HMRC successfully defends assessments of oil royalties

HMRC has successfully defended substantial corporation tax assessments on oil royalties in Royal Bank of Canada v HMRC [2020] UKFTT 267 (TC), an important decision by the First-tier Tribunal (Tax Chamber) (“FTT”) on the construction of article 6 of the UK / Canada double tax treaty (immovable property) and the scope of the UK’s ring fence corporation tax regime.  

The taxpayer was a Canadian bank which had advanced significant loans to a Canadian oil company.  The borrower sold its interest in the Buchan North Sea oil field in exchange for an entitlement to contingent royalty payments on production from the oil field (the “Payments”).  As a result of the borrower’s financial difficulties, the right to the Payments was assigned by the borrower to the bank.  Substantial Payments were made to the bank.  The question was whether the Payments were subject to UK ring fence corporation tax. 

The first issue was whether the Payments were income from immovable property within the meaning of article 6 of the UK / Canada double tax treaty (in which case the UK would have taxing rights in respect of the Payments).  Under article 6(2) the concept of “immovable property” includes “rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources”.  The FTT identified the purpose of article 6 as being to focus on profit derived from the exploration for or exploitation of mineral resources, whether that profit is derived directly by working the resources or indirectly by letting out the right to do so.  There was no reason to limit article 6(2) to cover only payments made directly to the owner of the rights in exchange for the grant of a right to exploit them.  The FTT held that the Payments were income from immovable property.  Accordingly, the UK had taxing rights in respect of the Payments. 

The second issue was whether the UK had exercised those taxing rights.  The FTT held that the Payments were taxable under section 1313(2)(b) Corporation Tax Act 2009 as profits “from exploration or exploitation rights” because the right to the royalty Payments gave the bank “rights to … the benefit of” the oil won from the Buchan Field within the meaning of section 1313(3). 

The Payments were therefore (as HMRC contended) taxable in full as ring fence profits of a deemed permanent establishment of the bank in the UK.   

In addition, procedural issues arose in respect of some of the tax years before the Tribunal as to HMRC’s entitlement to issue discovery assessments.  The Tribunal determined these issues in HMRC’s favour concluding, in particular, that (i) on the facts, a 15-16 month delay in issuing one of the discovery assessments did not render it “stale”; (ii) the list of information “made available” in paragraph 44(2) of Schedule 18 to Finance Act 1998 is exhaustive; and (iii) the insufficiency of tax had been brought about carelessly.

A copy of the full Decision can be found here

Jonathan Bremner QC acted for HMRC.