Canada’s move towards mandatory reporting of resource payments by mining and oil & gas companies to host governments got a big push recently at a meeting of provincial and territorial resource ministers. First, all provinces and territories endorsed the federal government’s plan to impose new rules with legislation to be introduced this fall. This is a key development as it removes the risk that such legislation will be challenged as being offside of federal jurisdiction. This was a big concern for Ottawa following its Supreme Court loss in the Securities Act reference case and will strengthen the federal government’s resolve to take the lead in legislating in this area.
In conjunction with securing provincial and territorial support, Canada’s Minister of Natural Resources Joe Rickford further cleared the way for the adoption of payment reporting by announcing that payments to Aboriginal groups will be exempted for two years for further consultation. This was the most controversial aspect of the federal government’s intended reporting framework since first announced in June 2013 and reiterated this past March (see here and here for previous bulletins on payment reporting). Aboriginal groups remained steadfast in their opposition to this disclosure and the scheme had little support from the mining and oil & gas industry, many of whom privately feared reporting these payments could hinder goodwill and their relationships with Aboriginal groups. Minister Rickford’s decision now better aligns Canada’s reporting framework with similar American rules introduced in the 2010 Dodd-Frank Act and the European Union’s recently amended Transparency Directive, neither of which cover payments to Aboriginal Groups. More importantly, the delay to aboriginal payment disclosure removes a further possibility of a court challenge to the scheme, which seemed inevitable following the Supreme Court’s recent landmark Tsilhqot’in Nation decision (See here for a bulletin on the implications of this ruling for project developers).
With the two main legal impediments to payment reporting in Canada now resolved, Canadian mining and oil & gas companies should fully expect legislation to be adopted by next spring, and payment reporting obligations to apply to their fiscal years ending after June 30, 2015. Companies that will be covered by this scheme – any mining, oil & gas companies publicly trading in Canada or privately held with $20 million in assets; $40 million in net turnover; or 250 employees – would be wise to take the following three steps to prepare for this new framework:
1. Assess Internal Capabilities
Fiscal year 2014 will likely be the last year that extractive companies in Canada will not have to report the payments they make to host governments to develop resource projects. This time should be used to assess record-keeping and accounting systems to ensure that these payments are properly tracked and can be reported in a verifiable manner. Natural Resources Canada has previously indicated a $100,000 threshold will be applied to such payments, which is the same threshold as in the United States. However, this can be a misleading figure as it represents an aggregate amount; any combination of taxes, permits, fees, licences, etc. that collectively equal or surpass $100,000 in a fiscal year to develop a mining or oil & gas project will require all payments to be reported (even those less than $100,000) on a disaggregated basis.
2. Prepare for a Competitive Intelligence Game Changer
While payment reporting may be seen as hassle to many resource companies, it also represents an unprecedented opportunity to see what competitors are paying to develop resource projects, often in the same jurisdiction. This information will undoubtedly impact how future resource contracts are negotiated with host governments, but it could also become an important tool for estimating project costs (and, thus, long-term profitability) and evaluating a management’s ability to create value for shareholders. Although we are still a year away from this information becoming widespread and easily accessible, the earlier companies are able to realize the benefit of this competitive intelligence, the better off they will be. (For more on how revenue transparency is a game changer for industry, see here.)
3. Keep an Eye on Longer-Term Payment Obligations to Aboriginal Groups
By pushing off aboriginal payment disclosure until at least 2016 and, crucially, until after the next federal election, it is now uncertain if such a scheme will ever be mandated in Canada (though it should be noted that neither federal opposition party has indicated a position on this issue). What is certain is that there is now at least a 24-month window where these payments will remain confidential. However, given that most mining and oil & gas contracts tend to have terms that can stretch into decades, a two-year window may not be a long time in this industry. Therefore, companies should keep in mind the possibility of future reporting when negotiating and entering into joint ventures, impact benefit agreements or related contracts with Aboriginal Groups that give rise to payment obligations. Should Aboriginal counterparties be resistant to payment disclosure, it may be worth exploring ways to structure a greater portion of payments upfront or at least before disclosure rules could apply in 2016.