Supreme Court adopts narrow approach to construction of Treaty

The Supreme Court has adopted a narrow interpretation to the construction of provisions of the UK/Canade Double Tax Treaty and held that “payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources” did not include payments which were, in effect, to a person who economically benefitted from the exploration of a UK oil field but which did not itself hold the licence to exploit the field: Royal Bank of Canada v HMRC [2025] UKSC 2. The Court has rejected, by a majority of four to one, arguments based on economic reality that payments to a person benefiting from a right to have another person work a field could be described as “payments as consideration for the working of, or the right to work” the oil field.

Background

The case concerns payments made by BP to the Royal Bank of Canada (RBC) in connection with the Buchan Field in the North Sea. The UK government had granted a licence to explore and exploit the field in the 1980s to Sulpetro UK, a UK subsidiary of a Canadian company Sulpetro. The arrangement was put in place as the UK was concerned that all North Sea oil and gas produced under UK licences were only granted to licensees incorporated in the UK to ensure they were subject to UK tax. Overseas groups found this requirement difficult as they wanted to deduct the expenditure they incurred from their income when computing the profits in the jurisdiction they were resident. The arrangements were put in place to solve this problem by ensuring the licence was held by a UK subsidiary but that the overseas company provided the funds and received all the oil won under the licence. The arrangements included provision that Sulpetro would provide all the funds and equipment required for exploration, development and operations of the licence and in return would own and receive all the oil won under the licence.

In 1986, Sulpetro sold its assets and rights to BP, including its shares in Sulpetro UK, pursuant to the terms of an SPA. The consideration included a promise to pay a quarter royalty in respect of all production from the Buchan Field from Sulpetro UK’s licence. In 1987, Sulpetro went into receivership and as part of the receivership arrangements, Sulpetro’s rights to payment under the SPA were assigned to RBC.

The question in this case was whether the payments made by BP to RBC under this scenario fell within the terms of Article 6 of the UK/Canada Double Tax Treaty so as to give the taxing rights to the UK.

Article 6 provides that income from immovable property is taxable in the Contracting State in which such property is situated. Article 6(2) provides for an extended meaning of “immovable property” for these purposes to include “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 and UT held that the payments in this case fell within that definition, but the Court of Appeal held that the rights conferred on Sulpetro by the agreement did not amount to a right to work the oil. HMRC appealed.

Decision of the Supreme Court

The main question was whether the rights that Sulpetro acquired under the arrangements added up to the “right to work” the Buchan Field for the purposes of Article 6(2). In summary, the Supreme Court (by a majority of four to one) agreed with the Court of Appeal that the “right to work” the oil field had been granted to Sulpetro UK, not Sulpetro. This structure had been put in place to meet the UK’s requirements and could not simply be ignored on the basis of some broader concept of commercial or economic reality. In particular, arguments put forward by HMRC to treat Sulpetro rather than Sulpetro UK as having the right to work the field ignored the legal structure of the arrangements and essentially sought to ignore the separate legal personality of the subsidiary.

More generally, there was nothing in the Treaty that would indicate that the “right to work” should be attributed to the entity which invests its funds and sells the oil, even if it is not the entity licensed by the UK government.

Dissenting judgment

Lord Briggs delivered a dissenting judgment which is, however, worth reading. Lord Briggs argued that the Ramsay approach (simply being a purposive approach to the construction of tax statues) was of general application and not limited to cases of tax avoidance. This approach requires a realistic view of the transaction to be adopted when interpreting the wording of a statute purposively. Lord Briggs considered that the purposes of Article 6 was to bring within the taxing rights of a State certain income derived from an expanded definition of immovable property. That included an income stream from someone else working natural resources. Lord Briggs would have held that taking a realistic view of the arrangements, Sulpetro was “working” the Buchan Field.

“When the question arises who is conducting a particular extraction activity, the fact that a particular person is incurring all the risks and rewards, paying all the costs and expenses, providing all the expertise, making all the relevant decisions and receiving immediate ownership of all the material extracted for no further payment strongly suggests that the person so identified is conducting that activity. And when the only other candidate for the role is its wholly owned subsidiary, acting as its puppet at no charge, at no profit or risk of loss, the impression that its parent is the person conducting the activity becomes irresistible.”

Comment

Ultimately the Supreme Court favoured a technical and literal application of the terms of the Treaty. Indeed, Lady Rose, giving the majority judgment, stated that: “No one here has suggested that the Ramsay principle has any application to the present facts and nothing in this judgment casts doubt on the efficacy of those principles where they apply.” However, it is hard not to agree with the judgment of Lord Briggs that, properly understood, the Ramsay approach is nothing more than a general approach to statutory construction and one that applies irrespective of the existence of tax avoidance. Ultimately, as the FTT and UT had recognised, a restrictive view of Article 6(2) that limits its application to payments only to the person directly holding the right to work a field results, in principle, to “a substantial hole in the scheme of taxation of income from oil”. The Supreme Court’s answer to this was that the Treaty was there simply to allocate taxing rights, so there was no question of non-taxation and no reason to suggest that there was any presumption as to where the boundary should fall.