On 25 October 2011, the European Commission (EC) announced a package of regulatory measures designed to support entrepreneurship and responsible business practice within the European Union (EU). In the context of encouraging responsible business, the proposed legislation included the introduction of country-by-country reporting (often referred to as CBCR) for payments made to governments by extractive industries, including mining and oil and gas companies, and loggers of primary forests.

At present, EU legislation does not require companies to provide financial information on a country-by-country basis. By increasing transparency relative to payments made to governments by extractors and forestry operators, the European Commission hopes governments—particularly those of countries rich in natural resources—will be held more accountable for revenues generated by allowing exploitation of their respective countries’ natural resources.

Levelling the Playing Field

The EC’s proposals have been made in response to various international developments. One of the key influences on the shaping of the proposals has been Section 1504 of the US Dodd-Frank Act. This provision, which has yet to be implemented, will require resource extraction companies subject to US Securities and Exchange Commission (SEC) reporting requirements to disclose, among other things, payments made to governments on a country-by-country basis and the projects to which the payments relate.

Separately, the proposals are intended to be expressions of support by the European Commission for the Extractive Industries Transparency Initiative (EITI). The EITI, announced in 2002, is a voluntary initiative with the objectives of improving transparency and accountability in countries rich in oil, gas and mineral resources and of providing “civil society with information to hold governments of resource rich countries to account for their receipts from the exploitation of natural resources.” Once a host country endorses the initiative, the EITI process is mandatory for all extractive industry operators (including those that are state-owned) operating in that country. To date, 35 countries have implemented the EITI.

The EC’s proposals also stem from a commitment made by the G8 governments in May 2011 to put in place transparency laws and regulations and to promote voluntary standards that require or encourage oil, gas and mining companies to disclose the payments they make to governments. In September 2010, moreover, the European Parliament made its own request to the EC to take action in this area.

Affected Companies

If implemented as proposed, the country-by-country reporting requirements will apply to any company that is active in the extractive industry (i.e., with any activity involving the exploration, discovery, development and extraction of minerals) or that conducts logging of primary forests if that company is:

  • listed on an EU-regulated market, even if it is incorporated in a third country; or
  • a large EU company or public interest entity.

For these purposes, a large EU company is an entity incorporated in the EU that exceeds two of the following three criteria: (a) a balance sheet total of €20 million; (b) a net turnover of €40 million; and/or (c) an average of 250 employees during the financial year.

These criteria mean that, unlike the requirements set out in the US Dodd-Frank Act, the EU country-by-country reporting requirements will apply to the primary logging industry and to large unlisted companies, as well as to listed entities. The European Commission has stated that the application of the proposals to large unlisted companies will reflect the fact that these companies can potentially make significant payments to governments in the countries in which they operate. Consequently, targeting these rules at large non-listed companies, as well as at listed companies, will create a more level playing field within the EU.

Data That Must Be Reported

Under the EC’s proposals, companies will have to prepare annual reports on payments and payments in kind made to governments when those payments are material to a recipient government. Under the proposals, specifying and developing the concept of materiality of payments will be delegated to the European Commission.

The yearly report is to be broken down by country and, where payments have been attributed to specific projects, by project. The types of payment to be reported are:

  • Production entitlements;
  • Taxes on profits;
  • Royalties;
  • Dividends;
  • Signature, discovery and production bonuses;
  • Licence fees, rental fees, entry fees and other considerations for licences and/or concessions; and
  • Other direct benefits to the government concerned, including payments in kind.

The report will not have to cover payments made to the government of a country in which the public disclosure of this type of payment is a criminal offence (for example, Qatar). In such cases, the company will have to state that it has not reported payments as it would otherwise be required to do and will have to disclose the name of the government concerned. This limited exemption has been included in response to concerns raised by some businesses that it is illegal to report details of royalties, bonuses, taxes and similar payments that may have been made to the governments of some countries in which they operate.

Responses to the Proposals

On 24 October 2011, Reuters reported that Anglo American, BHP Billiton, Rio Tinto, Xstrata, BG Group, BP, Repsol, Shell and Total each signed a letter addressed to Michel Barnier, European Commissioner for Internal Market and Services, criticising the proposals. The companies argued that the proposed disclosure requirements were commercially and politically sensitive, did not add transparency and failed to define what constituted a project.

The letter noted that where oil or gas fields cross national borders, governments are often careful to safeguard the confidentiality of terms they offer to investors and that, in such circumstances, the proposed disclosure requirements might damage the competitiveness of EU resource companies to which the proposals would apply. The additional costs and administrative burden of project-level reporting were also criticised, according to the Reuters report. Many of the concerns reportedly expressed in the letter mirrored the criticisms levelled at the equivalent provisions in the US Dodd-Frank Act by resource companies and other industry stakeholders.

On 19 February 2011, the Financial Times reported that Shell had written to the United Kingdom’s government stating that although it supports the introduction of the proposals, it wants reported payments broken down by national, regional and local levels of government. In addition, Shell argued that the EU should define “a single, absolute disclosure threshold” that should be set at a level “to reflect the fact that in Shell’s case we paid more than $20bn in direct taxes to governments in 2011, and collected close to $100bn in duties and VAT on behalf of governments.”

Other companies have taken a similar line. BHP Billiton reportedly said it was “concerned that project-by-project reporting is unlikely to increase transparency or help combat corruption.”

The European Commission has stated that as some companies have already voluntarily decided to disclose some payments to governments, it considers that the effect on the competitiveness of the affected extractive companies would be limited. However, the EC has confirmed that the system will be reviewed and modified, as appropriate, within five years of implementation. This review will take into account, among other things, international developments and the competitiveness of EU industry.

Implementation and Next Steps

The country-by-country reporting requirements have been put forward in the context of a package of proposals that are to be implemented by amendments to the EU Transparency Directive (in relation to companies listed on an EU regulated market, irrespective of country of incorporation) and the EU Accounting Directives (in relation to large EU companies and public interest entities).

These proposals were published on 25 October 2011. The Council of Ministers commenced its discussion of the proposals on 20 February 2012. Once the proposals are approved and published by the Council of Ministers, they will be passed to the European Parliament, which must approve the final text before the proposals can become effective.

The proposal to amend the EU Accounting Directives gives 1 July 2014 as the deadline for implementation into national law. Although the proposal to amend the EU Transparency Directive does not currently specify a deadline for passage into national law, it is currently expected that this implementation, too, will be required during 2014.