Commentary: John Avery Jones, “Treaties and the Other State’s Right To Tax Payments Computed by Reference to Oil,” International Tax Highlights, Vol. 2, No. 3, August 2023, p. 14
A Canadian corporation (“Sulpetro”), which had rights to direct and receive the proceeds from a licence its U.K. subsidiary (“SUKL”) held in an offshore U.K. oil and gas field (the “Buchan field”), sold its rights (along with a sale for nominal consideration of its shares of SUKL) in December 1986 to a U.K. purchaser (“BP”) for consideration that included a royalty that became payable, based on production from the field, when the market price of oil (less certain expenses) exceeded US$20 per barrel. The taxpayer (RBC), a bank resident in Canada, received an assignment of this royalty from the receiver for Sulpetro following default by Sulpetro on a secured loan made by RBC to Supletro in the course of its Canadian banking business.
The principal issue was whether HMRC was permitted by Article 6 of the Canada-U.K. Treaty to impose tax on the royalty payments received by RBC and, in particular, whether they fell within the portion of the definition of “immovable property” in Art. 6(2) (the “fifth limb”) that referred to "rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources". Before allowing RBC’s appeal, Falk LJ stated (at para. 45) that “the better interpretation of the fifth limb is that it is confined to rights to payments held by a person who has some form of continuing interest in the land in question to which the rights can be attributed.” In this regard, she stated (at para. 96):
[C]learer words would be needed to establish that a right of a personal nature, held by a person who has no link to the physical land in question, and comprising a chose in action owed by a person who might also have no link to the State in which the land is situated, falls within Article 6(1).
In concluding on this issue, she stated (at para. 97):
… RBC does not hold, and indeed has never held, an interest in the Buchan field. It cannot therefore be taxed under the fifth limb. What it acquired was a contractual right to receive payments calculated by reference to the sale proceeds derived from sales of oil, to the extent that the price obtained exceeded $20 a barrel.
She went on to agree with RBC’s further alternate ground of appeal that since it was SUKL, and not Supeltro, that in fact held the licence from the U.K. to exploit the Buchan field, it was Sulpetro rather than SUKL that had the right to extract oil, i.e., the royalty payments could not be consideration for a "right to work" within the fifth limb because Sulpetro never held that right.
In this regard she stated (at para. 113):
I cannot accept [HMRC]'s submission that Sulpetro's right to direct the work, in combination with its right to oil won (when combined with the fact that the shares of SUKL were also transferred), are sufficient to amount to a "right to work". The right to work was held by SUKL.
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