Royal Bank of Canada received payments from BP linked to North Sea oil production under an arrangement originally made with Sulpetro. HMRC sought to tax these payments under the UK/Canada Double Taxation Convention. The Supreme Court held the payments were not taxable by the UK as they did not constitute consideration for a ‘right to work’ the oilfield.
Facts
Sulpetro Ltd, a Canadian corporation, established a UK subsidiary, Sulpetro (UK) Ltd, which held a licence to explore and exploit the Buchan Field in the North Sea. Under an ‘Illustrative Agreement’ between the two companies, Sulpetro provided all funding and expertise while receiving all oil won from the field. In 1986, BP acquired Sulpetro (UK)’s shares and Sulpetro’s rights under the Illustrative Agreement through a novation. In consideration, BP agreed to make variable payments (‘the Payments’) to Sulpetro, calculated by reference to oil production and prices.
Following Sulpetro’s receivership, the right to receive these Payments was assigned to the Royal Bank of Canada (RBC) in 1993 in partial satisfaction of Sulpetro’s debt. RBC treated these Payments as Canadian income. HMRC issued assessments claiming the Payments were taxable in the UK under Article 6 of the UK/Canada Double Taxation Convention and section 1313 of the Corporation Tax Act 2009.
Issues
Issue 1
Did the rights Sulpetro acquired under the Illustrative Agreement with Sulpetro (UK) amount to a ‘right to work’ the Buchan Field within the meaning of Article 6(2) of the UK/Canada Convention?
Issue 2
If so, were the Payments made by BP to Sulpetro (and later RBC) ‘consideration for’ those rights within Article 6(2)?
Issue 3
If the Payments fell within Article 6(2), did they also fall within section 1313 of the Corporation Tax Act 2009?
Judgment
Majority Judgment (Lady Rose, with Lord Lloyd-Jones, Lord Hamblen and Lord Leggatt agreeing)
The Supreme Court dismissed HMRC’s appeal. Lady Rose held that Sulpetro never acquired the ‘right to work’ the Buchan Field. The licence was held by Sulpetro (UK), which remained responsible for discharging all obligations under the licence. The Illustrative Agreement did not transfer or confer the right to work; it merely entitled Sulpetro to the oil won and required it to fund operations.
“There is 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. Sulpetro has the latter but not the former.”
Lady Rose rejected the argument that the economic substance of the arrangement should override the legal structure:
“The structure reflected in the Illustrative Agreement was put in place to meet the UK’s own requirements. That legal structure cannot simply be ignored on the basis of some broader concept of commercial or economic reality.”
She emphasised that tax law generally operates on the basis of legal rather than economic reality, and separate corporate entities within a group are taxed individually. The Ramsay principle concerning tax avoidance did not apply here.
On Issue 2, Lady Rose found that even if Sulpetro’s rights had amounted to a ‘right to work’, the Payments would still have been too remote to constitute ‘consideration for’ such rights within Article 6(2). She endorsed the Court of Appeal’s reasoning that Articles 6, 13 and 27A of the Convention should be construed coherently, and noted that the bespoke provisions in Article 13(4) and (5) for hydrocarbon-related gains suggested the fifth limb of Article 6(2) was not intended to catch arrangements like the present one.
On Issue 3, Lady Rose stated obiter that if the Payments had fallen within Article 6(2), they would have been taxable under section 1313 as profits from ‘rights to the benefit of’ assets produced by exploitation activities.
Dissenting Judgment (Lord Briggs)
Lord Briggs disagreed with the majority. He considered that a realistic view of the transaction showed Sulpetro was indeed working the Buchan Field through Sulpetro (UK). He emphasised that Sulpetro bore all risks and rewards, provided all funding and expertise, made all decisions, and received ownership of all extracted oil.
“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.”
Lord Briggs considered that the Payments plainly constituted consideration for BP’s acquisition of the right to work, and would have allowed the appeal.
Implications
This judgment clarifies the scope of Article 6(2) of double taxation treaties based on the OECD Model Convention regarding income from immovable property and natural resources. The decision confirms that:
- The legal structure of corporate arrangements will generally be respected for tax treaty purposes, even where economic substance might suggest a different characterisation.
- The ‘right to work’ natural resources must be distinguished from contractual rights to receive oil or to require another entity to work resources.
- Payments made in connection with the transfer of indirect interests in oil production are not necessarily ‘consideration for’ the right to work within Article 6(2).
- The bespoke provisions in UK/Canada Convention Articles 13(4) and (5) provide a coherent framework for taxing gains from hydrocarbon-related disposals, and should not be read as extending Article 6(2) beyond its natural scope.
The case is significant for multinational oil and gas arrangements and the allocation of taxing rights between source and residence states under double taxation conventions.
Verdict: The Supreme Court dismissed HMRC’s appeal by a majority of 4-1. The Payments received by Royal Bank of Canada were held not to fall within Article 6(2) of the UK/Canada Double Taxation Convention because Sulpetro did not acquire a ‘right to work’ the Buchan Field under the Illustrative Agreement, and therefore the Payments were not ‘consideration for’ such a right. The UK accordingly had no right to tax the Payments under the Convention.
Source: Royal Bank of Canada v Commissioners for His Majesty’s Revenue and Customs [2025] UKSC 2
