On April 9, 2013, the European Union agreed to a preliminary deal requiring oil, gas, mining and forestry companies to report in greater detail any payments at or above €100,000 (approximately $130,000) they make to foreign governments.1 This disclosure requirement has been incorporated in the proposals to revise the EU Accounting Directives2 and the Transparency Directive.3 The new legislation, which must be formally adopted by member states and the European Parliament, is a result of negotiations between the European Commission and the European Parliament regarding a European Commission legislative proposal adopted on October 25, 2011.
Requirements for Compliance
The proposal follows guidelines developed by the Extractive Industry Transparency Initiative (EITI)4 and requires all extractive and forestry industry companies listed on EU exchanges to report payments made to governments and local authorities in each country and for each project. Importantly, large unlisted companies registered in the EU also are required to comply.5 The extractive industry consists of all companies with activities involving the exploration, discovery, development and extraction of minerals, oil and natural gas deposits, while the forestry industry covers companies with activities involving the clear-cutting, selective logging or thinning of primary forests.
Companies in these industries will need to report taxes, royalties, signature bonuses, licenses, concessions, leases, and any other payments made to government and local authorities in the countries where the companies operate. "Other payments" subject to reporting requirements may include rental fees, transit fees, and dividends. This level of disclosure is required for each project the company has undertaken in each country. The threshold for the disclosure of payments related to each project is set at €100,000 (approximately $130,000).
Timing for Compliance
EU member states will have two years to implement the law once it is published in the EU official journal-possibly as early as September 2013.
Similarities to Dodd-Frank Section 1504
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included a provision requiring disclosure by extractive industry companies of payments to foreign governments. The SEC promulgated a final rule clarifying the requirements of Dodd-Frank Section 1504 in August 2012. The SEC rule requires all US and foreign private issuers with annual reporting requirements, regardless of size, to disclose any payments of over $100,000 made to foreign governments. "Payments" include taxes, royalties, fees, bonuses, production entitlements, dividends, and any infrastructure improvements. The disclosure, filed on Form SD, must state clearly the total amount of payments by country and project, the currency of the payments, the financial period in which the payments occurred, and the business segment making the payments.6
The proposed EU law, however, goes one step further than the US law by subjecting large companies registered in the EU to reporting requirements, even if they are not listed on an exchange or subject to other reporting requirements. The SEC rule, in contrast, only applies to US issuers and foreign private issuers with pre-existing reporting requirements to the Commission. The proposed EU law also is broader than the US law because it includes the forestry industry among the categories of companies covered by the new reporting requirements.
One area where the US law is more stringent than the EU law relates to exemptions from the disclosure requirement. The EU legislation provides that companies may exclude payments to a government where disclosure clearly is prohibited by criminal legislation of that country. In such a case, the company must report that it is not reporting payments in the specified country. Conversely, the SEC rule does not allow an exemption based on the illegality of disclosure in a foreign jurisdiction. In addition, the EU law provides an exemption in situations where obtaining the data required for disclosure is overly burdensome; the SEC rule provides no such exemption.
Application and Next Steps
As a result of the SEC rule and the preliminary EU legislation, nearly 90 percent of all major extractive industry companies will be required to disclose their payments to governments and local authorities. This type of disclosure requirement will quickly become the norm in extractive industries and may signal increasing disclosure requirements for other global industries, as well, such as telecommunications and construction. Indeed, EU ministers agreed on a clause in the proposed EU law that requires them to decide in 2015 whether to extend the disclosure requirements to other industries. As a result, companies with business activities that involve significant licensing and other payments to foreign governments should consider the feasibility of collecting and reporting the types of data required by the SEC rule and the proposed EU law. Companies operating in the extractive industries should take immediate steps to implement the necessary policies and procedures in order to comply with the accounting and reporting requirements set forth by the SEC and the European Union.
The editors would like to thank Karen Woody for her contribution to this article.