Royal Bank of Canada v The Commissioners for HMRC

Introduction

1. This appeal concerns the liability of the Appellant (Royal Bank of Canada or “RBC”), a publicly owned bank incorporated and tax resident in Canada, to UK corporation tax on certain payments (the “Payments”) received by it in its accounting periods ended 31 October 2008-2015 inclusive.

2. The appeal raises three broad issues: i) The first issue is whether the rights to the Payments were consideration for the right to work the Buchan oil field (the “Buchan Field”) within the UK sector of the Continental Shelf. If so, the UK has the right to tax the Payments as income from ‘immovable property’ within the definition of Article 6(2) of the UK / Canada Double Taxation Convention of 8 September 1978 (the “Treaty”). ii) The second issue is whether the rights to the Payments constitute “rights to … the benefit of” the oil for the purposes of section 1313(2) (b) Corporation Tax Act 2009 (“ CTA 2009 ”) because they give the recipient part of the commercial benefit of the oil won from the Buchan Field. If so, the Payments are chargeable to UK corporation tax. iii) The third issue is, even if the Payments are chargeable to corporation tax in principle, whether the Appellant is entitled to a deduction for the loss it made on the original loan to the Canadian company from whom it had inherited the right to receive the Payments.

3. In summary, RBC, acting through its head office in Canada, lent monies to a Canadian oil company, Sulpetro Ltd (“Sulpetro”), which, together with its UK subsidiary, had originally exploited oil from the Buchan Field. Sulpetro subsequently went into receivership, leaving an outstanding amount owed to RBC. By virtue of asset disposals entered in to by Sulpetro, with the UK resident and unrelated third-party, BP Petroleum Development Ltd ("BP”), Sulpetro was entitled to certain contractual payments (the Payments) from BP. In due course the right to those contractual payments passed from Sulpetro to RBC as creditor under the original loan made by RBC. On receipt of the Payments by RBC from BP (and, later, Talisman a party standing in BP’s shoes), the Respondents (Her Majesty’s Revenue & Customs or “HMRC”) contended that RBC was taxable in the UK as the recipient of income from “immovable property” in the UK. HMRC issued RBC closure notices and assessments between 31 October 2014 and 3 October 2017 for the accounting periods 2008-2015.

4. The FTT dismissed the Appellant’s appeal against the closure notices and assessments. The FTT agreed with the substance of HMRC’s arguments on the three issues which are the subject of this appeal, in a decision released on 30 June 2020 (“the Decision”) released as [2020] UKFTT 267 (TC) . The FTT held on each of the three issues that are now in dispute that: i) The Treaty confers taxing rights on the UK in respect of the Payments on the basis that they are income from “immovable property” for the purposes of Article 6(2) (FTT [54]-[66] and [169]); ii) Section 1313(2) (b) of the Corporation Tax Act 2009 applies so as to charge the Payments to corporation tax because the Appellant had rights to the benefit of the oil won from the Buchan field (FTT [83]-[96] and [170]); iii) The Appellant had no right to offset any losses incurred by it in its loan to Sulpetro against the Payments in the computation of the corporation tax chargeable (FTT [96]-[102]).

5. At the hearing before us, the Appellant was represented by Jonathan Peacock QC leading Sarah Black and HMRC was represented by Jonathan Bremner QC leading Michael Ripley. We are grateful to all counsel and their solicitors for the high quality of the presentation and preparation of this appeal. Grounds of Appeal and issues to be determined

6. With the permission of the FTT, the Appellant appeals to the Upper Tribunal on five grounds (permission was also granted by the FTT for a sixth ground of appeal, which was not pursued): (1) The FTT failed to address and give proper weight to the purpose of Article 6(2) of the Treaty and its correlation to other articles within the Treaty, particularly in light of other double tax treaties entered into by the UK or Canada (“Ground 1”). (2) The FTT wrongly dismissed arguments based on the equally authoritative French language version of the Treaty with insufficient, if any, consideration, resulting in a potentially contradictory interpretation. This is contrary to the Vienna Convention on the Law of Treaties (1969) (“the Vienna Convention”) and established general principles of treaty interpretation (“Ground 2”). (3) The FTT’s analysis of both the Treaty, and s.1313 CTA 2009 , disregarded, or failed to appreciate, the true contractual position between the various parties (“Ground 3”). (4) The FTT failed properly to construe the reference to the “benefit of the oil” for the purposes of s.1313 CTA 2009 and failed properly to identify the nature of the rights held by RBC in this regard (“Ground 4”). (5) The FTT erred in holding that, if the Payments were within s.1313 CTA 2009 , RBC could not deduct the costs it incurred in acquiring the contractual right to the Payments (“Ground 5”).

7. Grounds 1-3 argue that the FTT erred in law in deciding the first issue and concluding that the UK had taxing rights over the Payments under the Treaty. The Appellant argues that the Payments do not represent income from immovable property for the purposes of Article 6(2) of the Treaty – income from ‘rights to variable … payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources’.

8. Grounds 3-4 argue that the FTT erred in law in deciding the second issue and concluding that the UK could exercise its taxing rights conferred by the Treaty over the Payments by virtue of section 1313 CTA 2009 in that they represented the benefit of the oil.

9. Ground 5 argues that the FTT erred in law in deciding the third issue and concluding that the Appellant could not deduct the losses it suffered in making the loan and acquiring the rights to the Payments from Sulpetro. This includes deciding whether the loss is an expense of the ring fence trade and, in any event, whether it is capital in nature. Preliminary observations

10. It has been suggested, both in the submissions of Mr Bremner QC and in some of the materials put before us, that the correct way to approach the issues in this appeal is by considering first whether the UK had the right under its domestic law to tax the Payments, and then to consider whether the UK had the right to tax the Payments under the terms of the Treaty. We will however follow the course taken by both counsel in their grounds and arguments, and consider the Treaty first, and then UK domestic law.

11. We also record that the UK domestic legislation we are looking at has been through changes over the periods relevant to the appeal, but that it is common ground that we need only consider the modern versions of the legislation.

12. We have had the benefit of three days of detailed oral argument from counsel during the hearing, in addition to their helpful skeleton arguments. Both leading counsel referred to a wide range of treaties, statutory provisions (including Canadian legislation), case law (both from this and other jurisdictions), and other legal materials, which were collected into the joint bundles of authorities which were before us. We also had the benefit of a core bundle, comprising the Decision and the other principal documents in the appeal, and bundles of other documents.

13. In reaching our decision on this appeal we have taken into account everything drawn to our attention, in both the written and oral submissions. It is however inevitable, given the detail of the arguments and given the quantity of material before us, that not everything in the appeal can be given specific mention in this judgment. Where a particular fact or argument, or a particular authority or document is not given specific mention in this judgment, that does not mean that it has not been taken into account. We can assure the parties that it has.