In Minera Las Bambas SA & Anor v Glencore Queensland Ltd & Ors  EWHC 1658 (Comm), the Commercial Court decided that VAT was not “payable” for the purposes of a tax indemnity in a share purchase agreement and related deed of indemnity until it became coercively enforceable. Here, this meant the Peruvian tax court must determine that the VAT was due before it became payable for the purposes of the agreement. The Court also decided that neither the reduction of a credit balance, or the reduction of refunds otherwise payable in respect of VAT, constituted “tax payable” for the purposes of the indemnification provisions. The case provides an interesting analysis of the tax indemnity provisions often used in international M&A transaction documents, both in the natural resources sector and elsewhere.
Factual and contractual background
Minera Las Bambas SAC and MMG Swiss Finance AG (“Purchasers”) had entered into a share purchase agreement (“SPA”) with Glencore Queensland Limited and Glencore South America Limited (“Sellers”) for the purchase of Xstrata Peru SA, which was the indirect owner of a mining project in Peru. The sale and purchase of the shares completed in July 2014.
The target group had in November 2011 entered into a swap agreement in connection with the project, under which a transfer of land took place between Minera Las Bambas SA and a rural community. No Peruvian VAT was accounted for in relation to the swap agreement, but following closing under the SPA in July 2014 the Peruvian tax authorities issued a tax assessment asserting that VAT was payable by the target group in connection with the swap agreement.
The SPA included a tax indemnity under which the Sellers agreed pay the Purchasers an amount equal to any “tax payable” by a Group Company that related to the period prior to closing and had not been discharged or paid on or prior to closing. The SPA also granted conduct rights for the Sellers in relation to any third party claims that could result in the Sellers becoming liable to the Purchasers under the SPA, subject to the Sellers indemnifying the Purchasers against any related costs and expenses. Having entered into a deed of indemnity for this purpose, the Sellers exercised their rights to take conduct of the VAT claim, and disputed it with the Peruvian tax authority.
In the case before the Commercial Court, the Purchasers were seeking to recover the outstanding amount of VAT from the Sellers on the basis that the assessment by the tax authority had resulted in it being payable, notwithstanding the ongoing dispute. Alternatively, they asserted that the reduction by the Peruvian tax authority of the credit balance for the target group (against which the VAT payable by the target group to the tax authority could be set-off), or the reduction of amounts of VAT otherwise refundable to the target group, fell within the scope of tax payable by the target group.
In determining the meaning of “payable”, Moulder J followed the rules of contractual construction set out by Lord Hodge in Wood v Capita Insurance Services Ltd  UKSC 24, and considered in turn the language of the relevant clauses, the documentary context, the factual matrix and the commercial consequences of the rival interpretations.
Due to the sophistication of the parties involved and the respective agreements being drafted with the assistance of international law firms, Moulder J attached significantly less weight to the factual matrix. Less weight was also attached to the commercial background of the case and previous authorities regarding the meaning of the term “payable”.
Having evaluated the term in the wider context of the SPA and the deed of indemnity, Moulder J concluded that the meaning of “payable” in the circumstances was limited to the narrower concept of “due”. An amount would therefore not be payable until it could be coercively enforced, with the result that the Peruvian VAT would not be payable for the purposes of the SPA or deed of indemnity until the outcome of the dispute with the tax authority before the Peruvian tax court.
The Court also found that:
The indemnity given in the deed of indemnity entered into upon the Sellers exercising their rights to take conduct of the claim was not limited to amounts accrued pre-closing of the SPA, and was in fact a full indemnity for any amount payable under the claim.
Upon taking conduct of the claim, the Sellers were entitled to utilise their rights to the detriment of the Purchaser’s ability to recover under the SPA.
The Peruvian tax authorities reducing the claimants’ accumulated VAT credit balance was not equivalent to an actual payment and would only amount to tax “payable” if it would result in the output tax exceeding the input tax, such that there would be a resulting debt owed to the Tax Authority for the relevant period.
International share acquisitions in the natural resources sectors will often include a short-form tax indemnity or tax covenant in the body of the relevant share purchase agreement, which seeks to protect the purchaser against bearing the cost of unexpected pre-closing tax liabilities arising in the target group. Unlike the more comprehensive tax deeds usually seen on UK deals, these short-form indemnities may not be accompanied by specific drafting regarding the timing of payment in relation to tax liabilities.
The case produced a logical commercial result that would be expected from such an indemnity, in that payment does not have to be made by the Sellers until the underlying liability to pay the tax authority has been determined (at least in circumstances where the underlying liability is disputed). However, the judgment also notes that on the basis of the determined meaning of “payable”, a claim under the SPA could fall outside the limitation period if the underlying liability had not been determined by a court until after the limitation period had expired. This was not a key issue – since the subsequent deed of indemnity covered the liability – but would probably not be the expected position between the parties for an issue identified during the limitation period, particularly given the time periods over which tax assessments can be raised and disputed.
From a wider perspective, the case also suggests that where sophisticated parties have been advised by international law firms the courts are likely to give more weight to the wording of the contract than to wider commercial considerations. As a result, purchasers should be careful to ensure that any potential way in which a liability could manifest itself are covered through the drafting: for example, to ensure that the offsetting of a tax liability against a refund is treated in the same manner as a liability to make a payment to a tax authority.