Atlantic
LNG payments taxable
By
Mark James Morgan
The Trinidad Guardian
Port
Spain
Petroleumworldtt.com
03 04 07
HCA
1449 of 2004
Tractabel
Trinidad Ltd v The Board of Inland Revenue.
Before
the Nolan Bereaux
In
1995 certain companies (Amoco, British Gas, Cabot
and NGC) entered into a shareholders’ agreement
under which Atlantic LNG was formed for the purpose
of establishing a LNG plant (known as a “train”)
at Point Fortin.
From
the outset, the companies foresaw the likelihood
of expansion through the construction of additional
trains and also that there might not be unanimity
with respect to such expansion.
The
agreement therefore set out an elaborate procedure
for such expansion which was intended to achieve
the following effects:
1.
It permitted the majority of the shareholders to
proceed with the expansion at their own expense
and to the exclusion of the minority who disagreed
with or were not interested in the expansion;
2.
It permitted the minority shareholders (or any of
them) to join subsequently in the expansion but
only after the majority, who had undertook the initial
risk and cost of expansion, had realised a significant
return on their investment and
3.
It allowed those shareholders who did not participate
in the expansion to be compensated for the value
the original plant added to the expansion. However,
most fundamentally, it obliged all shareholders
wishing to expand to do so under the provisions
of the shareholders’ agreement.
Sometime
in 1997, the shareholders commenced negotiations
for the expansion of the Atlantic LNG facility by
the construction of two additional trains (Trains
II and III). However, the majority (which included
gas producers) favoured doing this outside the 1995
agreement by narrowing the focus of the expanded
Atlantic LNG to that of a fixed price gas processor
and abandoning any direct link between LNG sales
prices and the income of the expanded Atlantic LNG.
Cabot
(which was not a gas producer) objected to this
on the ground that it would divert the major economic
benefits of expansion from Atlantic LNG to the gas-producing
shareholders and threatened arbitration if the majority
proceeded with their plans.
Eventually
in 2000, the parties restructured their arrangements
as follows;
First
a new company Atlantic 2/3 was formed to own and
manage Trains II and III. Cabot and NGC did not
participate in the expansion or become members of
this new company.
Secondly
the parties agreed to terminate the 1995 agreement,
surrender all their shares in Atlantic LNG, have
them reissued by a new holding company and enter
into several agreements including a Joint Use and
Operating Agreement (“JUOA”) and a payment
agreement between Atlantic 2/3 and Cabot.
The
main purpose of the JUOA was to provide for the
shared use of the common assets of the LNG Facilities
at Point Fortin (including Train 1) and their management,
operation and maintenance.
Under
the Payment Agreement, Atlantic 2/3 agreed to pay
Cabot a monthly sum calculated by the quantity of
LNG produced by each train over a 20-year period.
Tractabel
was Cabot’s successor and was a non-resident
company for tax purposes. The question therefore
arose as to whether the payments made to it by Atlantic
2/3 under the payment agreement was subject to withholding
tax under s.50 of the Income Tax Act.
If
the payments were capital in nature, they would
not attract withholding tax, however, if they were
in the nature of income and fell within the definition
“annual or periodic sum,” they would
attract withholding tax.
Tractabel
argued that the payments were capital in nature
because Cabot had surrendered its rights under the
1995 Agreement, had given up certain valuable rights
of pre-emption in respect of LNG sales, had withdrawn
its threat of arbitration and had agreed to the
proposals for expansion that led to the creation
of Atlantic 2/3.
His
Lordship, having analysed the nature of the various
agreements, disagreed; firstly because there was
no surrender of rights by Cabot, rather all that
the 2000 agreements amounted to was an adjustment
of the commercial arrangements between the parties
and secondly because the language of the payment
agreement suggested that the purpose of the payments
were for the use of the Train I facilities by the
additional trains and so were clearly income in
nature.
Having
determined that the payments were in the nature
of income he held that there was little doubt that
the payments were annual/periodic payments given
that they were monthly payments over a 20- year
period.
On
that basis his Lordship held that the payments attracted
withholding tax.
Trinidad Guardian
Thursday 1st March, 2007
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