paras 74-90, 98). The majority also held that, even if Sulpetro had held a right to work, the Payments would still have been too remote to amount to 'consideration for' that right, since neither Sulpetro nor RBC ever held an interest in the land and the Payments were made for an assignment rather than an initial grant of rights (paras 100-113).
On Issue 3, the majority held, obiter, that if the Payments had fallen within Article 6(2), they would also have been caught by section 1313(2)(b) of the CTA 2009, as profits arising from rights to the benefit of assets (the oil) produced by exploitation activities in the UK continental shelf (paras 116-122).
Lord Briggs dissented. He considered that a realistic view of the transaction, taking full account of the separate legal personality of Sulpetro (UK) and the terms of the Illustrative Agreement, showed that Sulpetro bore all the risks, rewards, costs and decision-making of extracting the oil, so that Sulpetro, and later BP, had the right to work the relevant share of the Buchan hydrocarbons. He found that the Payments plainly amounted to consideration for that right and would have allowed the appeal, restoring the decisions of the First-tier and Upper Tribunals (paras 124-145). He agreed with the majority on Issue 3 concerning section 1313 (para 124).
Outcome
The Supreme Court dismissed HMRC's appeal by a majority of four to one (Lord Lloyd-Jones, Lord Hamblen and Lord Leggatt agreeing with Lady Rose; Lord Briggs dissenting). The Court held that the Payments made by BP, and later received by RBC, were not consideration for a right to work the Buchan Field within the meaning of Article 6(2) of the UK/Canada Convention, so the UK did not have the right to tax them under the Convention (paras 98, 108, 123).
Major issues / areas of contention
- Whether the rights Sulpetro acquired under the Illustrative Agreement with Sulpetro (UK) amounted to the 'right to work' the Buchan Field within the meaning of Article 6(2) of the UK/Canada Convention (para 71a).
- If so, whether the Payments made by BP to Sulpetro and later to RBC were 'consideration for' those rights within Article 6(2) (para 71b).
- If the Payments fell within Article 6(2), whether the profits earned by RBC from the Payments were caught by section 1313 of the Corporation Tax Act 2009 as profits arising from rights to the benefit of assets produced by exploitation of UK natural resources (para 71c).
- Whether the separate legal personality of Sulpetro and its wholly owned subsidiary Sulpetro (UK) could be disregarded in construing the UK/Canada Convention (paras 86-98).
- Whether a realistic or economic view of the transaction, as opposed to its strict legal form, should determine whether Sulpetro held a right to work the Buchan Field (paras 90, 126-141).