In a claim arising out of the relocation of a rural community in Peru under a share purchase agreement (SPA), the High Court was asked to determine the natural meaning of the word ‘payable’ in a tax indemnity, in order to determine whether the claimants were entitled to be indemnified by the defendants for VAT the Peruvian tax authorities alleged to be unpaid. Minera Las Bambas SA & Anor -v- Glencore Queensland Ltd & Ors  EWHC 1658 (Comm) (29 June 2018).
In April 2014 the parties entered into a SPA which contained an indemnity in respect of particular tax liabilities; the target company was the owner of a copper development in Peru. Previously, the buyer (also the first claimant) had entered into a swap agreement with the target company under the terms of which the first claimant arranged the relocation of the Fuerabamba rural community from Las Bambas to other land. No VAT was paid on the swap.
Following completion of the share sale, the Peruvian Tax Authority (SUNAT) demanded payment of VAT on the relocation (referred to below and in judgment as the 'NBF VAT claims') The claimants (the buyers of the shares under the SPA) and the defendants (the sellers and guarantor) entered into a deed of indemnity whereby the defendants would indemnify the sellers in respect of adversely determined tax matters. The defendants were also given conduct of the NBF VAT claims.
SUNAT issued a tax assessment and then penalty resolutions, against which the first claimant appealed, firstly to SUNAT and then to the Peruvian tax court. An early payment discount of 40% on penalties and interest in respect of the NFB VAT was available, and at the defendants’ request the first claimant made a payment to SUNAT. The defendants then reimbursed the first claimant for penalties and interest on the NBF VAT.
Further tax assessments were issued by SUNAT in respect of NBF VAT and also an element of third party VAT. SUNAT initially sought to recover the VAT by way of a reduction in the first claimants credit balance, but this was subsequently refunded.
The claimants claimed against the defendants for unpaid sums determined by SUNAT. It fell to the court to determine whether these sums constituted ‘tax payable’ and/or ‘an amount…payable’ under the indemnity in the SPA and deed of indemnity, so as to make the defendants liable to make payment to the claimants.
Were the sums claimed by SUNAT ‘payable’?
In its judgment the court made a number of findings:
- The NBF VAT assessed by SUNAT was not ‘payable’ within the meaning of either the SPA or deed of indemnity, the natural meaning of ‘payable’ being when the debt was ‘due’ or ‘to be paid’. In this instance, although a liability existed, there was no amount ‘to be paid’ as the liability could not at that time be enforced.
- The sums would only be ‘payable’ if the Peruvian tax court determined that an amount was payable and this debt became enforceable in accordance with the Peruvian tax code.
- The defendants were required to indemnify the claimants only in the event that SUNAT’s claim was determined against the first claimant.
- Loss of assets as a result of a reduction in VAT credits did not amount to a tax which was ‘payable’ under the terms of the relevant indemnities; the clause only indemnified the claimants against tax which had been payable and not loss arising out of tax adjustments. If any such adjustments had been confirmed by the tax court then this would increase the VAT payable, but whether there would be any tax to pay would depend on the company’s overall VAT position.
- The decision to pay penalties in order to take advantage of the 40% discount was made to protect the parties in the event the appeal failed. This did not mean that the sum in question was ‘payable’.
In reaching its decision, the court applied the approach to contractual construction in Wood -v- Capita Insurance Services  UKSC 24, i.e. the factors that will be looked at are the clause’s language, the documentary context, the factual matrix and the commercial consequences. In the present case, the meaning of ‘payable’ was unclear but a narrow meaning was inferred from the terms of the SPA. Less weight was attached to the factual matrix. This interpretation achieved the indemnity’s purpose without putting the claimant in funds when no tax payment was made.
Practical consequences of the Court’s decision:
Parties who intend to rely on an indemnity to cover their tax liabilities should be cautious when making payments to tax authorities. It might be possible to start a dialogue between parties, obtaining assurances from the indemnifying party that they will cover the payments in question.
Whether or not a party should make early payment to gain the benefit of a discount is likely to be a commercial decision. Parties will need to consider likely future liabilities, cash flow and the likelihood that a tax scheme will stand up to scrutiny by the authorities.
As a seller, when faced with an indemnity that a buyer wishes to enforce, it is prudent to seek legal advice on when that indemnity bites. This is a complex area of law and procedures to determine the legality or viability of tax schemes can be protracted, particularly where the sums in question are significant.
Care needs to be taken when considering contractual limitation periods in circumstances where it is unclear when a liability is payable and an indemnity called upon.