Businesses operating in extractive industries face new compliance burden, says expert

Out-Law News | 03 Dec 2014 | 4:40 pm | 2 min. read

Businesses operating in the oil and gas industry are among those facing new compliance burdens as a result of new regulations that came into force on Monday, an expert has said.

Litigation and compliance specialist Stacy Keen of Pinsent Masons, the law firm behind Out-Law.com, said the burdens arise under the new Reports on Payments to Governments Regulations, which require businesses in the extractive industries to disclose details of payments made to government bodies.

Under the regulations, large and listed UK companies operating in the oil, gas, minerals and logging of primary forests industries must publicly report any payment or series of payments, whether in money or in kind, above £86,000 that they make to any government across the world. It is a criminal offence to fail to do so and directors of such companies must file a report of such payments with Companies House.

The types of payment that need to be reported include production entitlements, taxes, royalties, dividends, signature, discovery and production bonuses, licences fees and payments for infrastructure fees. The Regulations catch any payments to a government department, agency or controlled entity from 1 January 2015 onwards. The first reports will need to be lodged with Companies House during the course of 2016.

"The intention behind the Regulations is to promote transparency in the extractive industries and to give citizens of resource-rich countries the information they need to hold their governments to account," Keen said. "A large proportion of the UK's oil and gas industry will be caught by the new regime. A company is considered 'large' if it meets two of the following criteria: if it has a balance sheet of more than £18 million, a net turnover of £36m and an average number of employees exceeding 250 in the relevant financial year."

The Regulations implement part of the EU Directive on "annual financial statements, consolidated financial statements and related reports of certain types of undertaking". At the G8 Summit in Brussels in June, the UK committed to implement the Directive early to demonstrate its commitment to global transparency. The EU Directive introduces country by country reporting obligations.

The UK government has published industry-developed guidance (34-page / 267KB PDF) on the new Regulations for consultation. The guidelines include specific criteria to help businesses in the extractive industries determine whether they have a reporting obligation under the new regime and for determining what 'relevant activities' those obligations refer to.

"It is important for a company to have a clear understanding of the scope of its relevant activities because only payments that relate to those activities need to be included in the report," the guidance said. "Certain payments to government may relate to both these activities and other activities of the reporting entity or its subsidiaries."

According to the guidelines, the UK Regulations "do not require the disclosure of payments relating to refining, smelting or similar processing activities", nor do they "extend to the export or transportation of oil, natural gas, or minerals or timber from the logging of primary forests".

A parliamentary clerk told Out-Law.com that the publication of the new Reports on Payments to Governments Regulations has been delayed due to IT problems but that the new rules were approved by both the House of Commons and House of Lords and mirror the provisions contained in the draft regulations that were published previously.

Editor's note 05/12/2014: this story previously said that the government had endorsed the industry-developed guidance. This was incorrect, in fact it has only published the guidance for consultaiton. We apologise for the error.