Canada: Canada Seeking Consultation On Guidance And Reporting Requirements Under The Extractive Sector Transparency Measures Act

Natural Resources Canada ("NRCan") recently released draft guidance and specifications for reporting payments to governments and government officials under the Extractive Sector Transparency Measures Act ("ESTMA"). Mining and oil and gas companies should be carefully reviewing these drafts to understand how these new mandatory payment disclosure requirements will impact their operations in Canada and abroad. NRCan's consultation period expires September 22, 2015.

Background - The Extractive Sector Transparency Measures Act

On June 1, 2015, Canada's new regime for mandatory reporting of payments to governments came into force. The ESTMA contains broad reporting obligations with respect to payments to governments made by oil and gas and mining companies and requires companies to begin reporting in their first full financial year after June 1, 2015.

The ESTMA was introduced to deliver on Canada's 2013 G8 commitment to support efforts against corruption in the international oil, gas and mining sectors. The ESTMA is intended to supplement anti-corruption measures contained in the Criminal Code and the Corruption of Foreign Public Officials Act ("CFPOA"). The Canadian government has also noted that the purpose of these new standards is to improve transparency within the industry and to achieve alignment with similar measures set out in the EU Transparency Directive and the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act.

Our earlier client alert, Canada Brings into Force Payment Disclosure Regime: The Extractive Sector Transparency Measures Act, provided an overview of the key elements of the ESTMA, including who must report, what must be reported, and the applicable penalties and available defences. As noted in that alert, NRCan was working on its own implementation tools for the ESTMA which were purported to include official guidelines and technical reporting specifications.

NRCan Consultations

The draft of the ESTMA implementation tools includes three separate documents:

These drafts are now open for public consultation. The consultation period ends on September 22, 2015. After the consultation period, the final version of the Guidance and the Technical Reporting Specifications will be issued.

These implementation tools are meant to provide guidance on the interpretation of the ESTMA. They are not designed to be free standing supplemental legislation. They do not have the force of law, and companies should always defer to the actual wording used in the ESTMA.

Companies in the extractive sectors should be carefully reviewing and considering whether to provide comments on these implementation tools. The ESTMA contains significant penalties for non-compliance by firms and their directors, officers and agents. As such, providing feedback to help shape the ESTMA's implementation is critical to reducing compliance costs. It will be far more difficult to alter adverse guidelines after they have come into force.

Clarification of the Reporting and Record Keeping Requirements

The Guidance provides a questionnaire to help determine whether a company is subject to the reporting and record keeping requirements of the ESTMA, i.e., whether it is a Reporting Entity. This questionnaire, together with a flowchart also contained in the Guidance, provide a quick test to determine if an entity is a Reporting Entity. This test encapsulates the requirements set out in section 8 of the ESTMA. Under that section, a Reporting Entity is:

  1. an entity that is listed on a stock exchange in Canada;
  2. an entity that has a place of business in Canada, does business in Canada or has assets in Canada and that, based on its consolidated financial statements, meets at least two of the following conditions for at least one of its two most recent financial years:
    1. it has at least $20 million in assets,
    2. it has generated at least $40 million in revenue,
    3. it employs an average of at least 250 employees; and
  3. any other prescribed entity.

These requirements are independent of one another, and if an entity meets one of these requirements they will be considered a Reporting Entity.

The Guidance also provides two points of clarification. First, the company must be subject to Canadian law. Second, the ESTMA does not apply to parent companies not subject to Canadian law who have subsidiaries operating in Canada.

The ESTMA Only Applies to an Entity, Which is a Defined Term

"Entity" is a defined term which "means a corporation or a trust, partnership or other unincorporated organization

  1. that is engaged in the commercial development of oil, gas or mineralsin Canada or elsewhere; or
  2. that controls a corporation or a trust, partnership or other unincorporated organization that is engaged in the commercial development of oil, gas or minerals in Canada or elsewhere."

The Form of the Company is to be Given a Broad Interpretation

There are four business forms that are considered entities under the ESTMA: corporations, trusts, partnerships and other unincorporated organizations. The Guidance clarifies that these categories are intended to be interpreted broadly and apply to similar forms of business organizations, including but not limited to unlimited liability corporations, limited partnerships, royal trusts, crown corporations or state-owned enterprises. However, sole proprietors and individuals are not considered entities under the ESTMA.

The Guidance Clarifies the Meaning of Commercial Development

The Guidance contains an explanation of what is meant by "commercial development". According to the Guidance, commercial development includes activities conducted in foreign jurisdictions. The definition of commercial development also applies to temporary periods of inactivity. This is especially important to note for entities with seasonal exploration programs – such programs would be subject to reporting obligations regardless of whether they were in an active or inactive season.

However, commercial development is not meant to extend to ancillary or preparatory activities or to post-extraction activities. Likewise, commercial development is not intended to include businesses that provide goods or services associated with or related to commercial development. Companies must still be vigilant about activities that technically fall outside the scope of "commercial development" as they are frequently intertwined with exploration or extraction activities and, as such, are subject to the reporting requirements.

Even if a company is not involved in "commercial development" of oil, gas or minerals directly, it may be subject to the ESTMA if it directly or indirectly controls a company that is, even if that subsidiary is located in another country not subject to the ESTMA. The Guidance stresses that indirect control and joint ventures are both caught within the scope of "control" for the purpose of determining if an Entity is engaged in "commercial development". This control principle applies even in circumstances where the entity actually engaged in commercial development is a foreign entity not subject to the ESTMA. This could potentially place the burdens of the ESTMA on Canadian investors which possess controlling interests in foreign mining concerns.

The Process for Determining Size-related Criteria in s. 8(b) of the ESTMA

The Guidance provides the following approaches for determining the size of an entity under s. 8(b) of the ESTMA:

  • Financial statements: the $20 million asset and $40 million revenue figures are obtained from the company's financial statements in the two previous years; it need only meet the requirements in one of the years to be considered a Reporting Entity.
  • Gross assets: assets should be calculated on a gross basis, not net.
  • Total global assets and revenues: assets and revenues should be calculated on global revenues and assets from all business areas, not just commercial development of oil, natural gas or minerals.
  • Exclude parent entities: global assets and revenues do not include the assets or revenues of a parent company.
  • Currency: all non-Canadian currency financial statements should be converted to Canadian currency for the purpose of these tests using:
    • the exchange rate as of the entity's financial year-end; or
    • the entity's method of translating the currency of assets or revenues in its financial statements.
  • Employee Test: the test for 250 employees should be calculated using the average of all employees of the entity over the two most recent financial years; employees include full-time, part-time or temporary employees; independent contractors do not constitute employees.

Non-Reporting Entities May Still Be Subject to the ESTMA's Enforcement and Compliance Provisions

It is still important for non-reporting entities to monitor their behaviour in relation to the ESTMA. The Guidance provides additional clarity that an entity will be required to meet the reporting and record keeping requirements in the ESTMA if it were to become a Reporting Entity at any point in its financial year. As such, an entity may find that partway through a fiscal year it moves from being a Non-Reporting to a Reporting Entity and is required to report for the entire fiscal year. Furthermore, the ESTMA's enforcement and compliance provisions apply to all Entities.

Payments, Payees, and Payment Categories

The Guidance clarifies that all payments made to a single "Payee" should be totaled for the year to determine whether they meet the definition of a payment under section 2 of the ESTMA. Payments made by a Reporting Entity to the same Payee that meet the $100,000 threshold in one category of payment must be disclosed. To determine if payment was made to the "same Payee", the entity must group together departments, ministries, trusts, boards, commissions, corporations, bodies or other authorities that are established to perform a power, duty or function on behalf of a particular level.

Payees include crown corporations and other state-owned enterprises. Aboriginal and indigenous groups and organizations within Canada and other jurisdictions may be regarded as governments for the purposes of determining if they are a Payee. However, under section 29 of the ESTMA, Reporting Entities need not report payments made to aboriginal groups in Canada until June 1, 2017.

Payments that fall outside of the seven categories provided in section 2 of the ESTMA do not need to be reported. The Guidance clarifies that the substance of the payment and not the form should be considered when categorizing a payment.

A Reporting Entity must report all payments made:

  • by the Reporting Entity; and,
  • by the entity controlled by the Reporting Entity.

The Guidance provides further clarification on the following categories of payments, of which we have summarized below:

  • Taxes: Taxes are intended to capture income, profit, and production tax payments in relation to commercial development of oil, gas or minerals. The term tax means any type of government charge that is enforceable by law. Withholding taxes need not be reported. Consumption taxes, even if related to the commercial development of oil, gas or minerals do not need to be reported. Examples of taxes that need to be reported include:
    • Income and profit taxes
    • Capital gains taxes
    • Capital Taxes
    • Mining taxes
    • Windfall profits taxes
    • Resource Surcharges
    • Petroleum revenue taxes
  • Royalties: The Guidance suggests that royalties should be defined by their common meaning. Furthermore, it clarifies that in-kind royalties should be treated the same as other in-kind payments.
  • Fees: It does not matter whether a payment, in cash or in-kind, is characterized as a fee. If it accomplishes the same purpose in substance as a fee it should be reported. This category is not meant to capture amounts paid in the normal course of commercial transactions in exchange for services provided by the government or their entities.
  • Production Entitlements: A Payee's share of oil, gas or mineral production extracted as part of a commercial development under a production sharing agreement or similar contractual or legislated arrangement should be categorized as a production entitlement. In-Kind entitlements should be reported in their equivalent cash value. Volumes of production entitlements paid do not have to be reported.
  • Bonuses: Payments which are in substance, regardless of their label, signing, discovery, production and any other type of bonuses paid to a Payee in relation to the commercial development of oil, gas or minerals must be reported.
  • Dividends: Dividends paid to a Payee who is a normal shareholder of the entity need not be reported so long as the Payee acquired the shares on the same terms available to others in the market and the dividend is paid to the Payee on the same terms as other shareholders.
  • Infrastructure Improvements: Whether they are cash or in-kind payments, and whether they are payments made pursuant to a contract or not, they must be reported. The purpose is not to capture infrastructure improvement payments that relate primarily to the operational purposes of the Reporting Entity.

McCarthy Tétrault's International Trade and Investment Law Group has extensive experience in dealing with international anti-corruption enforcement and compliance matters and can assist with any issues or concerns with respect to your ESTMA obligations.

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