For overview of the key elements of the ESTMA, refer to our earlier Tax Alerts, and

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1 2015 Issue No September 2015 Tax Alert Canada Natural Resources Canada releases extractive sector transparency reporting guidance iti l l d b t i t d d EY Tax Alerts cover significant tax news, developments and changes in legislation that affect Canadian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. Natural Resources Canada (NRCan) has released draft guidance for reporting requirements under the Extractive Sector Transparency Measures Act (ESTMA) for specific types of payments made to all levels of government, both domestic and foreign, by businesses engaged in the commercial development of oil, natural gas and minerals. The ESTMA was enacted on 16 December 2014 and brought into force on 1 June The draft guidance is open for consultation until 22 September For overview of the key elements of the ESTMA, refer to our earlier Tax Alerts, and Overview The purpose of the ESTMA is to implement Canada s international commitments to contribute to global efforts to increase transparency and deter corruption in the extractive sector and follows similar initiatives being implemented across the world, such as the European Union Accounting and Transparency Directives (the EU Directives) and the US Dodd-Frank Wall Street Reform and Consumer Protection Act.

2 The drafts of the ESTMA Guidance and reporting implementation tools consist of the following three documents, which can be found on NRCan s website at nrcan.gc.ca/actsregulations/17727: Guidance: to help businesses understand the requirements of the ESTMA. Technical Reporting Specifications: providing instructions on how to complete the templates and how reports are to be published Reporting Templates: available in both XLS and PDF format EY perspective Companies affected by this legislation should carefully review the guidance published and consider whether to provide consultation, as non-compliance with the legislation is subject to significant penalties. In addition, NRCan concurrently issued a substitution determination stating that the reporting requirements in the EU Directives meet the purpose of the ESTMA and are an acceptable substitute for the requirements set out in the ESTMA. This means that reports submitted to EU and European Economic Area member states that have implemented the EU Directives may be submitted to NRCan as a substitute for a report required under the ESTMA, provided certain conditions laid out in the notice are met. EY perspective Aside from the EU Directives, NRCan has not yet determined if the reporting requirements of other foreign jurisdictions meet the purposes of the ESTMA. As NRCan reserves the right to determine if reporting requirements of another jurisdiction are an acceptable substitute for purposes of the ESTMA, businesses will need to evaluate their reporting requirements in other jurisdictions in addition to the ESTMA and design accounting systems, controls and processes to efficiently capture information to meet the requirements in the various jurisdictions in which they have filing requirements. Guidance The draft guidance is intended to aid businesses in their understanding of the requirements of the ESTMA and provide general information on areas such as: Who is subject to the ESTMA Which entities must report payments under the ESTMA What payments should be reported under the ESTMA The draft guidance has provided greater clarification on a number of items, including: Entity and reporting entity A reporting entity is required to report payments in either of the following circumstances: 1. If the entity is listed on a stock exchange in Canada; or 2. The entity has a place of business in Canada, does business in Canada or has assets in Canada and annually meets at least two of the following three conditions (size-related criteria) for at least one of its two most recent financial years: It has at least $20 million in assets It has generated at least $40 million in revenue It employs an average of 250 employees The guidance provides a number of interpretative insights: Clarification that these two tests are exclusive of one another. For example, an entity with common shares listed on the TSX Venture Exchange will be a reporting entity even if it does not have a place of business in Canada or does not meet any of the sizerelated criteria. Natural Resources Canada releases extractive sector transparency reporting guidance 2

3 Confirmation that only four types of business forms (corporation, trust, partnership or other unincorporated organization) are subject to the ESTMA. However, these four categories of enterprise are intended to be broadly interpreted and extend to similar forms of business organizations such as unlimited liability corporations, limited partnerships, royalty trusts, Crown corporations, state-owned enterprises, etc. A business must be subject to Canadian law to be a reporting entity. Thus, a foreign parent of a Canadian subsidiary is not required to report, but the Canadian subsidiary is required to report if the sizerelated criteria are met. A reporting entity is required to report all payments by domestic and foreign subsidiaries it controls, both directly and indirectly. Commercial development does not extend to ancillary or preparatory activities for the exploration or extraction of oil, gas or minerals, such as the construction of extraction sites. Furthermore, post-extraction activities such as refining, smelting, processing, marketing or distribution are not included. It should also be noted that the definition of commercial development also includes temporary periods of inactivity. This has implications for entities engaged in seasonal exploration programs, as these entities would be subject to reporting requirements even in periods of inactivity. Payments, payees and payment categories The guidance provides greater clarification as to: What payments are reportable A business must monitor its reporting entity status throughout the year. For example, an entity not listed in Canada may not meet the size-related criteria at the beginning of the year but may meet it later in the year and thus be required to report all payments made within that year. Thus all entities are subject to the record-keeping, enforcement and compliance provisions of the ESTMA. EY perspective The ESTMA creates a significant administrative burden for junior mining companies with common shares listed on the TSX Venture Exchange (TSXV), as these companies will be required to report payments regardless of the size of the company s assets, revenue or employees. Commercial development The draft guidance outlines what is meant by commercial development. The guidance emphasizes that exploration or extraction refers to the key phases of commercial activity, which occur during the life cycle of an oil, gas or mineral project. These extend from prospecting and exploration for oil, natural gas or minerals to the closure and remediation of a project. Who is a payee for purposes of reporting payments When payments to same payee are to be aggregated and reported Furthermore, it provides guidance as to classification of the payments into the seven categories of payments noted in the ESTMA. Reporting entities will need to consider the facts and circumstances to determine whether a particular organization or institution meets the criteria of a payee, as set out in the ESTMA. They will also need to consider whether a payment to a particular payee is reportable depending on the facts and circumstances of the payment. Payments that fall outside of the seven categories do not need to be reported under the ESTMA. The draft guidance provides illustrative examples of reportable and non-reportable payments. However, businesses will need to review the substance rather than the form of the payments to determine which category is applicable. It should be noted that reporting entities are not required to report payments made to Aboriginal Natural Resources Canada releases extractive sector transparency reporting guidance 3

4 governments in Canada until two years after the ESTMA comes into force, beginning on 1 June Technical reporting specifications: The technical reporting specifications set out the required way in which reports are to be presented under the ESTMA, including instructions on how to complete the reporting template. Following are the significant items noted: At a time when the resource industry is facing numerous challenges such as low commodity prices and there is a keen focus on reducing overhead costs, the reporting requirements of the ESTMA could be seen to create an additional unwelcome administrative burden. However, non-compliance is not an option as ESTMA provides for penalties of up to $250,000 for each day that the non-compliance continues. Action should be taken as soon as possible as the ESTMA is applicable for financial years that begin after 1 June Payments are required to be reported on a project-by-project basis when these can be attributed to a specific project, which is defined to be the operational activities that are governed by a single contract, license, lease, concession or similar legal agreements. If multiple agreements are substantially interconnected, this shall be considered a project. Each report is required to include an attestation from either of the following: (a) director or officer of the reporting entity or (b) an independent auditor or accountant. Reporting entities are required to publish their report on the internet so that it is available to the public and provide to NRCan a functional and direct web link to the report within 150 days following the end of their financial year. Learn more For more information, contact your EY or Couzin Taylor advisor or one of the following professionals: Bruce Sprague Canadian Leader, Mining and Metals bruce.sprague@ca.ey.com Jim MacLean jim.d.maclean@ca.ey.com Zahid Fazal zahid.fazal@ca.ey.com Michael Sabatino michael.sabatino@ca.ey.com Blake Langill blake.langill@ca.ey.com Action required Affected entities should review the draft guidance and technical reporting specifications to determine whether comments should be provided to NRCan. In addition, reporting entities should take action to implement policies and procedures to identify, track and report payments to governments in order to be in a position to produce reports in a timely and accurate manner. That will mean identifying the appropriate level of granularity required and establishing processes to gather the payment data and assembling for proper reporting. Natural Resources Canada releases extractive sector transparency reporting guidance 4

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