ARTICLE
29 January 2015

Extractive Industries

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New obligation on the extractive industries to disclose payments to Government entities.
UK Corporate/Commercial Law
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New obligation on the extractive industries to disclose payments to Government entities.

UK companies in the extractives industries must provide Companies House with a report on the payments they have made to Government entities for any financial year starting after 1 January 2015. Directors of a defaulting company may be liable to an unlimited fine and/or a prison sentence of up to two years.

The report must detail:

  • Which countries received payments
  • The amount paid to each government
  • The type of payments made – that is, taxes, royalties, bonus, licence fee, production entitlements, or dividends
  • A breakdown of payments by project

This requirement has arisen because of the publication by the Department for Business Innovation & Skills (BIS) of its response to consultation in relation to the UK implementation of the EU Accounting Directive's Chapter 10, which relates to extractives industry reporting.

BIS has stated that only the prospect of criminal sanctions for the directors of defaulting companies would achieve the aim of compliance to the new regime. It is no defence for a company to point to a confidentiality clause within its agreements with the relevant Governments.

The UK will implement the provisions of Chapter 10 from 1 December 2014, well in advance of the deadline of 20 July 2015 set out in the Accounting Directive. The UK has recently become a candidate country to the Extractive Industries Transparency Initiative, and by becoming an "early adopter" may wish to demonstrate its commitment to transparency in this sector and to lead by example.

Companies have 11 months from the end of their financial year to deliver the reports, so the first reports can be expected towards in the third quarter of 2016.

On 5 November 2014 BIS published draft guidance prepared by The International Association of Oil and Gas Producers and The International Council on Mining and Metals in relation to the new reporting obligations. The guidance is out for consultation only at this stage (consultation closes on 17 December 2014). It provides detailed information to companies in the extractives industry about which entities are covered by the new rules, what they are required to report and the timing and process for reporting.

The new regulations have yet to be finalised but are expected to come into force on 1 December 2014 and will apply to companies in the extractives industries which are:
  1. large limited liability companies registered in the UK, which are those which meet at least two of the three following criteria:

    • balance sheet total in excess of GBP 18 million
    • net turnover in excess of GBP 36 million
    • over 250 employees on average over the course of the financial year
  2. all "public interest entities", defined as including (among others) companies listed on a regulated market in any member state
The de minimis threshold is low, at GBP 86,000 (for a single payment or series of related payments in a financial year).

The definition given to "Government" is wide and will catch all Government sub-divisions and entities, including state-owned entities such as national oil companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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