Minera Las Bambas SA & Anor v Glencore Queensland Ltd & Ors  EWCA Civ 972 was an appeal from a High Court judgment of 20 September 2018. In that judgment, the High Court had held that the sellers under a sale and purchase agreement would only be liable to indemnify the claimant purchasers for tax assessments made by the Peruvian tax authority once the Peruvian tax court determined that the relevant tax claimed by the authority was in fact payable, and such debt became coercively enforceable. As with the first instance decision, the appeal provides an interesting judicial analysis of the tax indemnity provisions often used in international M&A transaction documents.
Factual and contractual background
For the factual and contractual background to this case, please see our Law Now on the High Court judgment here. The appeal was dismissed, and the decision by the High Court broadly upheld.
The decision concerned a number of points, but the three more significant issues considered related to when tax is “payable”; whether rejected VAT credits could amount to tax payable; and the effect of a purchaser not availing themselves of a 60% discount on penalties and interest on their ability to claim under the indemnity:
Tax is ‘payable’ when it is ultimately determined
The tax indemnity at the centre of the dispute provided that Glencore Queensland Limited and Glencore South America Limited (“Sellers”) would indemnify Minera Las Bambas SAC and MMG Swiss Finance AG (“Purchasers”) in relation to “an amount equal to any Tax payable by a Group Company”. The key consideration was at what point in time the amount of tax would become “payable”, given that the tax assessment was under appeal. The judge agreed with the Sellers’ interpretation (and the High Court decision) that, under the SPA, “payable” was reasonably understood to mean that there was an enforceable obligation to pay tax and not merely that the liability to pay had been established by the issuing of a tax assessment. To trigger the Sellers’ obligation to indemnify the Purchasers at a point where the Purchasers had not yet come under an enforceable obligation to pay was inconsistent with the nature of an indemnity.
‘Tax payable’ does not include rejected VAT credits
Additionally, the Peruvian tax authority had disallowed certain cash refunds of VAT credits that the target company had obtained. The Purchasers argued that the disallowance of a tax credit was equivalent to a recognition of a liability to pay tax, and therefore that the rejected VAT credits should come within the ‘tax payable’ definition. The Court of Appeal judge disagreed, finding that the loss of the right to receive repayment of a tax credit could not be characterised as an obligation to pay tax. Any claim for that element had to be made under the specific limb of the tax indemnity giving protection for loss of tax credits. The judge also partly deviated from the High Court decision, in holding that the unduly refunded VAT was not within the definition of an “indemnified VAT receivable” for which the Sellers would be liable to indemnify the Purchasers.
A buyer that does not claim a discount may be unable to claim full amount from Sellers
To encourage payment of sums which are the subject of an appeal, the Peruvian tax system operates a “graduality regime” under which the penalties charged by the tax authority (and interest on those penalties) are reduced if payment is made in full of the disputed tax liability before an appeal is filed. The size of the discount depends on the stage at which payment is made. If it is made before the filing of a first appeal to the tax authority, the taxpayer is entitled to a 60% discount. If the payment is made following a first appeal but before filing a second appeal to the tax court, the discount is 40%. The Purchasers’ failure to take advantage of the 60% discount on penalties and interest, by making payment of the relevant sum before the filing of the first appeal, was found not to be a failure to take reasonable steps to mitigate losses. However, the Sellers did potentially have a defence to any claim by the Purchasers for an indemnity for a larger amount in respect of penalties than would have been necessary to pay to obtain the discount, despite the lack of culpability on the Purchaser’s part.
As noted in our previous Law-Now, the result regarding the point at which tax is ‘payable’ is likely to be as expected from such an indemnity. It is not surprising that payment does not have to be made by the seller until the underlying liability to pay the tax authority has been determined in circumstances where the underlying liability is disputed. It should be noted again that, given this meaning of “payable”, a claim could potentially fall outside of the limitation period in circumstances where the underlying liability has not been determined by a court until after the limitation period has expired. Purchasers should therefore be careful to avoid being inadvertently ‘timed-out’ from bringing a claim by any contractual limitation periods.
It could also have been expected that rejected VAT credits would fall outside of the meaning of “tax payable”. Purchasers should ensure that if they require protection for loss of a right to receive a repayment of tax, this is expressly provided for (which is usually the case in practice).
The analysis surrounding the failure of the Purchaser to avail themselves of a potential discount on penalties and interest for early payment is perhaps the most interesting feature of the case. The implication is that a purchaser may need to pay tax earlier, and at a time when the sellers are not yet required to account to the purchaser under the indemnity, or risk being unable claim for the penalties and/or interest that could have been mitigated had it done so. While tax-specific limitations and conduct provisions may deal with this point, purchasers in particular should seek to ensure the position is clear, even in the short-form tax indemnities common in international M&A in the natural resources sector.