Last week, the Resource Revenue Transparency Working Group (Working Group) published a report entitled “Recommendations on Mandatory Disclosure of Payments from Canadian Mining Companies to Governments”, which resulted from more than a year of multi-stakeholder consultations, expert guidance, and a public comment process across Canada. The Working Group, which is comprised of Canada’s two largest mining industry groups (the Mining Association of Canada and the Prospectors and Developers Association of Canada) and two civil society transparency groups (Revenue WatchInstitute and Publish What You Pay (Canada)) had originally issued a set of draft recommendations in June 2013 for the purposes of furthering consultations with stakeholders. The draft was issued two days after Prime Minister Stephen Harper announced that Canada was adopting a G8 initiative requiring disclosure of payments by Canadian mining and oil and gas companies to foreign and domestic governments.
Key Takeaways from the Report/Recommendations
Which companies should have to disclose payments? Mining companies (i.e. companies that engage in the commercial development of minerals and make any of the prescribed payments in Canada or abroad) whose securities are publicly traded on Canadian stock exchanges should be required to report, including their subsidiaries and any other entities over which the parent company exerts (a) control directly or indirectly (in accordance with International Financial Reporting Standard (IFRS) 10), (b) joint control (as defined in IFRS 11, on a proportionate basis), or (c) significant influence (according to International Accounting Standard 28, on a proportionate basis). Requirements should also be extended to apply to foreign companies seeking to raise capital in Canadian markets. Private companies are not covered by the recommendations.
What types of payments should be covered? Disclosure on an disaggregated and cash basis should be required for the following types of payments: profit taxes, royalties, fees, production entitlements, bonuses, dividends, infrastructure payments required by law or contract (e.g. building a railway or a road), and transportation and terminal operations fees when paid to a public body. Payments should be reported on a project-by-project basis, with legal agreements (e.g. contracts, licenses, leases, concessions, etc.) that give rise to the payment liabilities serving as the basis for determining a “project” rather than using materiality, reporting units, country activity or geology.
What are the reporting thresholds? There should be two thresholds – one for issuers listed on the TSX ($100,000), which is aligned with the regimes in the U.S. and EU, and a second lower threshold for venture issuers ($10,000).
What is the form and format of the disclosure? A disclosure framework should be implemented through provincial securities regulations in Canada. Payment disclosure should be filed in a separate form on an annual basis (in line with the fiscal year of reporting company) and made available to the public on SEDAR. Disclosure should include the total amounts of payments (made by category), currency used, financial period, business segment, identity of the government, and project to which the payments relate.
What verification and audit requirements should apply? The verification standard should be in line with existing securities safeguards and requirements.
What penalties should apply for failure to report or reporting inaccurate information? Penalties should be consistent with the current enforcement regime of provincial securities disclosure requirements and proportionate to the violation and its impact.
What exemptions are provided? No exemptions from the reporting recommended should be provided as it would run counter to the spirit of improving transparency.
Next Steps Going Forward
The Canadian federal government (led by Natural Resources Canada) is consulting with the provinces and territories, First Nations and aboriginal groups, and industry and civil-society organizations in developing a framework and setting up a new reporting regime for both mining and oil companies.
The recommendations published by the Working Group are expected to provide a blueprint for a payment reporting framework for publicly-traded mining companies in Canada and aim to bring Canada in line with measures being adopted by the EU and U.S. (which, as discussed in our earlier article, had suffered a setback last year due to a legal challenge, forcing the U.S. Securities and Exchange Commission to reconsider its rules). The Working Group recommends that Canadian disclosure requirements need to include explicit recognition and acceptance of equivalent foreign reporting regimes and that “mandatory disclosure requirements be implemented in an expeditious manner, while providing reporting companies with the appropriate time to adjust their accounting and reporting systems to comply with new disclosure regulations”.