Extractive Sector Transparency Measures Act: Are you ready?

Extractive Sector Transparency Measures Act: Are you ready? 1 Presenters Heather J. Cheeseman, CPA, CA Partner, KPMG Audit and Risk Consulting 416-777-3314 hcheeseman@kpmg.ca Alex Fisher, CPA, CA Principal, CPA Canada afisher@cpacanada.ca Sarah Whyte, CPA, CA Manager, KPMG Audit and Risk Consulting 416-777-3562 sewhyte@kpmg.ca 2 Agenda Introduction to ESTMA Background Key documents Summary of key changes Who should report? When should you report? What should you report? Other (compliance, substitution) Attestation and Audit Getting ready for ESTMA next steps and considerations Disclaimer It is important to note that we are not intending to provide legal advice through this presentation. Entities should consult with legal counsel for legal interpretations. This presentation is based on information and guidance from Natural Resources Canada as of March 2016. As the ESTMA rules continue to evolve, we encourage entities to look for any updated guidance from Natural Resources Canada. 3 1

Introduction On June 1, 2015 the Extractive Sector Transparency Measures Act (the Act / ESTMA) came into force. The Act requires extractive entities to report annually on payments made to governments relating to the commercial development of oil, natural gas, or minerals, at home and abroad. ESTMA delivers on Canada s international commitments to contribute to global efforts to increase transparency and deter corruption in the extractive sector. On March 1, 2016, Natural Resources Canada (NRCan) launched the official ESTMA website and has released the final ESTMA tools and resources. 4 Background Canada: Extractive Sector Transparency Measures Act Norway: Extractive industry country bycountry reporting EU: Accounting & Transparency Directive US: Dodd Frank Act Section 1504 (pending) OECD: Base Erosion Profit Shifting (BEPS) Country-by-country reporting by multinationals operating in OECD or G20 countries. Map Data Sourced from: http://eiti.org/countries EITI: Extractive Industry Transparency Initiative Australia: Corporations Amendment (Publish What You Pay) Bill 2014 (pending) EITI Candidate Country Implementing EITI, not yet compliant EITI Compliant Country confirmed to have met all EITI requirements Non EITI compliant country Other Suspended Compliant/Candidate status is temporarily suspended 5 Key documents Extension of the Act Extension of the Act Guidance document; not compulsory Go to: http://www.nrcan.gc.ca/mining materials/estma/18180 New: Companies can now enrol with NRCan as an ESTMA Reporting Entity by completing a Contact Form 6 2

Summary of key changes Guidance: Treatment of property taxes Treatment of payments to state-owned enterprises Technical Reporting Specification: Details on enrolling in the reporting process prior to registering a report Clarification on currency conversions Rounding payments to nearest $10,000 but cannot be used to determine whether you are required to report Maintenance of record keeping 7 Who should report? (1/5) Are you subject to Canadian law? YES Are you a corporation, trust, partnership or other unincorporated organization? YES Are you directly engaged in the commercial development of oil, gas or minerals in Canada or abroad? or Are you controlling an entity that is engaged in the commercial development of oil, gas or minerals in Canada or abroad? Are you listed on a stock exchange in Canada? YES ENTITY or YES REPORTING ENTITY Do you have a place of business in Canada, do business in Canada or have assets in Canada? And based on your consolidated statement meet at least 2 of the 3 criteria ($20m in assets, $40m in revenue, 250 employees)? 8 Who should report? (2/5) What is meant by commercial development of oil, gas or minerals? 9 3

Who should report? (3/5) What is meant by indirectly engaged? A reporting entity must also report on all payments made by an entity that it controls directly or indirectly and is engaged in the commercial development of oil, gas or minerals. Accounting approaches to control (IFRS or US GAAP) are sufficient to determine control. 10 Who should report? (4/5) What is meant by indirectly engaged? Canadian parent Company 100% 60% 50% Subsidiary 1 (Brazil) Joint Operation (USA)* Subsidiary 2 (Brazil) 80% Subsidiary 3 (Australia) Subsidiaries may report their payments through the parent company * Other working interest holder is operator. Operating entity must report the payments on behalf of all the working interest holders Who should report? (5/5) What is meant by indirectly engaged? Foreign Parent Company 80% 70% 100% 100% Subsidiary 1 (Canada) Subsidiary 2 (USA) Subsidiary 3 (Russia) Subsidiary 4 (Brazil) 80% Subsidiary 2 (Canada) Only the Canadian subsidiaries are in scope of ESTMA. Subsidiaries may report their payments through the parent company, if the parent company is an entity for the purposes of ESTMA. 4

When should you report? The first reports under the Act will be in respect of financial years commencing after June 1, 2015. The report is due no later than 150 days after the end of the entity s most recent financial year. Reports should be published on company websites so that they are available to the public and a web link to the report should be provided to NRCan. Payments to Aboriginal Governments in Canada must be included in ESTMA Reports as of June 1, 2017. 2015 2016 2017 June 30, 2015 year-end Report covers period July 1, 2015 June 30, 2016 Report due by Nov 27, 2016 Payments to Aboriginal Government June 1, 2017 2015 2016 2017 Dec 31, 2015 year-end Report covers period Jan 1, 2015 Dec 31, 2016 Report due by May 30, 2017 Payments to Aboriginal Government June 1, 2017 What should you report? You are required to report payments to government by: Payment category Project (where possible) Payee (i.e. Government) Reportable payments include payments that: Are made in relation to the commercial development of oil, gas or minerals and Totals, as a single, or multiple payments, $100,000 or more within one of the payment categories and Are made to the same Payee (i.e. Government). Country In addition, payments: Are disclosed on a cash basis (i.e. when the payment is made) Are rounded to the nearest $10,000 Payment category (1/4) The required payment categories include: 1. Taxes (excluding consumption taxes (e.g. sales tax) and personal income taxes) 2. Royalties 3. Fees (including rental fees, entry fees and regulatory charges as well as fees or other consideration for licences, permits or concessions) 4. Production entitlements 5. Bonuses (including signature, discovery and production bonuses) 6. Dividends (other than dividends paid as ordinary shareholders) 7. Infrastructure improvement payments Both cash payments and payments in kind (cost to entity / fair market value) must be reported. CSR donations made in relation to the commercial development of oil, gas or minerals must be reported. 5

Payment category (2/4) Example 1. Company ABC pays corporate income taxes exceeding $100,000 each to the Canadian Federal Government, Ontario Government and a foreign government. In addition, Company ABC leases office space in Toronto for its admin function and pays business and property tax to the City of Toronto. 2. Company ABC pays a signing bonus to an Aboriginal band council in Ontario for providing access to a resource on traditional land. Payment Corporate income tax is reportable (at payee level) Property and business tax is nonreportable Bonus payment Reporting not required until June 1, 2017 (if still applicable) 3. The federal Government of Ghana is a shareholder in Company ABC and receives dividends on a quarterly basis amounting $150,000 annually. The shares were received as part of issuing a license to explore for minerals. Bonus payment (due to shares) Dividends Payment category (3/4) Example 4. Company ABC has built a sewage system to service one of its camps attached to amine. In the construction phase neighboring communities are also connected to the sewage system opening up the system for public use. At the end of the lease term (20 years), the ownership of the sewage system will be transferred to the local municipality. Payment Infrastructure improvement Report when expenditure is incurred (in kind) 5. Company ABC has donated a local municipality $5 million to run an apprentice program nearby one of its sites, to train young adults the necessary skills to work in the mining industry. In addition, company ABC has donated $2 million to the City of Sudbury to support a city wide campaign aimed at creating opportunities for homeless people. $5m to be reported as a bonus payment $2m payment is non reportable Payment category (4/4) Example 6. Company ABC has contracted an energy service company to install drilling equipment on site. To get the equipment to the site, the energy service company has acquired a wide load permit (i.e. fee) from the local government authority. Payment Third party payment Not related to the commercial development of oil & gas Non reportable 7. Company ABC has paid $200,000 to a foreign country s army for the provision of security at the oil extraction site (i.e. fee). Payments are made on arms length terms that are also available to other consumers. Commercial transaction Non reportable 6

Payment category (4/4) Example 8. Company ABC has 2 operating sites and 1 financing company that loans money to the operating sites and earns interest income in return. As a result, the operating sites pay interest and remits withholding tax to the government. Payment Withholding tax and interest income is non reportable Financing company is considered to be an ancillary service and not related to the commercial development of oil, gas or minerals. Project Payments must be broken down to the project level when they can be attributed to a specific project. Project: the operational activities that are governed by a single contract, license, lease, concession or similar legal agreements and form the basis for payment liabilities with a government. If multiple such agreements are substantially interconnected, they may be reported as one project. Substantially interconnected: a set of operationally and geographically integrated contracts, licenses, leases or concessions or related agreements with substantially similar terms that are signed with a government, giving rise to payment liabilities. A level of judgment will need to be applied ESTMA allows companies to report projects consistent with their unique operational/geographical practices. Payee (1/2) A payee is: Any government in Canada (federal, provincial, municipal) or any other foreign government; and Any body of two or more governments, or other similar bodies conducting the functions of a government (e.g. commissions, boards). This includes crown corporations and other state-owned enterprises that are exercising or performing a power, duty or function of government; From June 1, 2017, companies must also report payments made to Aboriginal governments in Canada. 7

Payee (2/2) Same payee is: You must group together departments, ministries, trusts, boards, corporations, bodies and other authorities that perform the function of a government and belong to the same legal entity (e.g. Canadian federal government, provincial government of Alberta, City of Calgary, etc). You are also encouraged, where practicable, to list the payees that received the payment. Example of same payee If several fee payments are made to the National Energy Board, Environment Canada and Natural Resources Canada (which are all Canadian federal bodies) that add up to $100,000 in a year, a fee payment of $100,000 should be reported. Substitution Reports submitted to the European Union as part of the EU s Accounting and Transparency Directives may be used as a substitute for ESTMA. NRCan will consider other comparable initiatives on a case by case basis e.g. Dodd Frank Act likely to be considered when finalized (currently delayed). Go to http://www.nrcan.gc.ca/mining-materials/estma/18192 for more information on the substitution process Compliance If a company fails to comply with the requirements of ESTMA, or makes any false or misleading statements - fines up to $250,000 can be imposed for every day that the offence continues. A director, officer or agent will be held personally accountable if they are proven to be involved in an offence (i.e. directed, authorized, assented to, acquiesced in, or participated in). A successful due diligence defence requires that an officer or director can establish: - Understanding of the requirements and application of ESTMA; - Development of appropriate policies and procedures; - Delegation to qualified personnel responsible for implementing the policies and procedures at corporate and mine sites; - Provision of resources necessary to implement the policies and procedures; and - Establish a system to monitor compliance with the policies and procedures. 8

Attestation and Audit Attestation Each report is required to include an attestation by a Director or Officer of the Reporting Entity; the technical guidance emphasizes that the Reporting Entity (i.e. director or officer of the entity) is responsible for the contents of the ESTMA report. Auditor Involvement Reporting entities may also obtain an audit opinion on the report. The suggested wording of the external audit opinion implies that no scope limitations or reservations of opinion would be acceptable. The auditors report would be publicly available. Optional Audit Approach Although not contemplated by the Act, companies could choose to have auditor involvement which provides assurance to their Board of Directors but not be publicly disclosed. Ministry Required Audit The Minister may, by order, require the company to provide the results of an audit of its report or of the records of payments. This is a distinct requirement from the audit considerations above. Where would ESTMA typically fit in the organization? Finance Legal Tax IT Financial reporting Accounting Accounts Payable Leading: Design P&P Collect data Review data Prepare report Support role: Interpretation of the Rules Support role: Expert advice on tax payments Support role: Design and implement system changes Other business areas could include: Community Affairs, Government Relations, Sustainability and Exploration departments Key challenges and risks for companies Identifying the multitude of government bodies, and same payees Collecting both manual and nonmanual payments Reporting on a cash basis Categorizing payments by project Identify which controlling entities are in scope and obtain data Correctly interpreting the legislation and technical guidance Applying the ESTMA requirements in your company s context Making system design changes to capture data on a complete and timely basis Retrieving ESTMA information from your existing systems in the correct reporting format D&A capabilities Developing policy and process documentation and training Designing and implementing new processes and controls across the organization to capture, compile and analyse payment data Ensuring completeness of payments, including in-kind payments Applying the appropriate level of due diligence required to support management s certification Matching multitude of payments to ESTMA categories Greater transparency might expose commercial sensitivities, that can be used against companies (e.g. not paying your fair share, controversial bonuses, etc.) Consistency with other global government transparency initiatives (e.g. EITI, EU Accounting & Transparency Directive or local reporting requirements) 9

4 steps to get ready for ESTMA 1. Understand 2. Implement 3. Collect & Review 4. Report Understand the requirements of the Act Identify & evaluate available data for reporting government payments Enroll with NRCan and obtain ESTMA ID number Develop project plan and assign roles and responsibilities Identify in scope sites, payments, projects and government bodies to be reported Determine & implement system changes Design and implement new controls Identify any data collection and reporting gaps Collect and review payment data on a monthly basis Investigate any errors or unusual payments with sites Consolidate all site s manual and system reporting templates Prepare ESTMA report in line with reporting requirements Create alignment with existing corporate reporting procedures (e.g. Disclosure Committee) Attest information is true, accurate and complete Consider third party assurance Q4 2015 Q12016 On going Q1/Q2 2017 Challenges we ve seen with implementation so far: 1. Interpretation of the Act 2. Completeness of government payments 3. Consolidation process manual and complex 4. Foreign exchange calculation and number of currencies 5. Designing system and manual data collection and reporting templates to capture the key information 6. Time and resourcing challenges 7. Designing and delivering training across the organization 8. Identifying and tagging of cash payments 9. Categorization of payment categories and suppliers Questions? 30 10

Thank you Heather J. Cheeseman, CPA, CA Partner, KPMG Audit and Risk Consulting 416-777-3314 hcheeseman@kpmg.ca Alex Fisher, CPA, CA Principal, CPA Canada afisher@cpacanada.ca Sarah Whyte, CPA, CA Manager, KPMG Audit and Risk Consulting 416-777-3562 sewhyte@kpmg.ca 31 11