March 22, 2013
If your Canadian mining or oil and gas company is registered with the SEC, your company will soon have to start reporting payments it makes to governments in all the countries where it operates. This new reporting requirement applies for companies’ fiscal years ending after September 30, 2013. Your company may need to start preparing its systems and processes right away to ensure you will be ready to file your first report on time.
The U.S. Securities and Exchange Commission (SEC) recently adopted new payment disclosure rules known as the Dodd-Frank Act section 1504. These rules require all foreign companies reporting to the SEC that extract oil, natural gas or minerals to provide data about any payments to governments for the commercial development of these resources. Commercial development refers to exploration, extraction, processing and exporting, and may include other activities as well.
The payments that must be reported can include taxes, royalties, fees such as licensing fees, production entitlements and infrastructure improvements such as building a road or railway. This information must be included in an annual filing to the SEC starting for companies’ fiscal years ending after September 30, 2013.
Among the reporting requirements, resource extraction companies must allocate the payments by project and by country. This obligation to publicly report such payments on a project-by-project basis is likely to prove challenging for the mining and oil and gas industries. Companies will have to identify all payments to governments relating to any of their operations or projects, such as drilling wells, building roads or training workers.
KPMG observation — More reporting rules on the horizon?
The Dodd-Frank reporting rules are part of worldwide efforts to require companies to disclose government payments. These efforts include the Extractive Industries Transparency Initiative, a voluntary project by the Canadian mining industry, and a proposed EU Directive on Government Payments Reporting.
The Canadian and EU proposals for mandatory reporting have not yet been adopted but once they are, an affected company may be subject to one, two or all three of these laws. As it stands, the disclosure standards vary for each of these initiatives. Companies will need to monitor developments to ensure they understand all their obligations and can meet them on time.
Challenges in preparing for SEC reporting
Preparing your company for SEC reporting may be challenging for several reasons:
Wide range of payments included
Many different kinds of payments to governments fall under the SEC provision. Such payments can be in cash or in kind and can include taxes, royalties, fees (including licensing fees), production entitlements and bonuses.
Many kinds of government entities are included in the provision, from a mining ministry to an environmental agency to a state-owned enterprise. It will be time-consuming to pull together all your company’s payments to all these entities.
No exemption for sensitive information
The final rule does not have exemptions for government prohibitions, confidentiality provisions, or commercially sensitive information. (This rule is unlike other SEC disclosure rules for oil and gas reserves that exempt certain disclosures if they would be prohibited by a foreign government.)
Meaning of “project” not clearly defined
The new rules leave the term “project” undefined to provide resource extraction issuers flexibility in applying the term to different business contexts. However, the rule release provides some guidance on the SEC’s view of what a project would be.
Even assuming that these terms are clearly defined, it will be difficult for issuers to break down expenditures on a project-by-project basis or to separate payments to government entities from payments to the private sector.
Worldwide information required
Not all companies will have centralized the information, or have a single source for the information. Thus, gathering and consolidating data from different parts of the world and on different IT platforms adds to the complexity.
New compliance processes may be needed
If your company is subject to the new requirements, you must understand the disclosure rules and consider whether your current systems can provide the necessary reporting. Given the challenges of organizing the data to comply with the new reporting requirements, you may want to start now. If your company establishes new compliance processes as early as possible, you may reap cost savings and operational improvements that can help offset the cost of compliance with the new rules.
KPMG observation — Benefits of reporting tax payments
The Dodd-Frank Act is part of a global movement to enhance the public scrutiny of the relationship between the extractive industries and host governments. Though your company may have to comply with the new reporting rules, you may benefit from doing so because providing detailed information about how your company contributes to the countries in which it operates can enhance its relationship with people in those countries, your shareholders and other stakeholders.
Preparing for this reporting as soon as possible can give you an opportunity to review your business practices and consider any potential public relations issues to see whether any changes are warranted before you make the information public.
Gathering this information also provides an opportunity to gain valuable insights as to how your organization manages payments to governments.
We can help
Your KPMG adviser can help you determine your obligations under the new Dodd-Frank Act reporting requirements. We can help you review your company’s operations around the world to define the impact of the new rules on your people, processes, technology, data requirements and reporting. We can also help keep you up-to-date on developments in the Canadian and EU reporting initiatives. For details, contact your KPMG adviser or John Bain, National Leader, Dodd-Frank Reporting, at (416) 777-3894.
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Information is current to March 22, 2013. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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