The Government of Canada recently issued a Consultation Paper regarding proposed mandatory reporting standards (the proposed standards) for payments by extractive industry companies to governments, both domestic and foreign, and including Aboriginal entities.1 The proposed standards are Canada’s implementation of a commitment made at the 2013 G8 Summit2 and reflect similar initiatives in several other countries, including the US through the Dodd Frank Act and the European Union (EU) through its Transparency and Accounting Directives.3
The proposed standards will apply to companies operating or headquartered in Canada that are involved in the commercial development of oil, natural gas, and minerals, whether in Canada or abroad. Companies involved in transportation within Canada are, apparently, not subject to the proposed standards, although the consultation paper is unclear as to how cross-border transportation undertakings are to be dealt with.
The proposed standards will apply not only to publicly listed companies, but also to medium and large private extractive companies operating in Canada. Medium and large private companies are determined as those which meet two of the three following criteria: (1) CA$20 million in assets; (2) CA$40 million in net turnover; and (3) 250 employees.
With respect to joint ownership or subsidiaries, extractive companies operating in Canada will be required to report if they have a controlling interest in any project in Canada or abroad. The proposed standards will adopt the International Financial Reporting Standards (IFRS) definitions of “control”, “joint venture”, and “joint operation”.
Affected companies would have to publish annual reports of payments of $100,000 and over, either cumulatively in one year or on a one-time basis. The reports would have to be made on a project-level basis, and include payments made to all levels of government, both domestically and abroad. Under the proposed standards, the following categories of payments would have to be reported:
- Taxes levied on income, production or profits of companies, excluding consumption taxes;
- Fees, including license fees, rental fees, entry fees and “other considerations for licenses and/or concessions”;
- Production entitlements (including payments made in-kind);
- Bonuses, such as signature, discovery and production bonuses;
- Dividends paid in lieu of production entitlements or royalties (excluding dividends paid to governments as ordinary shareholders; and
- Payments for infrastructure improvements (including roads, electricity, etc.).
Consistent with the U.S. and the EU, it is proposed that companies would not be required to report social payments such as for community centres, schools, hockey teams, arenas, capacity development, training and the like.
It is proposed that the disclosures would be posted on company websites, and would be available for free and unrestricted use by the public.
Payments to Aboriginal entities
The proposed standards would also extend to payments made to Canadian Aboriginal entities, including in relation to Impacts and Benefits Agreements. Payments to the following types of Aboriginal entities would be subject to mandatory reporting:
- Aboriginal organizations or groups with law-making power and/or governance mechanisms related to the extractive sector;
- provincially or federally incorporated Aboriginal organizations that undertake activities in the extractive sector on behalf of their beneficiaries; and,
- Aboriginal organizations or groups that are empowered to negotiate legally binding agreements on behalf of their members (this would include Impacts and Benefits Agreements).
Third party verification
Under the proposed standards, reports would have to be assured or verified by a third party, according to recognised accounting standards.
The Government of Canada has indicated its preference for these rules to be introduced via provincial securities regulators. However, if the provinces do not take the necessary steps in the near future, the Government of Canada has stated its commitment to introducing federal standards, and will begin work over the summer of 2014 to implement legislation by April 2015.
The Government of Canada is inviting feedback from interested parties prior to May 9, 2014. The consultation process builds on government dialogue with various groups that has occurred over the past year. The Resource Revenue Transparency Working Group (the Working Group), comprising the Mining Association of Canada, the Prospectors and Developers Association of Canada, Publish What You Pay – Canada, and the Revenue Watch Institute, issued recommendations in a paper published earlier this year.4 The Working Group’s recommendations include mandatory disclosure of the same information as contained in the proposed standards, but also includes transportation and terminal operations fees. The Working Group has also recommended that such disclosure be imposed through the provincial securities regulators.
In addition to placing an obligation on extractive sector companies to implement or adapt systems and processes to track and record relevant payments to governments, the proposed rules should be assessed in the context of business ethics and anti-corruption compliance policies and controls. Given the short lead-in time for introduction of the rules, companies operating in Canada should start the process of evaluating and implementing the steps they need to take, to avoid being unprepared for the changes to the Canadian regime. For companies with an international presence, compliance efforts in Canada will need to be addressed as part of wider efforts to comply with similar regimes to be introduced in the EU, and proposed for the US.