Mandatory Disclosure Rules in the EU

Here is a Q+A on the EU country-by-country and project-by-project reporting rules which were signed into law by the EU in June 2013 and in November 2013. These rules were introduced as amendments to the transparency and accounting directives.

The Q & A covers some broad themes related to the rules. If you’re looking for some more technical answers, you should read this fact sheet on the details of the rules.

What are these rules?

What’s at stake?

How will developing countries benefit?

How will companies benefit?

What difference will project-level reporting make?

Do investors support revenue transparency?

How is ‘project’ defined?

How is materiality defined?

Which extractive industry activities and payments are covered?

How will the information be disclosed?

Does country-by-country reporting put European companies at a competitive disadvantage?

Is this form of reporting be costly for companies?

Do the directives include exemptions?

What about business confidentiality?

Which companies currently practice and/or support revenue transparency?

What more is needed to ensure corporate tax compliance?

1. What are these rules?

These rules oblige all EU listed, and large non-listed, extractive companies to publish their payments on a country and project basis. EU member states are currently transposing these rules into national legislation, they have until the summer of 2015 to transpose the Accounting Directive and until the autumn of 2015 to transpose the Transparency Directive. We should start receiving the disclosure information in 2016.

2. What’s at stake?

Africa’s natural resources were worth $246 bn in exports in 2009 - that’s six times more than the continent got from overseas development aid ($44 bn) and seven times the value of its agricultural exports ($39 bn). In some resource-rich developing countries the government’s income from natural resources is their largest revenue flow; in many others, it should be. But many countries have so far failed to turn natural resource wealth into lasting benefits, and one-third of the world’s poorest people live in resource-rich countries. In Africa these revenue flows are likely to increase and to continue to dwarf other financial flows as resource extraction grows, so they offer a major opportunity for poverty reduction.

3. How will developing countries benefit?

Citizens and civil society need to be able to access information about extractive revenues to hold governments and companies accountable, ensuring that natural resources generate benefits for the whole population. Resource transparency reduces corruption and the costs of capital for developing countries and encourages foreign direct investment through a more stable business climate. Developing countries need to mobilise and manage their own natural resources more effectively to achieve sustainable growth and enable aid budgets to go much further.

4. How will companies benefit?

Transparency fosters a stable investment and business climate, informs investors’ risk assessment and stewardship, favours the best companies and deters less scrupulous competitors. It enables companies to provide clear evidence of how they contribute to government revenues and communities. Reducing conflict in resource-rich countries is important for stable energy and minerals supplies and can help protect company workers (see question 4).

5. What difference will project-level reporting make?

The usefulness of country level aggregate payment information is limited. Royalties and other payments vary enormously within jurisdictions and are typically negotiated in developing countries on a project-by-project basis. Project-level data allows investors to properly assess risk, governments to better track company compliance, citizens to track who is gaining from particular resources, and local communities to track their entitlements, essential to reducing conflict and interruptions to production.

• Governments can draw on comparisons with licence terms in other jurisdictions to help reach a fair deal and monitor companies’ delivery on their legal and fiscal obligations.

• Local governments and local communities, which often bear the negative impacts of development, and are often legally entitled to a share of revenues, can better judge the value of projects locally, with communities and civil society being able to hold central and local governments, and companies, to account and claim entitlements.

• Investors can assess project risk on the basis of specific data that may be obscured in more aggregated information. Risk of bribery or expropriation may vary greatly depending on where a project is, who is involved and the particular geological formation or resource.

Additional benefits:

• Investors benefit from the mitigation of political risks to company operations, which are typically concentrated at project level and arise from hostility from a local community which believes it is not getting a fair share of project benefits.

• Project-level reporting can increase safety and security for workers by creating incentives for, or greater awareness of, investment that benefits communities and alleviating local-level violence (see also question 16).

6. Do investors support revenue transparency?

Major investors support country-by-country reporting, and some support project-level disclosure. For benefits to investors, see question 4 above.

7. How is ‘project’ defined?

‘Project’ is defined as ‘the operational activities that are governed by a single contract, license, lease, concession or similar legal agreements and form the basis for payment liabilities with a government’.

8. How is materiality defined?

Any payment, whether made as a single payment or series of related payments, must be disclosed if it is at least 100,000 Euros within a financial year.

9. Which extractive industry activities and payments are covered?

Disclosure is required for payments arising from any activity related to minerals, oil, natural gas deposits or
other materials involving:

  • Exploration
  • Prospection
  • Discovery
  • Development
  • Extraction

10. How will the information be disclosed?

The payments will be disclosed annually in a report by the company, the details of how this is done will be determined by the EU member state.

11. Does country-by-country reporting put European companies at a competitive disadvantage?

No. The US Dodd-Frank Act 2010, which explicitly requires all US-listed companies to disclose at project level, covers several major Chinese companies listed in New York. A European regulation would cover Russia’s Gazprom, which has listings in London and Frankfurt. The Hong Kong Stock Exchange’s similar disclosure requirements have not scared away Chinese or Russian extractive companies from listing. Other exchanges are expected to follow.
Transparency is, at worst, a minor determinant in deciding which company wins a bid (see also question 15). The advance of Chinese state oil companies in west Africa has more to do with willingness to pay very large sums for access to oil, and their ability to provide cheap credit for infrastructure investments, than to transparency or lack of it. Statoil has recently won major offshore concessions in Angola despite being one of the most proactively transparent companies.

Most governments in oil-producing countries grant licences to companies from a wide range of countries to maximize their negotiating power. A country that excluded the very large number of major companies covered by Dodd-Frank or EU regulations, simply because these companies were more transparent, would be limiting its negotiating options in a way that is highly unusual.

Longer term, transparency will improve operating conditions for European and other companies by helping poor countries effectively use the revenues, making them less poor and unstable, and reducing suspicions that companies collude in corruption.

12. Is this form of reporting be costly for companies?

Extractive companies already keep books and records for themselves and their subsidiaries, including project-level data, under existing securities laws, to comply with national anti-bribery statutes, and for their internal accounts. Companies that operate in the US, including BP, Shell, Total and other European listed companies, report on a lease level to the US Department of Interior; others publicly report payment information by lease/license voluntarily (see question 17) or do so as required by the World Bank’s IFC, EITI rules or other national law.

Therefore the extra costs will not be significant. Estimates of the cost of project-level reporting, in the low millions of euros, are put in perspective by the record profits enjoyed by the largest oil companies: in the first half of 2011 ExxonMobil, Shell, Chevron, BP, Total and ConocoPhillips alone made collective profits totalling $78.3 billion. The European Commission has estimated the cost of project-level reporting for 171 companies to be 0.05% of annual revenues in the first year and less thereafter. Auditing the data would involve additional costs, but Shell’s global audit bill for 2009 was just 0.16% of pre-tax profits.

A survey of US SEC filings from 2008 to 2010 for oil and mining companies that have submitted comments to the SEC reveals that they have not warned investors of any significant costs from this form of reporting under the Dodd-Frank Act. They have included mention of climate change and other legislation, and mining companies have mentioned pending SEC rules on mine safety disclosure. No company making comments to the SEC has suggested in their annual reports 2008-10 that project reporting would have material competitive or cost impacts, which they would be required to do.

13. Do the directives include exemptions?

No. This is a crucial element of the directives, as exemptions would have been an incentive for host governments to increase secrecy in their laws rather than become more transparent.

Although companies claimed that certain resource-rich countries would prohibit them from disclosing, they were not able to identify a country that did so. The Revenue Watch Institute, with Colombia University, conducted research into this question and also found no country with laws that prevented disclosure.

14. What about business confidentiality?

The commercial realities of contractual processes in the extractive industries involve a wide array of factors, including fiscal terms offered, technological capacity/expertise and capital available. Project-level reporting, which will come after revenues start flowing, does not provide sufficient information to be a competitive disadvantage during bidding. Upfront payments for these rights, such as signature bonuses in the oil industry, are typically either disclosed at the time or reported in the media, so there are no obvious competitive drawbacks to publishing them (see also question 12).

Extractive companies already know, more or less, the terms of contracts their competitors make with governments. In an increasing number of countries, contracts are available online. Many other contracts are available through commercial database services. In the US, bonus payments made by each company for each lease are made public.

The information to be required under the EU Directives and Dodd-Frank is not commercially sensitive. It cannot be used to deduce a company’s contract terms, expected reserves, operating costs or future plans without additional information not publicly available. Also, information about payment terms is only illuminating as to a company’s performance for a very short timeframe, as prices, political situations and knowledge about geological formations change frequently. Any potential damage to a company’s competitive position would be minimized by the lapse of time between payments and publication.

Companies commonly operate in joint ventures, eg France’s Total with China’s CNOOC in Nigeria, BP with China’s CNPC in Iraq. Since tax payments to the government would typically be owed by the joint venture in such cases and allocated to the partners, all the partners are likely to know how much each of them contributes in tax.
Exxon submitted a letter to the US SEC from the Ministry of Energy in Qatar that shows that Qatar doesn’t consider payment disclosures to include confidential information (unlike production costs, revenue and reserves).

15. Which companies currently practice and/or support revenue transparency?

Many companies publicly state that support revenue transparency but in practice resist country-by-country and even more so meaningful project-by-project disclosure. But there are examples of companies reporting payments to governments, including in some cases at project level, such as:

• Anglo-American – including for operations in South Africa, Chile, Brazil, Peru and Namibia.
• AngloGold Ashanti – including for operations in Argentina, Guinea, Namibia and Tanzania.
• ExxonMobil - related to an IFC-financed project in Chad.
• Newmont Mining – including for operations in Peru, Bolivia and Ghana. Newmont has stated publicly that its voluntary payment disclosure serves as insurance to protect employees in operating environments around the world.
• Rio Tinto – including for operations in China, Indonesia, Mongolia, South Africa, Namibia, Guinea, Zimbabwe and Cameroon.
• Shell – including for operations in Brazil, Gabon, Malaysia, Nigeria, Philippines.
• Statoil – including for operations in Algeria, Angola, Azerbaijan, Indonesia and Iran.
• Talisman – including for operations in Indonesia, Algeria, Malaysia and Vietnam.
• Tullow Oil – for operations in Ghana.

The World Bank’s IFC requires project reporting and the publication of related contracts as a lending condition. In Mali and Indonesia, companies have been involved in designing EITI project-by-project payments reporting regimes.

16. What more is needed to ensure corporate tax compliance?

Lack of transparency also enables multinational companies to avoid and evade the taxes owed to developing country governments. This contributes to the drain of capital from these countries, estimated at more than US$1 trillion a year – far more than inflows from foreign investment and aid.

Payment disclosure is necessary but not sufficient to show that companies are paying their fair shares of taxes. Extractive companies should also be required to report a range of financial information including production volumes, sales and profit. It may be appropriate for companies to report some of this information on a per-country, rather than a per-project, basis.