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Energy Industry Accounting and Tax Update July 2013
 

Energy Industry Accounting and Tax Update July 2013

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Review of current developments related to The Disclosure of Payments by Resource Extraction Issuers to Governments (Section 1504) and Conflict Minerals Disclosures (Section 1502) of Dodd-Frank Act. ...

Review of current developments related to The Disclosure of Payments by Resource Extraction Issuers to Governments (Section 1504) and Conflict Minerals Disclosures (Section 1502) of Dodd-Frank Act. Also, a tax review including how domestic companies get stuck paying the tax burden for foreigners.

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    Energy Industry Accounting and Tax Update July 2013 Energy Industry Accounting and Tax Update July 2013 Presentation Transcript

    • Energy Industry Update July 16, 2013 Jake Vossen: Dodd-Frank Section 1504 and 1502 Patrick Hanley & Mei Lin Kis: Foreign Withholding
    • Dodd-Frank Section 1504 and 1502 July 16, 2013
    • Agenda for Today Today we will be covering current developments related to: The Disclosure of Payments by Resource Extraction Issuers (to governments) (Section 1504) and Conflict Mineral Disclosures (Section 1502) © 2013 Hein & Associates, LLP. All rights reserved.
    • Answer to the first question you have….. Does the law require disclosure of payments made to the US Government? Yes © 2013 Hein & Associates, LLP. All rights reserved.
    • What are the Objectives of 1502 and 1504 - Increase transparency and accountability - 1504- Highlights payments to governments. With that information Congress believes that public can then hold governments accountable for the use of those funds. - 1502- The law’s purpose is to indirectly discourage the use of minerals that are being mined in areas controlled by armed groups in the Democratic Republic of the Congo region. - 1502, 1503, and 1504 will allow investors to make more socially responsible investing decisions. © 2013 Hein & Associates, LLP. All rights reserved.
    • Current developments -Dodd-Frank was signed into law in July 2010. - On August 22, 2012 the SEC adopted rules to implement Sections 1504 and 1502 of Dodd-Frank. - Created a new SEC form called Form SD - In 2012 litigation against the SEC commences on both the 1504 and 1502 rules. - On July 2, 2013, a judge vacates the SEC rules on section 1504. - Oral arguments in July 2013 on 1502…Judge expects to make a quick decision. © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504 and Form SD • Only the SEC’s rules in implementing 1504 were vacated…not the underlying Dodd-Frank section 1504, which is still the law. • Court order was based on the conclusion that the process/deliberations used by the SEC to develop the rules to implement 1504 were flawed. • It is possible that the SEC re-deliberates, incorporating the concerns from court, and reaches the substantially the same conclusions. © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504 and Form SD • The EU has also adopted similar rules in April and June of 2013, albeit for larger enterprises. • NGO’s, governments and industry players have proposed similar disclosure rules through an organization called the “Extractive Industries Transparency Initiative” or “EITI.” © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504 and Form SD Disclosure of payments to Governments is…. NOT GOING AWAY. © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504…Who does this apply to? (per Dodd-Frank Act) Applies to any Company that: 1. Files a annual report with the SEC, and 2. Engages in the commercial development of oil, natural gas, or minerals. (note: includes exploration) © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504…Who does this apply to? (per Dodd-Frank Act) Also applies to any entity under the control of an extraction company. SEC estimates that 1,100 US Companies are subject to the rule. Cost to comply was estimated by the SEC at $1 Billion. (note: no exemption for small filers) © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504…What types of payments need to be disclosed (per Dodd-Frank Act) • Taxes (except VAT and Sales Taxes) • Royalties • Fees • Production Entitlements • Bonuses (such as a lease bonus) • Infrastructure Improvement fees © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504…What types of payments need to be disclosed (per Dodd-Frank Act) • Must be done on Edgar and must use XBRL • Consistent with the EITI • Not de Minimis – (defined by the SEC and any series of payments over $100,000) © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504…What Information must be disclosed for the payments Per Dodd-Frank: • Type and total amount for each “project” • Type and total amount paid to each government • Totals amount of payments by category • Currency used • Financial period • Business Segment • The name of the government that received the payment and the country in which that government is located • The “project” to which the payment relates © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504…Definition of Foreign Government and Federal Government Foreign Government includes payments made to companies owned by foreign governments. © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504…Definition of Foreign Government and Federal Government - (SEC) Foreign Governments include subnational governments…i.e. a province, county, district, territory etc. - (SEC) Federal Government means the United States and not subnational U.S. governments (i.e. does not include states or municipalities in the U.S.) © 2013 Hein & Associates, LLP. All rights reserved.
    • Form SD and timing….(per SEC) • Form was to be due 150 days after year-end. Note: Q1 will be due shortly before SD will be due • Payments are disclosed on a CASH basis. • Disclose method used to translate into reporting currency. • Form SD is FILED with the SEC not furnished to it (section 18 liability) Note: SEC says late filing will not preclude S-3 use. © 2013 Hein & Associates, LLP. All rights reserved.
    • Form SD and timing….(per SEC) Was scheduled to be due for all years ending after September 30, 2013 First report was scheduled to include all payments from October 1, 2013 to the end of the company’s first fiscal year. © 2013 Hein & Associates, LLP. All rights reserved.
    • Form SD and timing….(per SEC) Use the court order as an extension to get ready! - Identify types of payments that will be scoped in. - Develop policies and procedures. - Train accountants on coding and work on standardizing data inputs. - Begin collecting the data and work on reporting. © 2013 Hein & Associates, LLP. All rights reserved.
    • 1504 Any questions on 1504 before we move onto 1502? © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 Conflict Minerals “Conflict Mineral” is a defined term in Dodd-Frank Act. Conflict Minerals are – Gold – Columbite-Tantalie (Coltan) – Cassiterite – Wolframite – Any derivative of the above. © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 Conflict Minerals - ANY of these minerals from ANY area or country are “Conflict Minerals” - If your product has gold in it, you are using a Conflict Mineral and are subject to the requirements on 1502. Gold is a “Conflict Mineral” - Depending on where the gold in your product comes from, you will be subject to various levels of reporting. - SEC estimates that 6,000 issuers will be impacted, with initial compliance cost of $3B to $4B. © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 Really Simplified Step 1: Do you manufacture (or contract to manufacture) a product that must contain gold, solder, tungsten (or other components made from a Conflict Mineral) ? If not, stop. Step 2 Perform a “Reasonable Country of Origin Inquiry” or RCOI. After this inquiry, did the gold (etc.) possibly come from the Congo (DRC) region? If not, FILE A FORM SD, then stop. If yes, continue. Step 3 Preform Due Diligence. File a FORM SD, obtain and audit, and disclose products that are not DRC conflict free, or (during a transition period), disclose DRC conflict undeterminable. © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 Really Simplified SEC estimates that 75% of Companies that have to file a form SD, will need to go all the way to Step 3, and file a report (and obtain an audit.) © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 Really Simplified © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 RCOI Steps needed for “Reasonable Country of Origin Inquiry” are not defined. - Must be reasonably designed - Must be performed in good faith © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 RCOI If you must move on to the Third Step, then you must perform Due Diligence. - Must use a nationally or internationally recognized framework. - A framework for Due Diligence has been designed by the Organization for Economic Co-operation and Development (OECD Framework .) - Audit is to ensure compliance with OECD criteria…not to determine if minerals are from a Conflict Area. (Similar to the objective of a 404(b) audit) © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 Mining Companies In a change from the proposed rules, mining companies will not have to make disclosures unless they also manufacture. – FAQ clarifies that standard mining activities are not manufacturing © 2013 Hein & Associates, LLP. All rights reserved.
    • 1502 Mining Companies • Question: Instruction 1 to Item 1.01 of Form SD states that an issuer that mines conflict minerals would not be considered to be manufacturing those minerals for purposes of the rule. Does this Instruction exclude all of the activities customarily associated with mining from the rule? For example, gold mining of lower grade ore often involves, in addition to mining the ore, transporting the mined ore to a processing facility; crushing and milling the ore; mixing crushed/milled ore with cyanide solution; floating cyanide mixture through a leaching circuit; extracting gold from a leached circuit; melting leached gold, which is often referred to as smelting, into ingots or bars, which are often referred to as doré gold; and transporting the doré gold to refinery for refining process. • Answer: Yes. An issuer that only engages in those activities customarily associated with mining, including gold mining of lower grade ore, is not considered to be manufacturing those minerals. © 2013 Hein & Associates, LLP. All rights reserved.
    • THANK YOU Please call with any other questions for comments: Jake Vossen, National Director of Audit and Accounting Hein & Associates LLP jvossen@heincpa.com 303-298-9600 From SEC's small business guide to Conflict Minerals © 2013 Hein & Associates, LLP. All rights reserved.
    • BREAK
    • Buyer Beware: How Domestic Companies Get Stuck Paying the U.S. Tax Burden for Foreigners
    • Significance to the Energy Industry • Raising capital from foreigners • Payments to foreign vendors and service providers • Acquisitions and divestitures with foreign parties © 2013 Hein & Associates, LLP. All rights reserved.
    • Foreign Withholding - Exposure • The U.S. mechanism for taxing foreign persons. • The responsibility for foreign withholding lies with the U.S. person who is considered the “withholding agent”. • Potential civil and criminal penalties can apply. © 2013 Hein & Associates, LLP. All rights reserved.
    • Penalties The exposure associated with non-compliance may include any under withheld tax, interest, and the following civil penalties: Penalty IRC § Amount Failure to file correct information return 6721 $100/ea Failure to provide correct payee statement 6722 $100/ea Failure to File (e.g., Form 1042) 6651(a)(1) 5%/month Failure to Pay 6651(a)(2) 0.5%/month Failure to Deposit 6656 10% Accuracy related penalties 6662 20% © 2013 Hein & Associates, LLP. All rights reserved.
    • Classification of Payee The payee should provide you with one of the following forms prior to payment: • Form W-9 – With an EIN/SSN declaring they are a US resident • Form W-8ECI – With an EIN declaring they are a foreign company doing business and paying taxes in the U.S. • Form W-8BEN – This form indicates that they may be eligible for a reduction of withholding under the treaty if properly completed. © 2013 Hein & Associates, LLP. All rights reserved.
    • Classification of Income • Effectively Connected Income (ECI) • Dispositions of U.S. Real Property - Foreign Investment in Real Property Tax Act (FIRPTA) • Fixed or Determinable Annual or Periodical Income (FDAP) © 2013 Hein & Associates, LLP. All rights reserved.
    • Effectively Connected Income (ECI)
    • Effectively Connected Income (ECI) • U.S. Source income as defined by §861-863, 865 – “Asset-Use Test” - Income derived from assets used/held for use in a U.S. trade or business. – “Business-Activities Test” – The activities of the U.S. trade or business are a material factor in the realization of the income. • Withholding rates: 39.6% ordinary, 20% capital (under §1446) – Election under Reg §1.1446-7 © 2013 Hein & Associates, LLP. All rights reserved.
    • Withholding Forms to file: • Annual return for Partnership Withholding Tax - Form 8804, 8805 – Filing deadline: April 15th, Form 7004 extends to October 15th • Required quarterly tax deposits using Form 8813 • Distribute Form 8805 to recipients © 2013 Hein & Associates, LLP. All rights reserved.
    • Foreign Investment in Real Property Tax Act (FIRPTA)
    • FIRPTA • Withholding tax imposed on sales or exchanges of any US real property interest (USRPI) by foreign party. • What is a USRPI? – Land, land improvements – Buildings – Mines – Wells – Other natural deposits – Stock in a US Real Property Holding Corporation “USRPHC” – Some US Partnership interests • Withholding obligation lies with U.S. purchaser/transferee. • Withholding is on 10% of the gross amount or fair market value of the USRPI. © 2013 Hein & Associates, LLP. All rights reserved.
    • FIRPTA (Continued) • What is a US Real Property Holding Corporation (USRPHC)? US Corporation is considered a USRPHC if: FMV USRPI . ≥ 50% FMV USRPI + Foreign Real property + trade/business assets IRC §897(c)(2) Under the alternate valuation test a US Corporation is NOT considered a USRPHC if: NBV USRPI . < 25% NBV USRPI + Foreign Real property + trade/business assets IRC Regulation §1.897-2(b)(2) © 2013 Hein & Associates, LLP. All rights reserved.
    • U.S. Real Property Holding Corporation Example Resident of Canada U.S. Corporation North Dakota Working Interest FMV = $3M Canadian Royalty Interest FMV = $2M 15% USRPI = $3M = 60% = USRPHC $5M Resident of Canada U.S. Corporation North Dakota Working Interest FMV = $3M Debt Secured by ND Property = $2M Canadian Royalty Interest FMV = $2M 15% USRPI = $3M - $2M = 33.3% ≠ USRPHC $3M © 2013 Hein & Associates, LLP. All rights reserved.
    • FIRPTA Exceptions Exceptions to the general rule to withhold are: • Public company exception for a USRPHC – • Stock is regularly traded on an established securities market, and • The foreign shareholder owns less than 5% on acquisition date. • Personal residence sold for less than $300K. • Withholding certificate - The amount required to be withheld cannot exceed the transferor's maximum tax liability with respect to the transfer of a USRPI as determined by IRS. File Form 8288-B on or before the date of the transfer. © 2013 Hein & Associates, LLP. All rights reserved.
    • FIRPTA Forms to file: • U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests- Form 8288, 8288-A – File within 20 days of the transfer • Application for Withholding Certificate – Form 8288-B – File on or before the day of transfer - IRS will respond by the 90th day after receipt © 2013 Hein & Associates, LLP. All rights reserved.
    • Fixed or Determinable Annual or Periodical Income (FDAP)
    • Fixed or Determinable Annual or Periodical Income (FDAP) • All other income from a U.S. Payer – some examples (§861,871,881): – Dividends – Interest – Compensation for Personal Services – Director Fees – Rental income – Royalties • Withholding rate 30% (under §1441) © 2013 Hein & Associates, LLP. All rights reserved.
    • FDAP - Treaty Reduction of rates • Many times, the rate of withholding can be reduced or eliminated under treaty. • Treaty rates listed in IRS Publication 515, updated annually. • Documentation required: properly completed Form W-8BEN, or Form 8233. • There is no reduced rate for natural resource royalties. © 2013 Hein & Associates, LLP. All rights reserved.
    • Director Fee Considerations • Location services are performed • Reimbursed expenses and accountable plan requirements • Method of payment (i.e. restricted stock, cash, options) © 2013 Hein & Associates, LLP. All rights reserved.
    • Services Performed Outside the U.S. Performed Inside the U.S. Exempt Regulation 1.1441.1(b)(4)(v) Paid To Foreign Corporation/Branch NRA Individual All Others Engaged in U.S. Trade or Business Not Engaged in U.S. Trade or Business Not Engaged in U.S. Trade or Business Subject to Withholding Exempt Reg. 1.441-1(b)(t)(viii) -4 (a)(1) Subject to FDAP Withholding Reg. 1.1441- 4(a)(2) Reduced or Eliminated by Form 8233 Provided By NRA Subject to FDAP Withholding Obtain Form W8-ECI No Form W8-ECI Services Flowchart © 2013 Hein & Associates, LLP. All rights reserved.
    • IRS Audit Example - FDAP In February of 2013 Form 1042 for 2010 is selected for audit and the following is discovered: • Payments of U.S. sourced income during 2010 totaled $300K. (Assume both were paid 12/31) • $100K Dividends (for a 4% owner) • $200K Royalty Payment (landowner) • Canadian Undocumented recipients = 1 • Withholding = 0 • Forms 1042 and 1042-S filed = 0 © 2013 Hein & Associates, LLP. All rights reserved.
    • IRS Audit Example – FDAP (Continued) • Received Form W-8 from dividend recipient • With treaty benefits claimed under Article X. Dividend withholding = $15,000 ($100K x 15%) Royalty withholding = $60,000 ($200K x 30%) Total amount underreported and under-withheld = $75,000 © 2013 Hein & Associates, LLP. All rights reserved.
    • IRS Audit Example – FDAP (Continued) • On May 5,2013 you receive the final Form 4549 with the Income Tax Examination Changes and your amount due is as follows. Description Amount Tax Liability $75,000 Interest $5,440 Failure to deposit §6656 $7,500 Failure to file §6651(a)(1) $16,875 Failure to pay §6651(a)(2) $9,750 Penalty Interest $1,770 Failure to file form 1042-S $100 Failure to provide payee statement $100 Total Liability $116,535 © 2013 Hein & Associates, LLP. All rights reserved.
    • FDAP Forms to file: • Annual Withholding Tax Return for U.S. Source Income of Foreign Persons - Form 1042 – Filing deadline: March 15th, Form 7004 extends to September 15th. • Annual Summary and Transmittal of Forms 1042-S, 1042- T, 1042-S – Filing deadline: March 15th, Form 8809 extends 30 days (automatic), 2nd extension for another 30 days (with permission in extreme cases). – Distribute Form 1042-S to recipients. • Required tax deposits – EFTPS, Frequency depends on amount due. © 2013 Hein & Associates, LLP. All rights reserved.
    • Foreign Account Tax Compliance Act (FATCA)
    • FATCA What is FATCA – • Withholding under IRC §1471 on payments to certain foreign financial institutions. • Reporting specified foreign financial assets on Form 8938 • Intergovernmental agreements © 2013 Hein & Associates, LLP. All rights reserved.
    • §1471 Withholding • Who is a withholding agent? • What amounts are subject to withholding? • Who is subject to withholding? • What are the penalties for failure to withhold? © 2013 Hein & Associates, LLP. All rights reserved.
    • Form 8938 • Who is required to file: Individuals – Entities – pending regulations • Reporting period – specified person’s taxable year. Reg. §1.6038D-2T(a)(9) • Due date: return due date including extensions • Penalties: Reg. § 1.6038D-8T – $10,000 – there is a reasonable cause exception. – Increase in penalties for continued failures to file after receiving a notice: $10,000/month up to $50,000. – If you do not report income related to these assets the §6662 penalties apply and there are criminal provisions under this section. © 2013 Hein & Associates, LLP. All rights reserved.
    • Form 8938 Filing Thresholds Filing Status Domicile Value of foreign financial assets on the last day of the year > : OR at any time during the tax year is >: Single US $ 50,000 $ 75,000 Married Filing Joint US $ 100,000 $ 150,000 Married Filing Separate US $ 50,000 $ 75,000 Single Abroad $ 200,000 $ 300,000 Married Filing Joint Abroad $ 400,000 $ 600,000 Married Filing Separate Abroad $ 200,000 $ 300,000 © 2013 Hein & Associates, LLP. All rights reserved.
    • Intergovernmental agreements Under the Model IGA: • Foreign Financial Institutions (FFIs) will report information on U.S. account holders to their national tax authorities, which in turn will provide this information into the U.S. under an automatic exchange of information. • In addition, the U.S. will reciprocate and provide similar information related to foreigners with accounts in the U.S. © 2013 Hein & Associates, LLP. All rights reserved.
    • Questions? Mei Lin Kis, Tax Manager Hein & Associates LLP mkis@heincpa.com 303-298-9600 Patrick Hanley, Tax Partner Hein & Associates LLP phanley@heincpa.com 303-298-9600 © 2013 Hein & Associates, LLP. All rights reserved.