Australia commits to the Extractive Industries Transparency Initiative

The Australian government announced on 6 May 2016 that it will implement the Extractive Industries Transparency Initiative (EITI).

an international standard aimed at increasing transparency and accountability to the public for the revenue received by governments from companies operating in the oil, gas and resources sector. Although implementation of EITI in Australia will not impose mandatory reporting obligations, the Australian government is relying on the continued support from the extractive industry to participate in the initiative.

The Australian government has supported the EITI since 2006 as a donor and supporting country. The decision to implement the EITI follows a pilot program conducted between 2011 and 2015 (Pilot). In a joint press release announcing Australia’s commitment to the EITI, Minister for Foreign Affairs, the Hon Julie Bishop MP, and the Minister for Resources, Energy and Northern Australia, the Hon Josh Frydenberg MP indicated that committing to the initiative would demonstrate Australia’s leadership in transparency and anti-corruption matters.

What is the EITI?

The EITI was established in 2002 as a non-profit association under Norwegian law which “promotes the open and accountable management of natural resources”¹. It is governed by a board of members representing implementing countries, supporting countries, civil society organisations, industry and institutional investors.

The 2016 EITI Standard contains the requirements that countries must adhere to in order to be recognised initially as an EITI “candidate” and eventually an EITI “compliant” country. The Standard requires countries implementing the EITI to publically disclose information including company payments and government revenues from extractive industries, the framework for the award and transfer of licenses for exploration and production and the beneficial ownership of licences held via an “EITI Report”. Globally, there are currently 29 EITI compliant countries and 20 candidate countries working towards compliance.

To implement the EITI, a country must:

• establish a “multi-stakeholder group” (MSG) with representatives from government, civil society and companies in the extractive industries sector to oversee the implementation of an EITI work plan;
• make a formal application, endorsed by the MSG, to the board of EITI and be accepted as an EITI candidate; and
• publish its first EITI Report within 18 months from the date that the country is admitted as an EITI candidate. EITI Reports are made available on the EITI website.

The International Secretariat of the EITI then undertakes a process of validation to confirm that the country has met the standards required by the EITI.

The Australian Pilot

The Pilot conducted between 2011 and 2015 was chaired by the Department of Industry. Participants in the Pilot MSG included the Australian Federal Government, the States of Queensland, South Australia and Tasmania, seven civil society representatives and seven representatives from the extractive industries sector. The Pilot sampled six revenues received by state and federal governments: Petroleum Resource Rent Tax, Company Tax, North West Shelf Petroleum Royalties, North West Shelf Petroleum Excise, Northern Territory Uranium Royalty and state royalties received by the three states participating in the Pilot. BHP Billiton, Rio Tinto, ExxonMobil Australia, Shell Australia, BP Australia, MMG, ERA, OzMinerals and Mandalay Resources volunteered to report their payments under the Pilot.

Findings of the Pilot

The Pilot tested Australia’s current governance framework to determine whether it forms a suitable basis for Australia to implement the EITI without undue cost and effort to business. The Pilot considered $12.84 billion in receipts from the sampled revenues and found an unexplained discrepancy of only 0.03 percent, concluding Australia’s current governance and financial controls are strong and sufficient to enable it to implement the EITI without significant additional cost to industry or government.

However, the Pilot also determined that the level of transparency required by the EITI does not exist in Australia due to legislative restrictions on public release of relevant data (e.g. the Taxation Administration Act 1953 prohibits the ATO from disclosing disaggregated tax information of individual entities to third parties).

To resolve the barriers to the government disclosing tax payments received from individual companies, the Pilot used a methodology where the reporting entity first provided its revenue and payment data to the administrator and then requested its own financial data from the ATO before forwarding that information to the administrator for reconciliation.

As a result of this, the Pilot MSG recommended that Australia adopt a ‘hybrid’ model for EITI implementation purposes involving two steps:

1. Australian companies in the extractive industry sector voluntarily disclose their tax payments to an independent administrator appointed by the MSG. The administrator will then consolidate the return with the aggregated tax receipts from the government, and report the aggregated value for the taxes as well as the level of variance.
2. Using the disaggregated tax payments, the administrator will randomly sample tax payments for participating companies and request the corresponding tax receipts from government for reconciliation. For the sampled tax payments, government will report disaggregated tax receipts (using the same methodology as the Pilot).

The Regulation Impact Statement 2016 (RIS) released by the Department of Industry in March 2016 estimates that the cost of reporting under the hybrid model is $1.2 million per annum. In comparison, if a full model was adopted (where all 4,500 companies operating in the extractive industries in Australia are required to report payments) the estimated cost grows to $6.3 million per annum. Given the voluntary nature of this model, the Australian government is relying on support from the industry to participate in EITI and plans to publish aspirational targets for participation by the sector. Industry support for the initiative does appear strong. Major Australian companies including BHP Billiton, Oz Minerals, Rio Tinto, Santos and Woodside have signed up as EITI member companies.

What will EITI candidacy mean for companies operating in the sector?

Involvement in the MSG

There will be a role for businesses in the sector to be involved in the MSG which will set the work plan for Australia’s implementation of the EITI and oversee implementation. Following the success of the Australian Pilot, the Pilot’s MSG advocates the twenty one member MSG approach (comprising seven representatives from each of government, civil society and industry) continue during implementation of the EITI. This suggests the opportunity for participation in the MSG will be limited to seven companies of various size and commodity type operating in Australia.

The RIS highlights the milestones for EITI implementation and indicated that an MSG would be established by May 2016. At the date of writing, no further information on the establishment of the MSG or likely identity of its members has been published.

Reporting obligations

Given the voluntary nature of the proposed hybrid model, implementation of the EITI is unlikely to introduce additional mandatory reporting obligations for companies in the sector. However, companies that choose to participate must report to the administrator figures that are directly relevant to business activities pertaining to resource extraction. Companies that conduct a diverse range of business activities may have additional work to prepare and report relevant figures to the administrator.

Due to the sample-testing nature of the hybrid model, certain companies will be selected at random to provide further information for reconciliation purposes. Companies will need to work cooperatively with the independent administrator and the government to ensure the figures are properly and accurately reconciled.

No amendment to disclosure rules

As noted above, the Pilot found that there were legislative barriers in relation to the release of financial records to the administrator and the hybrid model proposed works around this without requiring legislative change.

This approach varies from the approach taken internationally, where a number of countries have passed transparency related legislation. For example, the Extractive Sector Transparency Measures Act was introduced in Canada in 2014 which imposes obligations on large, publicly-traded oil, gas and mining companies to disclose payments made to governments. In the US, which signed up to EITI implementation in 2014, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 places obligations on companies in the extractive industry and listed on the US security exchange to fully disclose payments made to foreign governments. Likewise, there are EU Directives aimed at implementing the EITI which apply to companies paying over €100,000 to government.

Notwithstanding the voluntary nature of the Australian model, companies operating in multiple jurisdictions or listed on foreign exchanges may face reporting obligations in other countries if the global trend towards increased transparency continues.

Further information:

Further information on the EITI can be seen at https://eiti.org/.

Further information on implementation by Australia is available at: http://www.industry.gov.au/resource/Programs/ExtractiveIndustriesTransparencyInitiative

Endnotes

1. Extractive Industries Transparency Initiative, Who we are https://eiti.org/about/who-we-are.