European Union Rule on Government payments Implications for Oil & Gas Industry
European Union Rule on Government payments
Implications for Oil & Gas Industry
According to an estimation, about 3.5 billion people live in countries that endowed with oil, gas and mineral reserves. Despite the fact that the citizens of these countries are the legal owners of the natural resources, in many cases, governments have hindered the effective exploitation of such resources resulting in an unequal wealth distribution, poverty and lack of sustainable economic development. Evidence indicates that this happens mostly in under-developed countries, with high level of corruption and lack of transparency considered among the responsible key factors.
In particular, there are several examples of nations with a history of corruption and poor governance where, despite the substantial hydrocarbon discoveries and initial hope for long term development, an almost total financial collapse was experienced. Significantly, per capita income went down to half of what it was prior the hydrocarbons and only a fraction of total oil & gas revenues accruing to the government was transferred to the budget, with a non-properly accounted majority.
The Extractive Industries Transparency Initiative (‘EITI’) standard was the primary global initiative introduced in 2002 with the aim of promoting revenue transparency and accountability in the extractive sector of oil, gas and mining. The ‘EITI’ maintains a more improved governance through the verification and disclosure of company payments and revenues.
Currently, EU regulators have presented efforts to create a global standard for transparency and accountability in the extractive sector based, mainly on the guidelines set out by the EITI. In 2013 the EU brought into force the amended Accounting and Transparency Directives. More recently the relevant payment disclosure rule applicable to oil, gas and mining.
Although the EU Directives are much broader in opportunity, the present briefing paper focuses on the precise rule demanding disclosure of payments to governments by extractive companies.
Aspects of the original reporting rule, which is based on the provisions of the new Accounting Directive (2013/34/EU) and also the relevant Cyprus Companies Law, which transposes the said Directive into local legislation:
- Who needs to report and for which activities?
Companies active in the extractive sector or the logging of primary forests, which are either Public Interest Entities or are Large undertakings incorporated in the EU. This does not include entities that only offer ancillary and support services. Companies are required to report all payments made to governments of the countries in which they operate in relation to their above-mentioned activities.
- How do the rules apply to consolidated groups?
Parent undertakings are required to prepare a consolidated report if any subsidiaries are active in the specified industries, subject to the exemptions mentioned below. Such a consolidated report should only include payments resulting from those activities.
- Who is responsible for reporting in the case of Joint Ventures?
All members of a joint venture are responsible to report any payments that they individually make directly to governments. There are differences of opinion on the correct treatment of payments that operators of joint ventures make to governments on behalf of all of the partners of the joint venture. In most cases, operators will report the full amount of the payment they made on the joint venture. Therefore, in some instances, non-operators have reported their proportional share of payments made by the operators.
- What types of payments must be reported?
According to Article 121 of Annex 13 of the Cyprus Companies Law, it is potential to report the payments of:
– Production entitlements
– Taxes on income, production or profits
– Signature, discovery and production bonuses
– License fees, rental fees, entry fees and other considerations for licenses and concessions
– Payments for infrastructure improvements.
- How should the payments be disclosed?
For objects operating out of Cyprus and are subject to the provisions of the EU Directive, the rule is to be applied for the financial year beginning. There is no prescribed EU extensive format and deadline for producing the relevant information. This will be contingent on implementation by each member state. For large, non-PIE undertakings there is no deadline specification in the relevant Cypriot Law the report must be attached on the company’s annual report and must therefore comply with annual report submission deadlines as per Article 120 of the Cypriot Companies Law. For PIE’s the deadline is set by the Directive at six months after the end of the financial year.
- Are there any penalties for not complying with this disclosure requirement?
Failure to comply is considered a criminal offence and every official responsible for the omission is subject to a fine.
From 2018, the European Commission will review and report on the implementation and effectiveness of the requirements. The review will take into consideration international developments and will consider other aspects such as whether the report should be audited and the possibility of extending to other sectors.
There is a wide range of instances of countries which have suffered economically and socially due to poor governance and corruption. As mentioned above there are exemptions from the reporting requirements.
Western and other societies have been experiencing an intensive social plea for increased transparency and accountability by corporations and governments. We are therefore of the opinion that companies affected should study carefully the new reporting requirements regarding payments to governments and proceed with full transparency to disclose all required information. Even voluntary disclosure of such information could be beneficial.
It is generally known that every new legal obligation creates challenges in thoroughly understanding and complying with the requirements. Companies will have to first of all consider the applicability of the rule to their business as well as examine the appetite for voluntary application of the rule and then ensure that they develop the appropriate policies, systems, processes and controls for the collection and review of the required information in order to comply with the new requirements by the effective date.
For more information and guidance please email Michalaki, Pitsillidou & Co LLC – iMPK Global Business Law Firm – Cyprus Lawyers, at firstname.lastname@example.org or visit our website at https://impklawyers.com.Tel. +357 25660092 – Fax +357 25 660097.