The Supreme Court heard a case requiring the interpretation of a double tax treaty between the UK and Canada.
Background:
In the early 1980s, the UK government granted Sulpetro (UK), a UK subsidiary of the Canadian tax-resident company Sulpetro Ltd., a licence to explore a particular section of the North Sea continental shelf known as the Buchan Field.
In 1986, BP Petroleum Development Ltd. (BP) acquired from Sulpetro both its share capital in Sulpetro (UK) and the rights that Sulpetro had under its agreement with Sulpetro (UK) to any oil acquired from the Buchan Field. The Royal Bank of Canada (RBC) subsequently took over from Sulpetro the rights to receive the payments in 1987.
In 2014, HMRC’s Commissioners sent notices of assessment to the RBC for the accounting periods ending 31 October 2008, 2009, and 2010, alleging that the payments are subject to UK corporation tax as profits of a “ring-fenced” oil trading regime under Part 8 of the Corporation Tax Act (CTA) 2010.
Both the First-tier Tribunal and Upper Tribunal held that the payments were within Article 6 of the UK/Canada Convention and were also caught by Section 1313 of the CTA 2009 so RBC was subject to tax in the UK. The Court of Appeal (CoA) however ruled that BP never acquired a right to work the Buchan Field and, therefore, it was not taxable. HMRC appealed.
Decision:
The Supreme Court (SC), by a majority, dismissed the appeal. The SC considered three issues. The first was the meaning of ‘working, or the right to work’ under Article 6(2) of the Convention. The SC agreed with the CoA that BP's payment did not fall within the understanding of a consideration or the right to work, as Sulpetro (UK) held the licence to work the Buchan Field. The Court explained that there was “a legal difference between someone having a right to work natural resources and someone having a right to require another person to work those natural resources.”
The SC noted that the payments could not have been in consideration for the right to work. In the SC’s opinion, the right to be paid for the sale of the oil is not captured by Article 6 of the treaty because the oil is movable and Article 6 relates to immovable properties. If the income had fallen under Article 6, then it would have been taxable under Section 1313 of the CTA 2009.
The SC reiterated that the “UK/Canada Convention is not determining whether a particular stream of revenue should be taxed or tax-free. Instead, it is identifying where the boundary lies between, on the one hand, Canada’s power to tax those profits attributable to the Canadian business of a Canadian-resident company and, on the other hand, HMRC’s power to tax profits which derive from the exploitation of the UK’s natural resources.”
Implications:
The interpretation of double tax treaties is often complicated. The allocation of taxing rights is an important aspect and one which ensures that companies can carry out work in different jurisdictions without being overly burdened.
This case offers guidance as to the scope of Article 6 of the UK/Canada Convention. However, some of the points made by the Supreme Court might be applicable to other double taxation treaties.
For companies operating in the cross-border resource extraction field, it is important to determine who maintains the ‘right to work’ under these double taxation treaties. Indeed, the Supreme Court made it clear that, had the income fallen within the ‘right to work’, it would have been taxable under Section 1313 of the Corporation Tax Act 2009.