New reporting requirements for extractive industries

The UK Government is introducing new obligations for oil and gas, mining and logging companies to annually report the payments they make to the governments of the countries where they operate. The Department for Business, Innovation and Skills (BIS) is currently consulting on the proposals, which will be brought into force by the Reports on Payments to Governments Regulations 2014 (the Regulations). The consultation closes on 16 May 2014. This briefing summarises:

• who the obligations apply to;
• the timing and content of the required report; and
• the penalties that may apply for breach of the reporting obligations.

The context: Accounting Directive and Transparency Directive

The proposals implement the requirements of Chapter 10 of the EU Accounting Directive (2013/34/EU), which seeks to bring greater transparency to extractive industries. The Accounting Directive applies to companies registered in EU Member States. An amendment to the EU Transparency Directive (2004/109/EC) imposes equivalent reporting requirements on companies active in extractive industries with securities admitted to trading on EU regulated markets even if they are not registered in the European Economic Area.

UK proposals

Who: The reporting requirements will apply to UK-registered companies involved in the oil and gas, mining and logging sectors, which are UK-listed companies or are "large". A company is defined to be "large" if at its balance sheet date, it fulfils two out of the following three criteria:

• its balance sheet total exceeds £17.8m;
• its net turnover exceeds £35.6m; or
• its average number of employees during the financial year to which the balance sheet relates exceeds 250.

An exemption applies to subsidiary companies covered by reports made by their parent companies.

What: The directors of affected companies will have an obligation to prepare and file with Companies House a report (extractive report) on an annual basis, that will need to:

• be prepared on the basis of individual projects;
• include all payments made in money or in kind, whether made as a single payment or a series of related payments, totalling £84,800 or over;
• disclose the total amount of payments made to each level of government, including national, regional and local governments, and state-owned organisations; and
• disclose the total amount per type of payment. The types of payments covered include taxes, royalties and bonuses.

Industry guidance will be published setting out a template for the extractive report.

When: BIS has proposed that the first extractive report should be prepared in respect of financial years commencing on or after 1 January 2015. Listed companies will be required, by the provisions of the Transparency Directive, to publish their report within six months of the end of the relevant financial year. BIS has proposed that unlisted UK-registered companies (to whom the regime applies) will be required to prepare and file the extractive report with Companies House no later than 11 months after the end of their financial year.

Penalties: It has been proposed that it will be a criminal offence for directors to fail to discharge the reporting obligations, as well as a civil penalty for the company. BIS is also consulting on the penalties that may apply if a report is filed containing misleading, false or deceptive information.

Many companies active in extractive industries are already gearing up for the new reporting requirements. In the US, the Dodd-Frank Act imposes similar requirements on US-listed oil and mining companies. However, those requirements are not yet in force because the US Securities and Exchange Commission (SEC) rule that implements the requirements is currently under review by the SEC. In the meantime, in March 2014, FTSE 100 company Tullow Oil became the world's first extractive industries company to voluntarily publish details of the payments it has made to the governments of the countries where it conducts its oil and gas activities.

What next?

BIS has said that it will publish a Government response to the consultation within 12 weeks of the closing date - i.e. by 8 August 2014. The draft Regulations contemplate that they will come into force on 1 October 2014. It is expected that HM Treasury will consult separately on the implementation of the equivalent requirements under Article 6 of the Transparency Directive.