February 2015 Newsletter Extractive Industries Reporting Requirements
1. Introduction
2015 is the first year of implementation of the first wave of initiatives covering the reporting of payments by extractive industries to governments or government agencies.
UK oil and gas companies will be affected by the following;
- EITI (Extractive Industries Transparency Initiative)- a voluntary initiative promoted by the government and certain industry bodies that seeks to demonstrate the correlation between company payments and declared government receipts with first reports required in the first half of 2015, and
- the EU Accounting Directive requirements for extractive industries, which adds further reporting requirements for companies in addition to the financial statements, with the first report to be filed for most companies by November 2016.
The details of payments reported under UK EITI are being aligned with the requirements of the EU Directive, but the EITI is being implemented first.
2. Content of reports; payments and other information
The content of the EITI reports is to be based on the requirements for the EU Directive, except that that the EITI report is likely to seek additional information on beneficial ownership of companies, and is only concerned with payments to UK government bodies and agencies.
The EU Directive requires a report from each ‘large’ UK company unless it is a subsidiary of an EU or UK company which prepares a consolidated report incorporating the payments made by the company.
Reporting is required for ‘large’ companies and groups, and listed companies. For these purposes ‘large’ is where the group meets at least two of the following;
(a) its balance sheet total on its balance sheet date exceeds £18 million,
(b) its net turnover on its balance sheet date exceeds £36 million,
(c) average number of employees during the financial year exceeds 250.
The payments to be reported are those made to a government or government agency or similar body in relation to the extraction activities. These include licence fees, taxes (excluding VAT and salary taxes), and payments such as signature bonuses, production entitlements and similar payments. For some payments the relevant project will need to be identified. Fines, interest and penalties do not need to be reported.
Any payment whether made as a single payment or by instalments which exceeds £86,000 should be reported. This threshold is applied to licence payments on a licence by licence basis not in aggregate.
3. EU Directive vs UK EITI
The aims of the initiatives differ;
- EITI aims to demonstrate openness and accountable management of natural resources by the relevant country through an independent report reconciling government receipts and company payments,
- the EU Directive aims to disclose EU company payments to any governmental authority worldwide.
The difference between the objectives is reflected in the method of reporting; company reports made under the EU rules will be made electronically to Companies House, whereas EITI reports are simply requested by the independent administrator.
The first UK EITI report will cover payments made in 2014, whereas the first reporting required under the EU Directive is for payments in 2015.
4. UK EITI reporting
UK EITI reporting is entirely voluntary. The independent administrator will invite companies to respond and HMRC will seek a waiver of confidentiality from companies to allow HMRC to share the details of payments.
The EITI process is evolving, but we expect requests to be made in the first quarter of this year, with a 3 month window in which to reply. It is assumed that the process will repeat annually.
The first UK EITI report will cover payments made in 2014, but to assist in identifying 2015 payments of ring fence CT HMRC has asked oil and gas companies to differentiate these from tax paid on other activities, and in particular to arrange for separate payments to be made. We have details of this suggested procedure if you require.
5. EU Directive reporting
The Reports on Payments to Governments Regulations 2014 have been enacted into UK law to comply with the EU Accounting Directive, and require disclosure of payments made to all governments in respect of extraction activities.
The Regulations apply to the first accounting period commencing on or after 1st January 2015 and cover the payments made within each period. The first report will be required to be filed within 11 months of the period end.
However for those companies which are members of a group for which consolidated accounts are prepared in another EU state there is delayed implementation; their first reporting is made in respect of the first accounting period commencing on or after 1st January 2016.
Comment;
Oil and gas companies are well aware of the high profile of their activities. The increased transparency sought by authorities and civil society is now being taken forward in a number of separate initiatives and companies need to be prepared for the impact of these.
For most UK oil and gas companies the first to have an impact will be UK EITI. The UK government has committed to the EITI to set an example and demonstrate its accountability. The UK EITI programme has the support of many industry players and organisations, and relies upon the companies to voluntarily provide certain information, waive taxpayer confidentiality, and potentially assist the independent administrator to reconcile amounts.
Nevertheless, companies should be aware that responding to requests for information, assisting HMRC in identifying ring fence CT and waiving confidentiality are all voluntary. As preparation for what is required under the new Regulations enforcing the EU Directive there may be some benefit to responding positively to the UK EITI, but when resources are stretched companies should not feel compelled to assist when there is no obligation on them to do so. The EU Directive reporting is however compulsory with most companies having to file their first report on or before 30 November 2016.
CW Energy LLP February 2015