As part of the global drive towards transparency in the mining industry the EU has published new rules on the disclosure by mining companies of payments to governments. Simon Trahair-Davies of Stephen Scown LLP outlines the new requirements.
EU Directives standardising accounting rules are normally at the very dry and technical end of the legislative spectrum. However, the EU has recently published its latest accounting directive which has received considerable publicity due to the new rules upon companies, within the extractive and logging industries, obliging them to make public the payments they make to governments at both the national and local level.
Why introduce new rules?
The new EU rules are a response to a policy at international level to promote transparency in extractive industry payments, an issue that has featured at the G8 level.
The US has already adopted parallel legislation (the Dodd-Frank Act) and the Mining Association of Canada has also published proposals for similar disclosure rules. These legislative initiatives are building upon the voluntary Extractive Industries Transparency Initiative, the aim of which is to improve transparency in those developing countries rich in resources.
Who has to disclose?
The rules will apply to all undertakings active in the extractive industry (as well as logging companies) listed on a stock exchange within the EU and also large private undertakings which satisfy two of the following three criteria:
1. a net turnover of €40million
2. a balance sheet total of €20 million
3. an average of 250 employees
An undertaking active in the extractive industry is one with an activity involving the exploration, prospection, discovery, development and extraction of, amongst other things, minerals.
What has to be disclosed, and what happens if there is non-compliance?
All payments (including payments in kind) of €100,000 (whether made as a single payment or a series of connected payments) and above in a financial year made to a government (this includes local and regional authorities) of an EU member state or third party country must be disclosed. The types of payments captured by the Directive are:
1. production entitlements
2. taxes
3. royalties
4. dividends
5. signature, discovering production bonuses
6. licence fees, rental fees entry fees and other payments for licences and/or concessions
7. payments for infrastructure improvements
Payments must be disclosed by both country and project. A project is defined as being an operational activity governed by a single contract, licence, lease or similar legal agreement, or by substantially interconnected multiple agreements.
There are very limited exemptions to the duty to disclose. In particular there is no provision allowing for non-disclosure due to confidentiality requirements, whether imposed contractually or under the general law of the country in which the payments are made.
The penalties for non-compliance are not specified in the Directive and it will be left to the member states when converting the Directive into national legislation to provide for ‘effective, disproportionate and dissuasive’.
When does the information have to be disclosed?
The rules are expected to come in for financial years beginning on or after 1 January 2016. The disclosures will have to be made annually.
Where will it have to be disclosed?
Groups will be able to consolidate their reporting. So a group with subsidiaries in member states, which would otherwise have to disclose payments at the subsidiary level, will not need to do so provided the parent undertaking is (a) subject to the laws of a member state and (b) the payments are included within the Group’s consolidated report.
The Directive also provides for an undertaking to be exempt from having to make a disclosure under the EU rules if it has made a disclosure under a third country regime that the
What does it mean for aggregates businesses in the EU?
Such companies will need to start considering:
1. If they are going to be caught by these new rules
2. If so, which of their projects and payments to governments will trigger a requirement to disclose
3. Whether there are any possible difficulties under local laws or confidentiality provisions in contracts/licences etc., that may conflict with the obligation at the EU law level to disclose.
4. A review of its internal procedures for notification, approval, recording and accounting for all payments that need to be disclosed.
Simon Trahair-Davies is a Partner in the mining and minerals team at
