The U.S. is ramping up taxation transparency requirements for firms operating in the extractive industry sector (oil, natural gas, and minerals) with two complementary initiatives to be launched this year. On September 30, the SEC's new disclosure rule arising from section 1504 (the Cardin-Lugar amendment), a two-page addendum to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) of 2010, will take effect.
Also, the U.S. Department of the Interior has begun a process to bring the U.S. into compliance with the Extractive Industries Transparency Initiative (EITI), a nongovernmental organization headquartered in Oslo dedicated to improving the economic returns for resource-rich countries through reporting of extractive industry company payments, including taxes, made to governments.
Dodd-Frank section 1504 amends the Securities Exchange Act of 1934 by adding a new section 13(q), "Disclosure of Payments by Resource Extraction Issuers," which requires country-by-country (and project-by-project) reporting of all payments, including taxes, made to all foreign governments and the U.S. federal government.
The legislation requires firms operating in the extraction industries that file a yearly report with the Securities Exchange Commission and that are engaged in the commercial development of oil, natural gas, or minerals to annually file a detailed report with the SEC (new Form SD, which is separate from countries' 10-K annual report) listing all payments, including taxes, fees (including license fees), royalties, production entitlements, bonuses, dividends, and infrastructure improvements. Payments of at least $100,000 during the most recent fiscal year must be listed. Analysis of Dodd-Frank.
Activities that fall under the rule's definition of "commercial development" include exploration, extraction, processing, export, or the acquisition of licenses to do any of these.
The new reporting requirements created by the Cardin-Lugar amendment will affect both domestic and foreign firms, apply to subsidiaries or other controlled entities of extraction industry companies, and take effect on September 30, 2013. Because the reports must be filed with the SEC no later than 150 days after the end of the company's fiscal year, the first reports could be due February 28, 2014, if any affected firms have a fiscal year ending September 30.
Reports must be detailed and specific, including the listing of payments to each individual foreign government, foreign subnational government, and the U.S. federal government (payments to subnational U.S. governments, such as state governments, need not be reported). Also, the reports will be available online to the public.
More specifically, the reports must separately list each project and the type and total payments made in relation to each project; the type and total amount paid to each government, including a list of the governments that received payment and the country in which they are located; total payments by category; the currency in which the payment was made; the relevant financial period; and the business segment of the firm that made the payment.
The Cardin-Lugar amendment was coauthored by Sen. Benjamin L. Cardin, D-Md., and (now former) Sen. Richard G. Lugar, R-Ind. Sen. Patrick J. Leahy, D-Vt., chair of the Senate Judiciary Committee, worked closely with Cardin and Lugar as a conferee and successfully offered the amendment during the Dodd-Frank conference. The legislation is based on the failed Energy Security Through Transparency Act (S. 1700) championed by Lugar and Cardin and introduced by Lugar on September 23, 2009. Related Lugar press release. Prior coverage.
President Obama signed Dodd-Frank into law on July 21, 2010. In December 2010 the SEC issued proposed regulations, but because of the tremendous response during an extended comment period, final regulations were not promulgated by April 17, 2011, when they were due. This prompted a May 16, 2012, Oxfam lawsuit seeking to force the SEC to make final rules because the agency's "unlawful failure [to publish final rules] simultaneously denies investors an important tool for assessing investment risk and impedes Congress's plan to use transparency to tackle the resource curse." The complaint was filed in the U.S. District Court for the District of Massachusetts.
In its defense, the SEC pointed out that it had to wade through the many responses it received (which included 150 original comment letters, 149,000 form letters, and a 143,000-signature petition), and that it faced strong pressure from the American Petroleum Institute (API) to repurpose the draft rule because of "deficient economic analysis." At the same time, however, many lawyers, investors, and even the State Department were urging the SEC to complete the final rules.
The SEC published final rules on August 22, 2012.1 At the time of the publication, Commissioner Elisse B. Walter projected that about 1,100 companies would be affected. In addition to helping address the resource curse -- the situation in which resource-rich countries remain or even become further mired in poverty despite the value of their commodity -- the rules are seen as a tool in the fight for stronger offshore tax enforcement through greater transparency, albeit in the limited forum of the extraction sector. The SEC also acknowledged that the rules will serve as informational tools for investors, an outcome the agency says that Congress intended.
"I'm pleased that the SEC has adopted the long-overdue final rule implementing the Cardin-Lugar amendment. Increased transparency reduces the risk for U.S. investors and allows citizens in resource-rich countries to hold their leaders accountable," Cardin said in an August 22, 2012, statement as the SEC released the final rules. "Increased transparency will not put companies that comply at a competitive disadvantage. We also expect, with U.S. leadership, the SEC rule will become the norm for governments and markets around the world," he said.
"Information is power," said Lugar in the same statement. "It is power for shareholders and power for citizens living under oppressive regimes. With the Cardin-Lugar amendment, the U.S. is leading the world in the moral and economic necessity to choose transparency over shadow, rule of law over corruption."
"Sunshine is a powerful disinfectant, and the SEC has just pulled back some curtains. I hope that the SEC's final rule relating to section 1504 will increase transparency for companies involved in the development of oil, natural gas and minerals," added Leahy.
In the view of the State Department, alleviating the resource curse could benefit the U.S. by serving to help strengthen overseas economies by moving people out of poverty. The resultant increase in economic activity would lead to new and expanded markets for U.S. products, including resource sector commodities. Furthermore, reducing poverty will have the effect of decreasing the potential for political and economic instability, both of which can contribute to terrorism and the rise of dictatorial regimes.
"Corruption and mismanagement of [extraction sector] resources can impede economic growth, reduce opportunities for U.S. trade and investment, divert critically-needed funding from social services and other government activities, and contribute to instability and conflict," declared a January 10 State Department statement, which marked the agency's first public comment on the SEC rule.
An unnamed State Department spokesperson added that then-Secretary of State Hillary Clinton "has called corruption a national security issue, and has called increasing transparency a key tool to combat this challenge. [Dodd-Frank and the SEC rule] provide transparency by ensuring that a sufficiently detailed level of information concerning payments from the extractive industry . . . will soon be made public and accessible to civil society and investors."
In formulating the final rules, the SEC rejected several commentators' suggestions that the commission thought would inappropriately weaken the rule. Among them was the position articulated by many in the extraction industry that the legislation allow the agency to collect the data confidentially and then make it public only as a compilation on a "per-country basis," thereby preserving individual company anonymity.
But the SEC disagreed. "We believe that Section 13(q) contemplates that resource extraction issuers will provide the disclosure publicly," it wrote in the final rule, citing the fact that current SEC reports are disclosed publicly and that the agency sees no reason why Congress would have intended something different in this case.
The final rules also do not provide any disclosure exemptions. This includes exemptions for "certain categories of issuers or for resource extraction issuers subject to similar reporting requirements under home country laws, listing rules, or an EITI program." Exemptions are also not provided for companies operating in a foreign country that prohibits the required disclosure or exemptions in instances "when an issuer has a confidentiality provision in an existing or future contract or for commercially sensitive information."
Industry Reaction and the SEC Response
In response to the final rules, the API, the U.S. Chamber of Commerce, the Independent Petroleum Association of America (IPAA), and the National Foreign Trade Council on October 10, 2012, filed a petition for review in the U.S. Court of Appeals for the District of Columbia challenging rule 13(q) and the related amendments to Form SD (Case No. 12-1398 (D.C. Circuit)).2 Also on October 10, 2012, the same group filed a complaint in the U.S. District Court for the District of Columbia challenging the validity of rule 13(q) on several grounds (Case No. 12-CV-1668 (D.D.C.)).3
The API et al. argue that the process through which the SEC arrived at its final rules contains four primary defects, which should lead to the rule's cancellation.4 First, the complaint argues that the SEC's estimate of the total costs the rule will impose on the U.S. economy is based on an inadequate economic analysis.
Second, the complaint argues that the SEC failed to properly consider that the rule will likely stop firms from doing business in some countries, pointing to SEC language that recognizes that some companies may be forced to sell assets in some countries "at fire sale prices" or potentially leave assets idle.
The complaint also denounces the SEC's refusal to allow exemptions when foreign law prohibits the kind of disclosure required by the new rules. "In calculating the competitive costs associated with the potential for lost business in countries that prohibit the required disclosures, the Commission did not even bother to determine how many countries had laws on the books prohibiting disclosure," the complaint said.
Finally, the complaint accuses the SEC of acting arbitrarily and capriciously by selectively ignoring its statutory duty to conduct a thorough and careful cost-benefit analysis, pointing to the dissent of Commissioner Daniel Gallagher as an indication that the agency failed in this aspect of its mandate.
"Commissioner Gallagher dissented from adoption of the Rule, criticizing the Commission for failing to adequately tailor the Rule to avoid significant adverse effects on competition and capital formation. 'We are not at liberty,' he explained, 'to ignore selectively the longstanding congressional mandate to consider the impact our rulemaking is likely to have on competition,'" the complaint said.
In a response brief filed January 2 in the court of appeals,5 the SEC wrote that it had rejected commentators' suggestions to exempt firms operating in countries where the required disclosure was prohibited because the agency was skeptical that such prohibitions actually exist, and allowing exemptions would violate the spirit of the law. Furthermore, it said that allowing this kind of exemption could incentivize foreign countries to pass anti-transparency laws or interpret existing laws in a harsher fashion.
Moreover, in answering the lawsuit's charge that it acted arbitrarily and capriciously by promulgating a rule without first determining whether the transparency and accountability that Congress sought would, in fact, result from the new rule, the SEC wrote that it had "rightly declined to second-guess the wisdom of Congress's policy determination. Moreover, in conducting its economic analysis, the Commission -- which was generally dependent on industry commentators for empirical data -- acted appropriately when it used the little data that they provided to quantitatively assess (and generally confirm) their claims about potential costs."
In an October 11, 2012, joint statement, Cardin and Lugar also defended the SEC's section 1504 rulemaking process, criticizing the API et al. for their attack on the new transparency tools.
"API wants to push us back to a time when the U.S. had few tools to add accountability and stability to the inherently unstable energy sector," Cardin said. "Congress and the SEC carefully crafted a reasonable and very manageable reporting requirement that will bring greater transparency to the oil, gas, and mineral sectors."
Added Lugar, "The U.S. economy and our values substantially benefit when our companies are working in oil, gas, and mineral rich states. But the benefits will not be realized if investments serve to entrench authoritarianism, corruption, and instability. With oil prices high and volatile, our economy needs more transparent markets, not less."
On January 17 the two senators, along with Sen. Carl Levin, D-Mich., submitted an amicus curiae brief in support of the SEC.6
"Resource companies can believe whatever they wish and make any communication they wish about their payments to foreign governments, 'the resource curse,' or the benefits or costs of transparency; they have done so throughout this process. What resource companies may not do is impede the power of the legislative branch to require disclosure of objective information to fulfill compelling public policy objectives, including the strengthening of American national and energy security and investor protection," the brief said.
Members of the House of Representatives also weighed in behind the SEC rule.7 Ranking House Financial Services Committee member Maxine Waters, D-Calif., and ranking Natural Resources Committee member Edward J. Markey, D-Mass., were joined by Eliot L. Engel, D-N.Y., Jim McDermott, D-Wash., Gregory W. Meeks, D-N.Y., Betty McCollum, DFL-Minn., James P. Moran, D-Va., Earl Blumenauer, D-Ore., André Carson, D-Ind., Sam Farr, D-Calif., Peter Welch, D-Vt., and Barbara Lee, D-Calif., in submitting a brief in support of the SEC concerning the issue of confidentiality. The brief argued that the SEC was given no discretion to do anything besides require public disclosure.
"Investors and the public need to be able to fully evaluate whether a company has properly addressed the commercial, political, and legal risks it faces when operating around the globe in environments where corruption is rife and the rule of law weak. The Resource Extraction Rule, and the country-by-country and project-by-project data that will be disclosed under it, are critical to giving investors and the public the ability to make these evaluations," the brief said.
On October 25, 2012, the API et al. filed a request for a stay of the September 30 effective date of rule 13(q)-1 and specific related amendments to Form SD under section 13(q) pending the outcome of the challenge.8 API et al. argued that the four main defects articulated in its complaint make it likely that they will succeed in their petition.
The associations' motion also claims that without a stay their members will suffer irreparable damage due to initial setup costs that must begin immediately. The motion claims these members will also suffer "immediate, serious competitive disadvantage" in bidding on new contracts in countries that oppose the section 13(q) reporting as well as from the impact on existing contracts where countries prohibit such reporting.
Also, harm could be suffered through the disclosure of certain information required in the reports, and members would suffer First Amendment damage as a result of being forced "to make involuntary representations to the public on controversial topics." However, on November 8, 2012, the SEC denied the motion.
In its order denying the stay,9 the SEC wrote that the movants had failed to demonstrate imminent irreparable harm, a failure that is sufficient on its own to disallow the stay motion. The SEC said that the failure to demonstrate imminent harm arises in part from the fact that the pending case could be settled as soon as spring 2013, nearly a year before the first possible reports would be due.
In terms of initial setup costs, the SEC pointed out that it had estimated initial compliance costs for rule 13(q)-1 to be in the range of $10,180 to $106,890 for firms with a market capitalization under $75 million, and $90,080 to $945,840 for those above $75 million. Because the movants previously neither disputed these figures nor claimed that they would significantly harm any of their members' businesses, they cannot now claim that these costs would create irreparable harm, the SEC said.
The denial of the stay motion also said that the claim that businesses would suffer harm in terms of damage to current contracts in countries where section 13(q)-type disclosure is prohibited fails because the movants failed to adequately show that any such laws exist. The SEC also wrote that because Congress enacted section 13(q) with the goal of advancing the U.S. interests in, inter alia, promoting accountability, good governance, and stability, staying the rule would not serve the public interest.
Transparency Versus Competitiveness
Those supportive of a country-by-country reporting structure welcome the law as potentially a first step toward requiring all U.S. multinationals to submit to this kind of reporting. Advocates say that country-by-country reporting promotes transparency, which in turn helps governments decide where to focus audit resources. The information also helps investors make better decisions and can serve to demonstrate the actual tax and other payments made by major extraction firms operating in countries where enforcement of the statutory tax system may be lax.
While firms may complain that they pay substantial tax overseas and therefore should not be expected to pay similarly at home in the U.S., the SEC reports will show the extent to which those claimed offshore payments are real and accurate.
But the business community has opposed the idea, saying that generating the reports will create onerous new compliance burdens as well as damage competitiveness by making information public that firms claim could put them in violation of contracts or country laws.
Susan Ginsberg, vice president, Crude Oil and Natural Gas Regulatory Affairs at IPAA, told Tax Analysts that as constituted, the Cardin-Lugar amendment is problematic in terms of supporting transparency because it is limited to U.S. publicly traded firms. This means that state-owned firms, which she said dominate the oil industry internationally, are not affected. Under the Cardin-Lugar amendment only a subset of companies operating in a country will be required to make the disclosures. This differs significantly from the EITI standards, in which all firms in a compliant country (including state-owned) must provide the required information.
The Cardin-Lugar amendment approach "is not the best way to push transparency," she said, adding that the "lopsided approach" will hurt U.S. firms' competitiveness. Ginsberg said that for small independent oil and gas firms such as those widely represented within IPAA, the new legislation "makes no sense." She gave the example of a small U.S. public firm that operates only on private property existing in one U.S. state, but which pays federal tax.
Under the Cardin-Lugar amendment, such a firm would be required to file a report, which could result in significant compliance costs. She added that contrary to popular belief, small firms make up a large proportion of the U.S. domestic oil and gas industry.
She also disagreed with some aspects of the way in which the SEC drew up the rules. She complained that there is no quantification about the benefits of the Cardin-Lugar amendment, and that the cost estimation is cursory at best. She said that in generating the final rule "the SEC went beyond what 1504 [the Cardin-Lugar amendment] asked of it," adding that it is "not what Congress asked the SEC to do."
Ginsberg told Tax Analysts that a better approach would be to jettison the rule and instead move forward with EITI compliance, which will eventually create the need for new legislation. Then, a more balanced rule can be drafted, given that EITI standards require that all companies, including state-owned firms, must report. She suggested that part of the impetus behind the Cardin-Lugar amendment was the desire by civil society organizations to push Congress to do something now, rather than awaiting developments in the medium to longer term.
API, the lead organization in the anti-Cardin-Lugar amendment litigation, expressed similar concern for the potential impact of the rule on competitiveness, especially vis-à-vis state-owned giants in China and Russia.
"Indications are that the administration will take a draconian approach to disclosure that would unnecessarily harm U.S. competitiveness and jobs," API chief economist John Felmy told reporters during an August 21, 2012, call. "It's very clear that this is the equivalent of giving the formula for Coca-Cola so that people can compete on it," he said, adding that foreign companies would now gain an advantage in bidding on overseas resources.
"The SEC appears to want to require publicly traded energy firms to release commercially sensitive, detailed payment information about every foreign and U.S. project. With a few clicks of a mouse, state-owned foreign firms -- companies like the China National Petroleum Company and Russia's Gazprom -- could plunder that information, which could help them determine their rivals' strategies and resource levels. Without appropriate changes to the final rule, U.S. firms would lose business. U.S. jobs would not be created. And potential revenue to our government would not be generated," Felmy said.
"The oil and natural gas industry strongly supports payment transparency," added API president and CEO Jack Gerard in an October 10, 2012, press release at the time of the launching of the API lawsuit against the rule. "We've been working hard to increase transparency for a decade, but this rule could interfere with ongoing efforts by making U.S. firms less competitive against state owned firms in China and Russia that have no interests in transparency."
"This rule is harmful to our energy security and to American consumers, and should not stand," said Karen Harbert, president and CEO of the U.S. Chamber's Institute for 21st Century Energy, in an October 11, 2012, statement. "American oil and natural gas companies must compete against foreign, state owned oil companies for access to resources around the world. The SEC's 'extraction rule' will require them to turn over their playbooks for how they bid and compete. Their competitors are under no such obligation to do so, and compliance with this rule violates the law in several countries in which U.S. firms do business. Yet the SEC refused to craft an exception for that circumstance and has dramatically underestimated the impact to businesses and consumers."
Also, some in the business community have questioned the efficacy of country-by-country reporting in general in dealing with the perceived low tax revenue gained by resource-rich developing countries.
In a March 2010 issue of the OECD's Observer publication, Will Morris, senior international tax counsel and director of European tax policy at General Electric, pointed out that low tax returns can be a product of imperfect bargaining power that creates lopsided, but legal, contracts. In other instances special tax benefits are offered by governments that are aware that firms are being asked to operate in a politically or physically challenging or dangerous environment. None of these issues would be addressed by country-by-country reporting, he says.
Morris also argued that shortcomings in local government capacity will not be improved by country-by-country reporting, nor will the propensity of some developing countries to greatly undertax their elite. Access to country-by-country reporting may have no impact on these kinds of problems and could even exacerbate the situation by flooding governments with data they are not equipped to handle. For these reasons, Morris advocates some kind of aggregated data for developing countries, to be supported by greater information exchange between these countries and the developed world.
Morris also laments the possible reaction of firms, pointing to higher compliance costs and a loss of competitiveness. Instead, Morris suggests better enforcement of transfer pricing rules and a careful assessment of what level of reporting will actually help when dealing with specific developing countries.
Extraction Industries Transparency Initiative
Transparency has also been in the spotlight lately as the U.S. seeks to become an EITI-compliant country. The U.S. initiative (USEITI) is being spearheaded by the Department of the Interior under Secretary Ken Salazar.10 On December 21, 2012, Salazar convened an advisory committee that will act as coordinator for the U.S. efforts to meet EITI standards on an annual basis. Passage of the Cardin-Lugar amendment could play a complementary role in these efforts.
"Today marks another significant step in USEITI implementation, and underscores the administration's continued commitment to lead by example in promoting global transparency and accountability under the Open Government Partnership," Salazar said on December 21, 2012, in announcing the committee member selections. Under EITI rules, the advisory committee must include participation from federal and state governments, businesses, and civil society stakeholders.
"I look forward to working with this group in the new year as we work to forge open governments and institutions that are accountable to the people," he said.11 The advisory committee includes participation by representatives of API and the IPAA, and held its first meeting on February 13.
The USEITI effort was launched by Obama during a September 20, 2011, speech in New York, which marked the official beginning of the Open Government Partnership. The president made reference to the Cardin-Lugar amendment in his speech when he said, "We're continuing our leadership of the global effort against corruption, by building on legislation that now requires oil, gas, and mining companies to disclose the payments that foreign governments demand of them. Today, I can announce that the United States will join the global initiative in which these industries, governments, and civil society, all work together for greater transparency so that taxpayers receive every dollar they're due from the extraction of natural resources."
Governments of countries wishing to be EITI compliant must publicly disclose payments received from the oil, gas, and mining sectors. Companies operating in those sectors of the country must similarly report all payments made to the government. Both sets of information are then reviewed and reconciled by a mutually agreed-upon third party, leading to the publication of the report. The advisory committee, called the Multi-Stakeholder Group in EITI parlance, oversees the entire process.
Despite the overall complementarity between the two, EITI compliance and Cardin-Lugar requirements are in fact a kind of mirror image. In order for the U.S. to be EITI compliant, extraction-sector companies that make payments to the U.S. government must report those payments to a third party named by the advisory council. Meanwhile, to facilitate EITI's "double disclosure" requirement, the U.S. government must also report the payments it receives to the same third party. The two sets of data are compiled and published as the U.S. EITI report for a given year.
But U.S. listed companies would not have to report payments made to other governments, as part of the U.S. report. That information would be part of an EITI report for the country in which the payment was made (if that country were EITI compliant).
Furthermore, in addition to payment data from U.S.-listed firms the U.S. EITI compliance report would contain data from all non-U.S. listed companies, including state-owned firms, which make payments to the U.S. government. Companies in these latter categories lie outside the scope of the Cardin-Lugar amendment.
So while a U.S. EITI report would require reporting of all payments involving the U.S. government, both those made by firms and those received by the U.S. government, the SEC report requires reporting of all payments involving U.S. listed companies, regardless of where the payments are made. Cardin-Lugar focuses on payments by listed firms, while EITI focuses on payments made to governments by firms operating in the country.
In its final report, the SEC also noted that its emphasis on publishing the reports differed from the EITI approach. "We note that . . . the EITI approach is fundamentally different from section 13(q). Under the EITI, companies and the host country's government generally submit payment information confidentially to an independent administrator selected by the country's multi-stakeholder group, frequently an independent auditor, who reconciles the information provided by the companies and the government, and then the administrator produces a report." The implication here is that the final report does not allow for a reader to locate specific information about specific companies' payments.
But Anders Tunold Kråkenes, communications manager at the EITI Secretariat in Oslo, told Tax Analysts that while the description of the process is generally correct, the majority of EITI countries in fact do disclose company-by-company payments in their final report. Kråkenes added that there is a strong possibility that EITI too will require company-by-company reporting in their next standards revision, due in May.
"In other words, in most (and soon all) EITI Reports members of the public can look up what a specific company has paid -- including also payments by companies that are not listed in the U.S. or EU, such as National Oil Companies and companies from emerging economies," he said in comments e-mailed to Tax Analysts. Kråkenes added that it was not decided if project-by-project reporting would eventually become required.
Kråkenes also told Tax Analysts that the idea of moving beyond the extractive industry sector was being tested in some EITI countries already. However, he said that while the method's flexibility could allow it to apply to other sectors, the core focus of EITI will remain on the extractive industry. He added that potential enhancements at which the multi-stakeholder coalition were looking include changes to the reporting structure and more disaggregated reports.
While EITI and the SEC rules take different approaches to tax disclosure, the two processes are seen as complementary by Clare Short, EITI chair of the board and former U.K. Labour Member of Parliament and secretary of state for international development (1997-2003).
"There are different opinions amongst EITI stakeholders about these listing requirements . . . but I want to take this opportunity to reiterate my crucial argument that the proposed SEC and EU transparency requirements are complementary to, and not in conflict with, the EITI transparency requirements. Implementation of the EITI standard does not achieve enough in isolation. We need a range of different transparency, accountability and governance reforms," she said in an August 21, 2012, press release in anticipation of the SEC's release of its final rule.
Short went on to point out, however, that the EITI requirements go further in that they also reach state-owned companies, an issue central to those opposed to the SEC rules.
"In addition, a significant proportion of natural resources are exploited by companies that are not listed at stock exchanges in the U.S. or in the EU, especially by state-owned companies. The EITI requires disclosure of all companies' payments in countries that sign up to the EITI," she said.
EU Transparency Directive
Short's reference to EU activities relates to the review currently being undertaken by the EU of its transparency and accounting directives. The changes were first proposed by the European Commission on October 25, 2011, and are aimed at promoting greater economic growth within the EU through better transparency.12
The transparency proposal, like the Cardin-Lugar amendment, requires EU publicly listed firms in the oil, gas, mineral, and logging sectors to annually report all payments to the government of the countries in which the firms are operating on a project-by-project basis. In addition to the inclusion of logging, the initiative goes beyond the SEC rule by requiring privately owned, non-listed large companies (those that exceed two of the following three criteria: annual turnover of at least €40 million; total assets of at least €20 million; or 250 employees) and state-owned firms to also file annual reports. The proposed payment threshold for required reporting is €80,000.
The European Parliament, after considering the European Commission's proposal, on September 18, 2012, accepted the proposal and added provisions to make the reporting requirements stricter than both the original European Commission proposal or the Cardin-Lugar amendment (beyond the addition of logging and expansion to large privately owned companies and state-owned firms).
The EU Parliament's proposal covers oil, gas, mining, forestry, construction, telecommunications, and the banking sectors. It applies to listed, large non-listed, and state-owned firms and requires reporting of taxes on profits, production entitlements, royalties, dividends, signature, discovery and production bonuses, license fees, rental fees, and other considerations for licenses or concessions, and other direct benefits to the government concerned.
Like the Cardin-Lugar amendment, disclosure must include all countries to which payments are made as well as all projects within those countries, and no exemptions are provided. Noncompliance would elicit a fine of up to 10 percent of annual turnover for companies or €5 million for individual businesspersons.
Unlike the Cardin-Lugar amendment, the term "project" is defined. It is "equivalent to a specific operational reporting unit at the lowest level within the company at which regular internal management reports are prepared to monitor its business." Also, disclosure is required of all payments to national, regional, or local authorities of any EU member state or third party. This differs from the Cardin-Lugar amendment in that U.S. firms do not have to report on payments to government levels below that of the federal government. Because the EU proposal lists all government levels in all member states, companies will have to report payments to subnational governments even in their home country.
The proposal will now move to the European Council, after which, if passed, it will become a new legally binding directive. As to whether the final version will include the European Parliament's upgrades, time will tell. Some believe the stricter provisions may have been inserted to be eventually used as bargaining chips to have a better chance of securing more core pieces.
People in the U.S. are watching to see how the final directive compares with the Cardin-Lugar amendment, with opponents ready to argue that anything weaker will create an uneven playing field, which will need to be leveled by watering down Cardin-Lugar.
If the new EU directive retains most of the European Parliament's core proposals, however, it will be seen (along with the Cardin-Lugar amendment) as a victory by civil society organizations that have been pushing for country-by-country reporting for some time.
Despite its limited application in sectoral terms, it will also be seen as a setback for the business community, which has been leery of country-by-country reporting and may fear that success in the extraction industry will be the beginning of a greater push to expand to additional sectors.
Randall Jackson is a legal reporter with Tax Notes International.
1 See http://www.sec.gov/rules/final/2012/34-67717.pdf.
END OF FOOTNOTES
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