The United Kingdom has become the first EU member state to transpose the most recent EU directives on accounting and transparency rules, in an effort to satisfy growing demands for an EU-wide strategy to fight corruption in relation to the substantial payments that oil and gas companies are often required to make to government entities by way of signing bonuses, taxes or royalties.
Reports on Payments to Governments Regulations 2014
The United Kingdom has passed regulations to conform with the EU Accounting Directive (2013/34/EC), which provides in Chapter 10 for new reporting obligations for certain types of company. The Reports on Payments to Governments Regulations 2014 came into force on December 1 2014, more than seven months ahead of the deadline imposed by the directive. UK-registered companies operating in extractive industries such as oil, gas and mining are now required to disclose certain payments made to governments in the various countries in which they operate, on a country-by-country and project-by-project basis.
In addition, companies that are not incorporated anywhere in the European Union but are listed in the United Kingdom can expect similar rules from the Financial Conduct Authority as a result of its early implementation of the EU Transparency Directive (2013/50/EC).
Similar rules already exist in the United States, according to which companies engaged in the commercial development of oil, natural gas or minerals are required to disclose payments made to the US federal government and all foreign governments.
The regulations provide that the directors of 'large undertakings' or 'public interest entities' which are incorporated in the United Kingdom and involved in extractive industries (including the extraction of crude petroleum and natural gas) are required to disclose on an annual basis any single payment or series of related payments over £86,000 made to any government. The reporting obligation comes into force for the financial year commencing on or after January 1 2015 and companies have 11 months from the end of their financial reporting year to prepare and submit the report. However, this is not applicable to UK subsidiaries of parent companies that are obliged to report under the laws of another EU member state, for which these requirements are only applicable to the financial year commencing on or after January 1 2016.
A 'large undertaking' is defined as an entity which meets any two of the following three criteria:
- a total balance sheet in excess of £18 million;
- a net turnover in excess of £36 million; and
- an average number of employees in excess of 250.
A 'public interest entity' includes:
- entities listed on a regulated market in any EU member state;
- credit institutions;
- insurance undertakings; and
- entities designated as public interest entities.
If any undertaking referred to above is a parent undertaking that is obliged to prepare consolidated group accounts, the relevant directors must prepare a consolidated annual report to satisfy the disclosure obligation required of that undertaking. In this case, a parent undertaking will be considered a company involved in the extractive industry if its subsidiary is involved in the extractive industry.
Payments to be disclosed
Only payments, whether in cash or in kind, related to the relevant activities covered by the regulations (ie, those involving the exploration, prospection, discovery, development and extraction of minerals, oil, natural gas deposits and other materials), must be disclosed. The list of the various categories of payment that are covered by the regulations is exhaustive, and includes:
- production entitlements;
- taxes on income, production or profits (excluding value added tax, personal income tax and sales tax);
- dividends (other than ordinary course payments), provided these are paid to the government on the same terms as to other shareholders and not in lieu of production entitlements or royalties;
- signature, discovery and production bonuses;
- licence, rental and other fees and considerations for licences or concessions; and
- payments for infrastructure improvements.
The disclosure must be made to Companies House in the form of an annual report with the following information:
- the government and country to which the payment has been made and the total amount paid; and
- the total amount per type of payment made to each government.
In the case of a consolidated annual report, the relevant information listed above must be included for the parent undertaking and any subsidiary undertaking included in the consolidated group accounts of that parent undertaking. However, certain payments of subsidiary undertakings may be excluded from the consolidated report, as is the case where the relevant information cannot be obtained without disproportionate expense or undue delay or where subsidiaries are held exclusively with a view to subsequent disposal.
Payments must be listed on a project-by-project basis or at an entity level if the payment obligations are imposed on a particular project or entity, respectively. In either case, the regulations emphasise that the disclosure must reflect the substance of the payments, rather than the form.
The concept of 'government' is also broadly defined to include national, regional and local government authorities and their departments, agencies and subsidiary undertakings.
An exemption from reporting obligations applies if a company or its parent is subject to equivalent reporting requirements (ie, from another country as determined by the European Commission from time to time), which include the payments made to governments, although the information contained in such equivalent report must be delivered to the UK registrar.
Further, directors of a parent undertaking will not be required to prepare a consolidated report if:
- the group meets any two of the following three criteria:
- a total balance sheet of under £21.6 million;
- a net turnover of under £43.2 million; and
- an average number of employees of fewer than 250 (unless any group member is a public interest entity); or
- the parent undertaking has itself a parent undertaking that is governed by the law of an EU member state other than the United Kingdom (ie, a holding company will not have to report in the United Kingdom if its parent company is obliged to report elsewhere in the European Union).
However, this does not exempt the relevant director from having to disclose payments of the relevant parent undertaking; it means only that such disclosure does not have to be on a consolidated basis for the group.
Directors will be subject to criminal liability for not complying with these disclosure requirements, which may be punishable with unlimited fines or potential jail terms.
Ben James, Ana Becker-Weinberg
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