Natural Resources Canada (NRCan) has released its final Guidance to assist Canadian extractive sector businesses in complying with the Extractive Sector Transparency Measures Act1 (the Act). Our previous legal update on this topic outlined the scope of this regime, which came into force on June 1, 2015, requiring the disclosure of certain categories of payments made to domestic and foreign governments as well as related bodies.
A new version of the Technical Reporting Specifications document, providing the form and manner specifications for the reporting process, has also been released as well as a new Reporting Template and Contact Form. First reports for organizations whose financial year-end is December 31 (covering the period between January 1, 2016, and December 31, 2016) will be due on May 30, 2017, and must be made publicly available for five years. NRCan will publish on its website links to all the reports it receives for this time period.
“Commercial development of oil, gas and minerals”
The Act requires disclosure of certain payments made in relation to the commercial development of oil, gas and minerals. The Guidance clarifies that the legislation’s intent here is to capture the key phases of commercial activity, extending from prospecting and exploration to closure, remediation and reclamation.
Consequently, ancillary or preparatory activities such as the manufacturing of equipment or the construction of an extraction site as well as post-extraction activities such as refining, smelting, processing, marketing, distribution, transportation and export are not included, as long as they are not integrated with extraction operations. For example, payments made to a government by an engineering, procurement and construction company under contract for building permits and other fees that are related to constructing a processing plant are not likely reportable.
It is important to note that even if a business is not directly engaged in the commercial development of oil, gas or minerals, reporting obligations will apply to entities it directly or indirectly controls that are engaged in such development, in Canada or abroad.
Applying the size-related criteria
As described in our last update, the Act applies to businesses that are either publicly listed in Canada or have a place of business in Canada, do business in Canada or have assets in Canada and meet a certain size threshold, i.e., at least two of the following conditions for at least one of their two most recent financial years:
- $20 million in assets;
- $40 million in revenue; and/or
- employ an average of at least 250 employees.
The Guidance provides that the calculation of assets and revenues should be on a gross basis, based on consolidated financial statements, and is not restricted to assets or revenue in Canada or solely deriving from the commercial development of oil, gas, or minerals. Moreover, the number of employees includes people residing or employed in Canada as well as any other jurisdiction. It also includes full-time, part-time and temporary employees, but does not include independent contractors, all as defined in Canadian common law.
Reportable payments (monetary or in-kind) are the specific categories of payments described in the Act and made to governments at any level, including national, regional, state/provincial or local/municipal levels as well as Crown corporations and other state-owned enterprises that are exercising or performing a power, duty or function of government. However, when governmental entities are engaging in commercial activities or acting in the capacity of a commercial partner, rather than exercising such functions, the payments may not be reportable. For example, payments made in the context of a joint venture with a foreign state-owned enterprise acting as operator may not be captured.
The tax category is intended to capture payments relating to commercial development such as property taxes on a building on an extraction site, income and profit or capital gains taxes, capital or mining taxes, windfall profits taxes, resource surcharges and petroleum revenue taxes. The infrastructure improvements category, however, is not intended to capture payments relating to operational purposes, such as building a road to access a mine. Rather, developments outside of this scope such as roads or sewage systems built for a government are generally captured.
In all cases, the facts and circumstances must be considered carefully and Canadian businesses should look at the substance, rather than the form, of payments in determining which category is applicable.
To date, the only acceptable substitution for the Canadian reporting requirements remains the European Union’s Accounting and Transparency Directives. However, on December 11, 2015, the United States Securities and Exchange Commission (SEC) re-issued proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC anticipates adopting final rules on or before June 27, 2016. The proposed regime would require an issuer with a fiscal year-end of December 31, 2017, to file its first report by May 30, 2018.
NRCan has not yet assessed whether the American regime is an acceptable substitute for the Canadian reporting requirements; however the similarity between the two regimes suggests this is likely. Canadian businesses should note, however, that NRCan reserves the right to impose additional conditions on businesses that wish to rely on a report submitted to a foreign regime in order to address any gaps in the reporting requirements.
1 S.C. 2014, c.39, s.376.