When is Tax ‘Payable’?
A corporate buyer could not claim under a tax covenant giving it protection against historic tax liabilities relating to the target business - until the tax actually became payable. But what does ‘payable’ mean?
In a recent case, a company (Minera) bought 100 per cent of the shares in a Peruvian mining company owned by the seller (Glencore). There was a related property transaction in which land was transferred to Minera and on which it paid no VAT.
After completion, a tax assessment was levied on the business by the tax authorities in Peru, under whose laws the issuing of a tax assessment creates an actual liability to pay tax straightaway. The assessment was in respect of VAT, interest and penalties.
Minera therefore sought to recover the VAT, penalties and interest as assessed. A covenant within the sale purchase agreement (SPA) required Glencore to indemnify Minera against “the amount of any Tax payable by a Group Company to the extent the Tax has not been discharged or paid on or prior to the Effective Time and it . . . relates to any period, or part period, up to and including Closing”.
Relying on this clause, Minera brought proceedings against Glencore to recover the amount of tax it had paid towards funding the tax demand, arguing that the VAT had become ‘payable’ for the purposes of the deed of indemnity when the tax assessment was issued.
For its part, Glencore, said it only became payable when it could actually be enforced - in this case, when the courts had upheld the tax determination (an appeal is still yet to be determined).
When did the tax become payable?
The court agreed with Glencore’s argument. The traditional rules of contractual interpretation applied to the meaning of ‘payable’, ie. the court had to ascertain the objective meaning of the relevant contractual language. The appeal judges found that ‘payable’ in the context in which it was used in the SPA meant an “enforceable obligation to pay an amount of tax” had to arise, and not merely “a liability to pay an amount of tax”.
So what was the court’s rationale? Glencore was required to indemnify Minera - to prevent it suffering loss. The VAT repayment had not yet become enforceable which meant that Minera had not suffered any loss as a result. In any event, the outcome could be that the tax would never be paid.
Lord Justice Leggatt said: “This is an actual and not merely contingent liability and remains an actual liability unless and until there is a decision of the tax court which sets it aside. However, the liability is not enforceable in that the tax cannot be collected through any coercive procedure while the assessment is under appeal to the tax court.”
What does this mean?
The ruling is another cautionary tale on the care needed in drafting the required contractual documentation in commercial transactions and that the terms agreed are binding on the parties. Where, as in this case, indemnities are required it is vital to consider what (if any) payment triggers are to be - and to ensure these are unambiguously provided for in the contractual provisions.
It is also important to remember that any liabilities could take a long time to crystallise (how long, for instance, could it take for the above case to finally conclude?). This means that the buyer needs to consider the risks of being statute barred – or otherwise prevented - from bringing a claim and negotiate provisions to protect against this risk.
1Minera Las Bambas SA v Glencore Queensland Limited
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