Selection of payment flows

Selection of sectors

The EITI Standard requires that all significant payment flows of a country’s extractive sector are considered. In various meetings, the MSG discussed which extractive sectors should be included in the third German EITI report. In detail, it was decided to consider the following sectors:

  • Lignite
  • Crude oil and natural gas
  • Potash and salts
  • Quarried natural resources

Hard coal mining ended in Germany at the end of 2018. Therefore, as in the previous report, this sector is not included (cf. the general explanations on hard coal mining in Germany and on state financial aid for the hard coal sector).

Selection of companies

The EITI Standard does not provide direct guidance on the process of selecting companies to be included in the report. Like the selection of sectors to be included, the selection of companies should be based on the EITI Initiative’s goal of making a state’s revenues from the extractive industry transparent and thus disclosing all significant payment flows between companies and government agencies. According to EITI requirement 4.1b) payments and receipts are deemed to be material if their omission or misstate- ment could materially affect the completeness of the EITI report.

Regarding the selection of companies, the MSG has decided to follow the requirements of the EU Accounting Directive 2013/34/EU of 26 June 2013. The goals and payment flows specified by the EITI Initiative largely correspond to the content of the EU Accounting Directive. In the recitals in paragraph 44 and paragraph 45, the EU Accounting Directive explicitly refers to the fact that

  • the new provisions are intended to help governments implement the EITI principles and criteria; and
  • payments should be disclosed that are comparable to those under EITI.

This EU Directive has been transposed into German law through the BilRUG. Companies in the extractive industries are required to prepare (consolidated) payment reports according to §§341q et seq. German Commercial Code (HGB) if they meet certain criteria regarding their registered place of business, legal form, size, and activity (cf. the explanations given in Public reports).

In various meetings, the MSG agreed to develop the content of the D-EITI process further in accordance with the new provisions of §§ 341q et seq. HGB. In particular, the new provisions refer to:

  • criteria for identifying companies eligible for reporting,
  • the relevant reporting period,
  • the determination of materiality thresholds for the payment flows to be reported.

By using the provisions of the HGB as a basis, the MSG intends to create suitable conditions for the broadest possible participation of companies and avoid any double burdens for participating companies that could result from differences between the statutory provisions on (consolidated) payment reporting and the reporting requirements for EITI purposes (cf. also Public reports).

Accordingly, the criteria for “large” companies pursuant to §267(3) HGB were used as a basis for identifying the companies eligible for reporting in a first step. Companies eligible for reporting must meet at least two of the following three criteria for classification as a “large” company on at least two consecutive reporting dates:

  • Balance sheet total more than €20 million
  • Revenue of more than €40 million
  • More than 250 employees on average per year

Regarding the question of whether an “activity” in the extractive industries exists, reference was made to Regulation 1893/2006/EC of 20 December 2006, which provides details on the statistical classification of economic activities. 

To identify companies eligible for reporting, companies assigned to one of the divisions 05 to 08 are considered as “active” in the extractive industry. In addition to the legal obligation to prepare payment reports for “large“ companies, there is also an obligation for parent companies to prepare consolidated payment reports if at least one subsidiary is active in the extractive industry. The size of this “active” subsidiary is irrelevant, so that even group companies that are not deemed to be “large” companies can cause their “large” parent company to be under a reporting obligation (so-called “corporate infection theory”).

The corporate infection theory was also considered for the identification of companies in the extractive industries, so that the group of companies under a reporting obligation is enlarged accordingly. As a result, the selection of companies eligible for reporting was made through a combination of the size and activity criteria (cf. also the explanations in chapter 8.b.ii.).

Besides the size of the companies and their economic classification, the MSG has chosen the market coverage by a company as a criterion for the selection of the companies eligible for reporting. There are significant differences between the various segments of the extractive sector in Germany in terms of the number of companies and people working in it. The coal mining and the crude oil and gas extraction sectors, for example, are dominated by a few large companies while quarried natural resources sector is characterised by a structural mix of a few large suppliers and a high proportion of small and medium- sized enterprises. Hardly any of the companies in the sector are subject to any legal obligation to draw up payment reports and thus cannot be identified by the criteria for identifying companies eligible for EITI reporting (cf. also the explanations in chapter 8.b.iii.).

Die Anforderungen 2.6, 4.5 und 6.2 des EITI Standards stehen im Zusammenhang mit staatlichen Beteiligungen an rohstofffördernden Unternehmen.

For Germany, one extractive company with a government majority shareholding was identified – Südwestdeutsche Salzwerke AG. According to the 2018 Annual Report, the city of Heilbronn holds 46.6% of the voting rights and the Federal State of Baden- Wuerttemberg holds 45% of the voting rights in this company (see 2018 Annual Report, pp. 128 and 129). The dividend paid in 2018 for the previous financial year amounted to €16,812,000.00, corresponding to €1.60 per share (see Annual Report 2018, p. 93). The share capital amounts to €27,000,000.00 and is divided into 10,507,500 no-par shares.

There are no quasi-fiscal revenues, as under requirement 6.2 of the EITI Standard.

In the MSG’s opinion, the requirements 2.6, 4.5 and 6.2 of the EITI Standard are adequately addressed by the above explanations.

Selection of payment flows

Payment flows of the extractive industries are to be considered according to the EITI Standard if they are regarded as significant for a complete overview of corporate payments and government revenues. The following payment flows are recorded for the purposes of the third German EITI report (cf. also the explanations in Revenues generated).


Corporation tax

In Germany, corporation tax is the most important income tax for corporations. It is not a specific tax for companies in the extractive sector, but covers all corporations operating or having their principal place of business in Germany. The basis of assessment for corporation tax is the taxable income, which is derived from the net income for the year under commercial law, considering several tax modifications. If a company is not only active in the extractive sector but also in other sectors of the economy, it may be difficult to clearly draw the line between the share of corporation tax attributable to activities in the extractive sector, because corporation tax is calculated based on the total taxable income (cf. also Revenues generated).

For this reason, corporation tax is classified as a non- project-related payment in the payment reports to be prepared in accordance with commercial law. An allocation of these payments to activities within and outside the extractive sector can be made by the companies at their discretion if an appropriate allocation can be reliably made using suitable allocation standards. This commercial law approach is used for the purposes of EITI reporting.

Trade tax

Furthermore, commercial companies operating in Germany are subject to trade tax. The municipalities in which the respective company has permanent establishments are entitled to levy trade tax. A permanent establishment can extend over the territory of several municipalities. Accordingly, the recipients of trade tax payments are the individual municipalities and not, for example, the Federal Government or the Federal States. The trade tax reflects the federal structure of Germany (cf. also Revenues generated).

Further information on the recording of tax payments (including certain parent-subsidiary constellations and special features of fiscal unity relationships) are provided below for a better understanding of the reported payments of corporation tax and trade tax. During data evaluation, it became apparent that both aspects are highly relevant for the classification and assessment of the reported tax payments.

Special features regarding the recording of tax payments in certain parent-subsidiary constellations

In contrast to many other legal systems, partnerships such as the “GmbH & Co. KG” type have traditionally played a major role in Germany, especially in the medium-sized enterprises economy. These partnerships are subject to trade tax, but not to corporation tax. The latter is only charged at the shareholder level but only if the shareholder is a corporation. In this respect, a special feature of German tax law must be considered: business partnerships are not tax subjects for income tax purposes, but the income generated in the company is subject to taxation at the level of the shareholders together any other income generated by them from other sources.

This special feature of German tax law may be relevant for the recording of corporate and trade tax payments for the EITI report, if the reporting company is a corporation (parent) with a subsidiary in the legal form of a partnership. The below examples are provided to illustrate this in more detail. In each example, it is assumed that a company operating in the extractive sector voluntarily participates in the data collection carried out for the EITI Report.

If both the parent corporation and the subsidiary partnership operate in the extractive sector, all relevant tax payments (trade tax payments made by the subsidiary and the parent corporation as well as corporation tax payments made by the parent company) are recorded in the EITI report. If, however, the subsidiary or the parent corporation does not operate in the extractive sector, it may happen that not all or too many tax payments to government agencies are recorded. For example, if the parent corporation operates in the extractive sector but the subsidiary partnership does not, the corporation tax payments reported by the parent company also include the results of the subsidiary. From a commercial law perspective, in this case, there is the possibility (but not the obligation) to apportion corporation tax payments between the activities carried out in the extractive sector and those carried out outside the extractive sector. Conversely, if the subsidiary partnership operates in the extractive sector, but the parent corpora- tion does not, only the subsidiary is taken into account for data collection purposes. As a result, only the trade tax payments of the subsidiary, (but not the corporation tax paid by the parent company but attributable to the results of the subsidiary) are considered for data collection purposes.

The cause for this particularity is the German tax system. The MSG has decided to follow the tax law approach described above also for EITI purposes.

Special features regarding the recording of tax payments in fiscal unity relationships

German tax law has selective special regulations for the treatment of corporate groups in trade tax and corporation tax. Under certain conditions, a so-called fiscal unity relationship may exist. In these constellations, the controlled companies, which are themselves corporations, generally do not make any tax payments. Rather the taxation of the results of all companies included in the tax group is carried out exclusively by the controlling company. The controlling company pays taxes on its own income and the income of the controlled companies, which may not result exclusively from activities related to the extraction of natural resources.

Therefore, a differentiation is made (as explained below) for the purposes of the (consolidated) payment report under commercial law:

  • If, in accordance with §341 lit. r no. 1 HGB, the tax group primarily operates in the extractive industry, the total amount of taxes paid by the tax group parent company can be reported. There is no obligation to allocate tax payments to activities within or outside the scope of §341 lit. r no. 1 HGB.
  • If, however, the tax group is not primarily active in the extractive industry in accordance with 341 lit. r no. 1 HGB, the tax payments of the tax group parent company can be divided on a voluntary basis. Otherwise, the tax payments made by the controlling company are not disclosed.

The results of the payments survey show that, from a practical point of view, tax groups are highly relevant for the taxation of corporate groups. As a result, in various cases the companies participating in EITI reporting do not disclose the taxes paid by the controlling company (cf. the remarks on the payments made in Payment flows 2018).

The MSG has also decided to follow the commercial law perspective for EITI purposes regarding the recording of tax payments made by tax groups.

Mine site and extraction royalties levied under the Federal Mining Act

In Germany, mine site and extraction royalties (§§30, 31 BBergG) are levied on so-called free-to-mine natural resources under the Federal Mining Act as a specific levy for companies operating in the extractive sector (for further details see Revenues generated).

The MSG has decided to include mine site and extraction royalties as payment flows in the EITI report.

Lease payments

Apart from the mine site and extraction royalties, no other taxes are levied in Germany for the exploration and extraction of free-to-mine natural resources. However, lease payments to government agencies in connection with the extraction of free-to-mine natural resources, especially in the quarried natural resources sector, may be incurred. This is the case when government agencies are the owners of the land where the mine site lies and conclude private-law agreements on the extraction of natural resources with extractive companies. Such contractual arrangements may include fixed payments or payments that depend on the quantity extracted, or a combination of both variants.

The recipients of lease payments are the government agencies that have concluded contractual arrangements with the company (e.g., cities and municipalities, forestry offices, state domain or moorland administration offices). For example, payments to the city of Kerpen for the extraction of gravel were reported for the 2018 reporting year by a company in the quarried extractive sector.

The content and number of agreements are not centrally documented (cf. Revenues generated). Unlike the individual tax offices in the case of corporation tax, the individual government agencies that have concluded lease agreements cannot be addressed via a central organisational unit. As with trade tax, this leads to quality assurance problems.

It is not possible to predict in advance to which and to how many government agencies lease payments will be made. This information can only be provided by the companies participating in EITI reporting as part of the data collection process.

Therefore, lease payments made by companies to government agencies are included in data collection, as in the second German EITI report, but are not subject to separate quality assurance. Like in the first and second D-EITI reports, the total amount of lease payments, which are generally collected via the municipalities’ treasuries, plays only a minor role in the 2018 reporting year compared to the total amount of reported payments. The amount of the reported lease payments of €2 million and their contents are comparable to the reporting years 2016 and 2017.

Payments for the improvement of infrastructure

This payment flow corresponds to the legal regulation of the (consolidated) payment report under § 341r no. 3 lit. g HGB. The data on these payments were collected for the first time when the second German EITI report was created, and the data reported by the participating companies were supplemented in this respect. The reported payments include measures carried out by enterprises for renaturation purposes, payments to support municipal investments or educational institutions or for the creation or maintenance of public infrastructure. As in the second D-EITI report, the reported payments for the 2018 reporting year are exclusively attributable to companies from the lignite extraction sector, thus it does not represent a cross-sectoral payment flow.

At the request of the MSG, the Independent Administrator analysed the content and composition of the reported payments in more detail as part of the first two D-EITI reports and presented the results to the MSG. They show a high heterogeneity of the recorded payments because of the variety of measures taken in connection with the compensation of impacts from the respective extraction company. Information on the recipients of the payments and the payment purpose can be found to some extent in the payment reports of the companies.

Definition of the project concept

The EITI Standard generally requires reporting at project level (EITI requirement 4.7). The MSG has decided to implement the content and scope of the project concept by analogous application of §341r no. 5 HGB. Accordingly, payments to government agencies must generally be disclosed per project if the reporting entity operated more than one project during the reporting period. The term “project” is specified and defined in § 341r no. 5 HGB as several related operational activities that give rise to payment obligations to a government agency and are based on a contract, licence, lease, concession, or similar legal agreement.

For the payment flows “corporation tax” and “trade tax”, no project-related reporting is thus generally provided for, because these payment flows are based on a legal regulation and not on a legal agreement provided for in § 341r no. 5 HGB.

For the payment flow “mine site and extraction royalties”, it is sufficient to specify the extraction area/area under permit during the data collection process to make sure that the project in question can be identified. Regarding any lease payments and payments for infrastructure improvements, the data collection templates provide for an allocation of payments to projects per government agency.

Materiality of payments

The regulations under commercial law on the preparation of (corporate) payment reports stipulate that the companies concerned must report payments made in a reporting year in an amount of €100,000.00 or more per government agency (cf. § 341t (4) HGB). A government agency to which an amount less than €100,000.00 was paid in the reporting period does not need to be disclosed.

The MSG has decided to adopt these regulations for the third D-EITI report. If payments were made that did not reach the amount of €100,000.00 per government agency in the reporting year 2018, the reporting entity must indicate in the template that payments were made but does not have to specify the payment amounts.