In the next year, companies that work in the development of oil, natural gas or minerals will have to publicly make new disclosures of payments of $100,000 or more made to governments. The $100,000 threshold is on a project-by-project basis, and will require companies to provide details of the type and amounts of payments made.
By a vote of two to one, with two commissioners recusing themselves, on August 22, 2012, the Securities and Exchange Commission (the “SEC”) adopted long-awaited rules requiring extensive project-by-project disclosure of tax and royalty payments made by resource extraction issuers worldwide. Resource extraction issuers (companies working in the development of oil, natural gas or minerals) are required to annually disclose payments of $100,000 or more made in a fiscal year to the U.S. government or foreign governments. The $100,000 analysis is on a project-by-project basis. The new rule’s adoption was mandated by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 13(q) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is intended to improve transparency among companies involved in resource extraction.
Companies are required to make the payment information publicly available by filing the information with the SEC on a new form called Form SD. The information must be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format. Form SD is considered “filed” rather than “furnished” for purposes of Section 18 liability under the Exchange Act.
A resource extraction issuer is required to comply with the new rule for fiscal years ending after September 30, 2013, and the form must be filed with the SEC no later than 150 days after the end of its fiscal year. For the first report, most resource extraction issuers may provide a partial report disclosing only those payments made after September 30, 2013. For example, if a company’s fiscal year began before September 30, 2013, its first report only must include information about payments made after October 1, 2013. For any fiscal year beginning on or after September 30, 2013, a resource extraction issuer will be required to file a report disclosing payments for the full fiscal year. For a fiscal year ending December 31, 2013, the issuer must only disclose information relating to October 1, 2013 to December 31, 2013.
A resource extraction issuer (including domestic and foreign issuers and smaller reporting companies) will be required to disclose payments made to governments if it meets the following criteria:
- The issuer is required to file an annual report with the SEC.
- The issuer engages in the commercial development of oil, natural gas or minerals.
An issuer must also disclose payments made by a subsidiary or another entity controlled by it.
Form SD Disclosures
Companies that are affected must disclose payments that:
- Are made to further the commercial development of oil, natural gas or minerals;
- Are “not de minimis;” and
- Include taxes, royalties, fees, production entitlements, bonuses, dividends and payments for infrastructure improvements.
In response to concerns expressed about the difficulty of allocating certain payments that are made for obligations levied at the entity level, such as corporate taxes, to the project level, issuers may disclose those payments at the entity level rather than the project level. Had issuers been required to report taxes on a project-by-project basis, highly confidential information could have been publicly disclosed.
Under the rule, “commercial development of oil, natural gas or minerals” includes exploration, extraction, processing and export of oil, natural gas or minerals or the acquisition of a license for any such activity. According to the SEC’s commentary to the new rule, commercial development is limited to “activities that are directly related to the commercial development of oil, natural gas, or minerals,” thereby excluding “activities that are ancillary or preparatory” to such commercial development, such as manufacturing a tool used in the extraction.
“Not de minimis” means any payment (whether a single payment or a series of related payments) that equals or exceeds $100,000 during the most recent fiscal year. The rule does not have an exception for payments that seem immaterial compared to the company’s overall financial performance.
The rule does not contain exemptions for reporting commercially or competitively sensitive information or exemptions for instances in which reporting the payments might violate foreign laws. In the SEC comment process, there were complaints that the disclosures made in Form SD may violate laws of a foreign country, which may have an effect on the company’s presence in that country or its employees.
The new required disclosure includes: (i) the type and total amount of payments made for each project related to resource extraction, (ii) the type and total amount of payments made to each government, (iii) the currency used to make the payments, (iv) the financial period in which the payments were made, (v) the business segment making the payments, (vi) the government that received the payment (including the country in which such government is located) and (vii) the project to which payments relate. The SEC has not defined “project” so as to allow issuers flexibility in applying the term.
Effect on Companies
The new disclosures will add a new burden to most compliance officers and other employees in charge of securities compliance, as the $100,000 threshold may be low for many companies. However, the types of payments covered by the new rule may be relatively easy to record and analyze if the company has a system of accurate internal reporting and recordkeeping in place.