As stated above, the previous negotiations of parties and their subjective intent are admissible only in an action of rectification. The Tribunal is not interested in rectifying the EA2 PSA. What is of concern to the Tribunal would be the meaning a reasonable man would convey to the document in respect to an exemption to capital gains tax and not the meanings of words. The meaning of words may not be the same as the meaning of a document as the latter involves the parties using the words against the relevant background. Where the agreement involves government, for once, the taxman may have to forget that he is collecting taxes for the government.
What should be considered is the use of the words in the agreement and the relevant background. The background that may be relevant, in this case, is that the EA2 PSA was entered into by GOU for the exploration, production and development of oil. By the time the EA2 PSA was signed no oil had been discovered. Article 23.5 was incorporated in the agreement to entice oil companies in the oil exploration venture. However what may not be clear is whether Article 23.5 was to encourage oil companies invest in the venture or was it to facilitate them transfer off their interests to other investors? This can only be resolved by looking at the wording of the Article in relation to the relevant statute. In order to understand whether Article 23.5 included capital gains tax one would need to look at the statutory provisions which define the tax payable. It is a bit surprising that when the parties were trying to interpret Article 23.5 of the EA2 PSA, none referred to the description of capital gains tax under the ITA and compared it with the Article. The relevant Sections in the ITA include S.18 which defines what business income is, and reads: “(1) Business income means any income derived by a person in carrying on a business and includes the following amounts, whether of a revenue or capital nature- (a) the amount of any gain, as determined under Part VI of this Act which deals with gains and losses on disposal of assets…” S. 50 of the ITA which deals with disposals of assets reads: “(1) A taxpayer is treated as having disposed of an asset when the asset has been (a) sold, exchanged, redeemed, or distributed by the taxpayer; (b) transferred by the taxpayer by way of gift; or (c) destroyed or lost.” S. 18 states that a disposal of an asset is business income. S. 50 shows that a disposal of an asset includes when an asset has been sold or exchanged.
The applicants cited Article 23.5 of the EA2 PSA, as their shield against income tax liability arising from a capital gain. Article 23.5 read as follows: “The assignment or transfer of an interest under this Agreement and any related Exploration or Production Licence shall not be subject to any tax, fee, or other impost or fee levied either on the assignor or the assignee in respect thereof.” For an interest to be exempt from any tax there should be an assignment or a transfer. Is an ‘assignment’ or’ transfer’ under Article 23.5 of the EA2 PSA the same as a ‘sale’ or ‘exchange’ under S. 50 of the ITA? The Black’s Law Dictionary 8th edition p, 128 defines assignment as follows” “1.The transfer of rights or property <assignment of stock options>. … 2. The rights or property so transferred < the aunt assigned those funds to her niece, who promptly invested the assignment in mutual funds>.” A transfer is defined under Black’s Law Dictionary (supra) p. 1536 as: “1. to convey or remove from one place or one person to another; to pass or hand over from one to another, esp. to change over the possession or control of. 2. To sell or give.” S. 50(1) (a) of the ITA provides for “sold, exchanged, redeemed, or distributed by the taxpayer.” A sale is defined by Black’s Law Dictionary (supra) p. 1364 as: “1. The transfer of property or title for a price… 2. The agreement by which such a transfer takes place. ● The four elements are (1) parties competent to contract, (2) mutual assent, (3) a thing capable of being transferred, and (4) a price in money paid or promised.” A transfer under Article 23.5 of the EA2 PSA involves a sale as provided under S 50 of the ITA.
The applicants contended that they sold their interests under Article 2 of the SPA. Article 2.1 of both the SPAs between the applicants, Total and CNOOC read as follows: “Subject as herein provided, Tullow hereby agrees to sell and transfer all of its legal and beneficial right, title and interests in and to the interest free from all Encumbrances whatsoever relating thereto (subject to the provisions of the Interest Documents) with full title guarantee to the Purchaser for the consideration referred to in Clause 3.1 and the Purchaser hereby agrees to purchase and acquire the interest. The transfer shall, as between the Parties, be deemed for purposes to be made with effect on and from the Effective Date.” Hence it cannot be denied that the applicants’ sales of their interests in the SPAs were covered under S. 50 of the ITA and exempted by Article 23.5 of the EA2 PSA. Without prejudice, Article 23.5 of the EA2 PSA mentions “any tax, fee, or other impost or fee levied either on the assignor or the assignee”. The above net is so wide to include capital gains tax as long as it is a tax or other impost. So would one be wrong if one stated that the exemption under Article 23.5 of the EA2 PSA covered a gain made by the applicants in the transfer of their interest in EA2 under the SPAs to CNOOC and Total and was therefore exempted? The Tribunal does not think so. To a reasonable man, an assignment or transfer of an interest under the PSAs if it involves a sale or an exchange is covered by both S. 50 of the ITA and Article 23.5 of the EA2 PSA. Therefore to a reasonable man the exemption under Article 23.5 purportedly covered capital gains.
Pages: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57