For the past several years, the federal government has been seeking public input on its plans to increase resource revenue transparency in the extractive sector in Canada and align its reporting standards with those of international markets. Natural Resources Canada (NRCan) began consultations with public stakeholders in April 2013 regarding the development of reporting standards for payments made by extractive companies to domestic and foreign governments. An industry working group, the Resource Revenue Transparency Working Group,1 was established in September 2012 to provide recommendations to NRCan, which were published in a report on January 16, 2014 (Working Group Recommendations).2
On March 3, 2014, NRCan released a paper seeking further consultations with industry stakeholders regarding its proposed requirements for extractive companies to publicly disclose payments made to governments. The six-page paper, entitled Establishing Mandatory Reporting Standards for the Extractive Sector (Consultation Paper), is the federal government's first public statement to provide in-depth details of the proposed reporting requirements. For the first time, the Consultation Paper confirms that payments to Aboriginal entities will be included for the purposes of mandatory reporting.
This article provides a brief summary of the main features of the mandatory reporting requirements as they are reported in the Consultation Paper, focusing on the implications for companies doing business with Aboriginal groups. If implemented, the reporting requirements could significantly affect the way in which companies approach the negotiation and implementation of impact benefit agreements and similar arrangements with Aboriginal groups. For a more detailed analysis of the non-Aboriginal aspects of the proposed reporting requirements, see our earlier article.
What Are the Purposes of Mandatory Reporting?
According to the Consultation Paper, a key purpose of the mandatory reporting requirements is to build on a global trend of enhancing the transparency of payments made to governments, while reducing the incidence of bribery, corruption and mismanagement of funds. Canada's standards are also intended to align with those being implemented in the United States (through the Dodd-Frank Act) and the European Union (through its Transparency and Accounting Directives), and to eliminate duplicative reporting to multiple jurisdictions.
To Whom Will the Reporting Standards Apply?
If implemented, the reporting standards would apply to both foreign and domestic companies operating in Canada in the extractive industries: commercial development of oil, natural gas and minerals (exploration, extraction, primary processing) and international export.3
The reporting standards would apply to all publicly listed companies, as well as to private companies that meet or exceed two of the following three thresholds: C$20 million in assets, C$40 million in net turnover and 240 employees. In the case of subsidiaries or joint ownership of a project, companies with a controlling interest in a project in Canada would be subject to the reporting requirements.
What Must Be Reported?
If the standards are implemented, the following types of payments of over $100,000 made to all levels of government (including to Aboriginal entities), both domestically and abroad, must be reported:4
- taxes on income, production or profits of companies, excluding consumption taxes;
- fees (licence, rental and entry fees, and other considerations for licences and/or concessions);
- production entitlements;
- bonuses (such as signature, discovery and production bonuses);
- dividends paid in lieu of production entitlements or royalties (excluding dividends to governments as ordinary shareholders); and
- payments for infrastructure improvements (such as roads and electricity).
The Consultation Paper states that "social payments" may be excluded from the reporting requirements. These would include payments such as those supporting community centres, schools, hockey teams, arenas, capacity development and training. These types of payments are fairly common features of impact benefit agreements, so this means that not all types of payments made to Aboriginal groups would necessarily be captured.
Based on the above list, it also appears that payments made to Aboriginal groups for the purposes of funding participation in consultation or regulatory proceedings, or to carry out traditional land use or environmental studies, would not be captured.
What Aboriginal Entities Would Be Included?
The Consultation Paper proposes that the following types of Aboriginal entities be considered "governments" for reporting purposes:
- Aboriginal organizations or groups with law-making power and/or governance mechanisms related to the extractive sector;
- provincially or federally incorporated Aboriginal organizations that undertake activities in the extractive sector on behalf of their beneficiaries; and
- Aboriginal organizations or groups that are empowered to negotiate legally binding agreements (e.g., impact benefit agreements) on behalf of their members.
The Consultation Paper notes that an unresolved issue is how payments to foreign indigenous entities would be captured.
How Would Reporting Be Carried Out?
NRCan proposes that companies would use a common reporting template designed for equivalency with the United States and European Union standards. Companies would post annual reports made in accordance with recognized accounting standards on a project-by-project basis on their corporate website for public access. Companies would also be required to inform the government and post a public notice confirming they have complied with their reporting obligations.
The Consultation Paper also proposes that each company's public disclosure be linked on the Treasury Board Secretariat's Open Government portal. This feature would significantly streamline the public's ability to access a large amount of data regarding multiple companies' operations and finances.
NRCan has also indicated a preference for the reporting regime to be carried out with the cooperation of provincial securities regulators under provincial securities laws. However, the federal government has indicated its plans to move forward with implementation on its own if needed.
Implications for Negotiating Agreements with Aboriginal Groups
The Consultation Paper expressly states that "payments to Aboriginal entities by extractive companies would also be captured by the reporting standards, including relevant payments in Impact Benefit Agreements." In this respect, the reporting standards proposed by Canada are a significant departure from the U.S. and EU standards and, as a result, government risks losing the support of the extractive industry (at least the mining industry, which has largely been supportive to date). Certainly, the inclusion of payments to Aboriginal entities is a substantial policy decision and will be the subject of significant controversy and debate.
The Working Group Recommendations, which did not extend to payments made to Aboriginal entities, note several important benefits for extractive companies operating in Canada. For example, increased transparency can lead to greater government accountability, deter corruption and bribery, inform public debate on resource development, assist investors to analyze risks and help companies achieve social licence. It can also lead to stabler business environments and relationships between business, governments and communities. By extension, an improved business and community environment can generally improve operating and development outcomes for extractive companies. It could be argued that many of these same policy considerations apply to payments made to Aboriginal groups, particularly given the indirect influence these deals often have on government decision-making on projects in the extractive sector.
Nevertheless, if implemented, the mandatory reporting requirements have the potential to significantly affect the current dynamic between resource companies and Aboriginal groups, and may force companies to rethink their approach to negotiating agreements with Aboriginal groups. Currently, the vast majority of impact benefit agreements between extractive companies and Aboriginal groups in Canada, and the payments made under such agreements, are confidential. There are often strong incentives for both companies and Aboriginal groups to maintain confidentiality in their agreements.
There are also practical issues with the currently proposed approach. Since the reporting standards apply only to payments over $100,000 and not all types of payments are captured by the reporting standards, this approach could potentially be misleading. Such reporting will not always provide a complete picture of the payments and benefits provided under a particular impact benefit agreement. For example, important benefits related to employment, contracting and business opportunities contained in most impact benefit agreements would not be captured, potentially resulting in the financial component of these deals becoming the focal point of negotiations. Instead of creating certainty and transparency between business and Aboriginal groups, such partial reporting could in fact have the opposite effect.
What Happens Next?
The Consultation Paper states that further consultations with stakeholders will occur between March and May 2014. It indicates that consultation materials will be posted on the Treasury Board Secretariat's Open Government portal for stakeholder comment during this time. The federal government has also released a backgrounder that provides NRCan's contact information for where the public can direct their questions about the proposed reporting requirements.
NRCan intends for the mandatory reporting standards to be in place by June 2015. This is a relatively short time frame in which the federal government intends to introduce legislation and implement the reporting standards. Unless provincial regulators are brought onside relatively quickly, at this stage it seems likely that the reporting will, at least at the outset, be a federally imposed initiative.
1 The Working Group comprised the Mining Association of Canada, the Prospectors & Developers Association of Canada, Publish What You Pay — Canada and the Revenue Watch Institute.
2 McCarthy Tétrault legal update on the Working Group Recommendations
3 Companies in the business of transporting resources within Canada would not be subject to the reporting standards (e.g., domestic pipelines).
4 Companies could also choose to voluntarily report smaller payments.
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