Which payment flows are reported on?

Selection of sectors

The EITI standard requires all major payment flows from a country’s extractive sector to be tak-en into account. The first step is to identify the sectors to be included. In various meetings, the MSG discussed which sectors of the extraction of natural resources should be included in the present German EITI report. In line with previous years, the following sectors have been adopted by the D-EITI MSG:

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

The mining of hard coal in Germany ended at the end of 2018. As a result, the sector is still not included in the reporting.

Selection of companies

After defining the sectors, the second step is to identify the companies to be included in the EITI reporting. The EITI standard does not contain any direct requirements for the process of selecting these companies. The MSG has therefore decided to follow the guidelines for the prepara-tion of (group) payment reports.¹

Under Section 341q et seq. of the German Commercial Code (HGB), companies in the extrac-tive industries are obliged, under certain conditions, to prepare and publish a (group) payment report. This obligation is based on criteria such as the registered office, legal form, size or activity of the company. The report shows which payments were made by the respective companies to government agencies during the reporting period (see comments on public reports).

The chosen approach is largely based on the EITI’s objective of creating transparency on government revenues from extractive industries (extractive sector) and disclosing all material payment flows between companies and government agencies. Payments and revenues are considered material if their omission or misrepresentation could significantly impair the completeness of EITI reporting (according to EITI requirement 4.1b). The individual criteria are presented individually below.

Sector

The basis for the identification of the companies is the activity within the extractive industry. The current classifications of companies according to NACE Revision 2 are applied. They are based on Regulation (EC) No. 1893/2006 of 20 December 2006. This Regulation lays down detailed rules for establishing the statistical classification of economic activities. According to this, companies are considered to be “active” in the extractive industries if they are assigned to the following sub-sections:

• Sub-section 05: Coal mining
• Sub-section 06: Extraction of crude oil and natural gas
• Sub-section 07: Ore mining
• Sub-section 08: Quarrying, other mining

Please refer to the end of this section for a detailed list.

Size categories of companies

In addition to the sector, the criteria for the identification of companies are initially based on the criteria for “large” companies in accordance with Section 267 para. 3 HGB. For the 2023 reporting year, at least two of the three criteria must be met on at least two consecutive reporting dates:

• Balance sheet total more than EUR 20 million
• Sales revenues more than EUR 40 million
• More than 250 employees on average per year

Infection theory

In addition to the legal obligation to prepare payment reports for “large” companies, there is also a group reporting obligation for parent companies, provided that at least one subsidiary is active in the extractive sector. The size of the subsidiary does not matter. This principle is known as “infection theory”. The activity of a subsidiary in the extractive sector may trigger a reporting obligation for the entire parent company. This approach has been taken into account in the identification of companies, thus broadening the range of companies concerned.

Activity test

Only companies that actively extract natural resources in Germany should be considered. Companies that extract natural resources exclusively abroad, as well as companies that focus on storage or act as service providers, are not considered.

The selection of companies is thus based on a combination of company size and economic activity in the extractive sector.

Selection of payment flows

Payment flows of the extractive sector are to be taken into account in accordance with the EITI standard if they are to be regarded as material for a complete presentation of corporate payments and government revenues. The MSG has decided to collect the subsequent payment flows as part of the eighth German EITI report for 2023 (see also the comments on Payments incurred).

Corporate tax

In Germany, corporate tax is the central income tax of corporations (essentially relating to GmbH, AG and SE). It does not constitute a specific tax for companies in the extractive sector, but covers all corporations resident or operating in the national territory. According to the Corporation Tax Act (KStG), the taxable income is the basis of corporate tax. This is derived from the annual result under commercial law, taking into account tax modifications. When a company is active not only in the extractive sector but also in other sectors, it can be difficult to determine exactly how much corporate tax is charged on extractive activities. The background to this is that the corporate tax is calculated on the basis of the total taxable income (see also comments on Payments incurred).

For this reason, the corporate tax is classified as a non-project payment in the payment reports to be drawn up under commercial law. These payments can be split between activities within and outside the extractive sector by the companies on an optional basis, if an appropriate classification is reliably possible. This commercial practice is followed for EITI reporting purposes.

Trade tax

Companies operating on a commercial basis are subject to trade tax in Germany irrespective of their legal form. Trade tax is levied on business income, which reflects the earning potential of the business. The assessment procedure is two-stage. The municipalities in which the respective company has operating facilities are entitled to levy the tax; an operating facility may also extend across several municipalities. Payees for trade tax payments are only the individual municipalities. In this respect, the federal structure of the state is reflected in Germany (see also comments on Payments incurred).

The following figure shows a simplified calculation scheme for determining the trade tax:

Profit from commercial operations (Section 7 Trade Tax Act [GewStG])

+ additions (Section 8 GewStG) / – reductions (Section 9 GewStG)

= Trade income (Section 10 GewStG)

x basic federal rate amounting to 3.5% (Section 11 II GewStG)

= taxable amount (Section 11 I GewStG)

x individual tax factor of the municipality (Section 16 GewStG)

= trade tax

The tax authorities calculate the taxable amount, which is obtained by multiplying the trade income by a uniform rate of 3.5%. The trade income is based on the basis of assessment of income or corporate tax, taking into account the rules of the Trade Tax Act (essentially additions and reductions).

The taxable amount shall be transmitted by the tax authorities to the local government in which the company is located. If the company has several operating facilities of if an operating facility extends over several municipalities, the tax authorities also allocate the taxable amount among the municipalities according to a distribution key determined by law.

On the basis of the preceding administrative procedure, the respective municipality determines the trade tax to be assessed. The taxable amount is multiplied by the municipality-specific tax factor. The tax factor varies from municipality to municipality, but is at least 200%. The elected representatives of the respective municipal council are responsible for determining the tax factor.

This two-stage assessment process is followed by the collection process (the actual payment processing). This is done exclusively at municipal level.

Special features of corporate and trade tax

The analysis of data collection has shown that tax payments play a special role in certain parent-subsidiary structures and in the context of tax groups. In order to be able to interpret the reported payments of corporate tax and trade tax better, the following information is provided on the special features of parent-subsidiary constellations and tax groups.

Recording of tax payments in certain parent-subsidiary constellations​

In the German SME sector, partnerships, especially GmbH & Co. KG, have traditionally played an important role. This is very different from the structures in other countries. The partnership is subject to trade tax, but not to corporate tax. Corporate income tax is only levied at the level of the shareholder if the latter is a corporation.

In this regard, it is important to note a special feature of German tax law, according to which partnerships are not themselves subject to corporate income tax. Instead, the income generated by the company is taxed at the level of the shareholders together with their other income.

In the situation of a subsidiary-partnership of a parent corporation, consequences can arise for the recording of tax payments (trade tax and corporate tax) in the context of data collection for the EITI reporting, which are illustrated by way of example below. It is assumed that a company operating in the extractive sector will voluntarily participate in data collection for EITI reporting.

If both the parent corporation and the subsidiary partnership are active in the extractive sector, all relevant tax payments (trade tax of the subsidiary and parent company as well as corporate tax at the parent company level) are recorded in the EITI reporting. If, on the other hand, the subsidiary or parent company is not active in the extractive sector, not all or too many tax payments to government agencies are recorded. For example, if the parent company is active in the extractive sector but the subsidiary partnership is not, the reported corporate tax payments of the parent company also include the results of the subsidiary. From a commercial law perspective, in this case there is the option, but not the obligation, to allocate corporate tax payments between activities in the extractive sector and activities outside the extractive sector.

Conversely, if the subsidiary partnership is active in the extractive sector but the parent corporation is not, only the subsidiary’s trade tax payments are recorded via the (sole) participation of the subsidiary in the data collection, but not (pro rata) the corporate tax attributable to the subsidiary’s income at the parent corporation.

The above special features are based on the German tax system. The MSG has decided to follow the tax law perspective outlined above for EITI purposes as well.

Recording of tax payments in cases of tax groups​

German tax law provides for specific special rules for the treatment of corporate groups with regard to trade tax and corporate tax. Under certain conditions, a tax group may exist. A tax group is a tax structure in which two or more legally independent companies are treated as a single entity for tax purposes. This does not affect their legal independence.²

In such constellations, the integrated companies (subsidiaries) generally do not make any tax payments. On the contrary, the income of all the companies included in the tax group is taxed exclusively via the parent company. The parent company in turn pays taxes on its own income and the income of the subsidiaries. If the various subsidiaries also carry out activities outside the extractive sector, there may be difficulties in allocating tax payments.

For the purposes of the commercial (group) payment report, the following differentiation is therefore made at the level of the parent company:

• If, in accordance with Section 341 r No. 1 HGB, the tax group is primarily active in the extractive sector, a report may be made on the total amount of taxes paid by the parent company. There is no obligation to apportion the tax payments to activities within or outside of the scope of Section 341 r No. 1 HGB.
• If, in accordance with Section 341 r No. 1 HGB, the tax group is not primarily active in the extractive sector, the tax payments of the parent company may be distributed on a voluntary basis. Otherwise, the amount of tax paid by the parent company is omitted.

The results of the collection of payments demonstrate the high practical importance of tax groups among the companies included in the reporting (see the presentation of payments made under Payment flows).

With regard to the recording of tax payments within the scope of tax groups, the MSG has also decided to follow the commercial perspective for EITI purposes.

Mine site and extraction royalties in accordance with the Federal Mining Act

In Germany, the mine site and extraction royalties (Sections 30, 31 BBergG) are levied as a specific charge for “free-to-mine natural resources” on the basis of the Federal Mining Act (for further details, see also comments on Payments incurred).

According to feedback from participating companies as well as from the published payment reports, the payments of mine site royalties do usually not exceed EUR 100,000. Due to this minor significance and the materiality approach of the EITI standard, the mine site and extraction royalties are reported below as a shared payment flow.

Lease payments

In addition to the mine site and extraction royalties, no other consideration is levied in Germany for prospecting for and extracting free-to-mine mineral resources. However, lease payments to government agencies in connection with the extraction of mineral resources which are not free to mine may be incurred, in particular in the area of quarried natural resources. This is the case when government agencies, as landowners, conclude private contracts for the extraction of natural resources with companies in the extractive industries. Such contractual arrangements may include fixed payments or payments that depend on the quantity extracted, or a combination of both variants.

Recipients of lease payments are the government agencies that have concluded contractual arrangements with the company (e.g. cities, municipalities, districts or other offices). The content and number of contracts are not documented centrally (see comments on Payments incurred).

This information can usually only be provided by the participating companies themselves as part of the data collection process. In the context of quality assurance, there are additional difficulties, since there is no central organisational unit through which the individual government agencies can be contacted.

Lease payments by companies to government agencies are therefore recorded unchanged from the previous D-EITI reporting as part of the data collection, but are not subject to separate quality assurance. The total amount of lease payments, which are generally collected via the local authorities’ tax offices, plays only a minor role for the 2023 reporting year, in line with the most recent D-EITI reports, compared to the total amount of reported payments.

Payments for infrastructure improvement

The payment flow corresponds to the legal regulation of the (group) payment report in Section 341 r No. 3 g HGB. The reported payments generally include measures taken by companies to cover expenditure on renaturation on the one hand, and payments to promote municipal investments or educational facilities or to create or maintain public infrastructure on the other. Payments may be made on the basis of legal or contractual obligations (e.g. on the basis of the operating licence agreement) or on a voluntary basis (private contracts with the government agency for individual projects). The latter include, among other things, the compensation of additional administrative burdens due to mining or services related to the construction and maintenance of local public infrastructure.

The reported payments for the reporting year 2023 are, by analogy with the previous D-EITI reporting, exclusively attributable to companies from the lignite extraction sector, so that this is not a cross-sectoral payment flow.

The content and composition of the reported payments were analysed in more detail by the Independent Administrator in the first two D-EITI reports at the request of the MSG and the results were presented to the MSG. The results showed a high degree of heterogeneity in the recorded payments as a result of the variety of measures taken in the context of offsetting impacts from the respective lignite extraction company. Information on the recipients of the payments and their purpose can be found in some cases in the payment reports of the companies.

For this reason, the payments are recorded as part of the data collection, but are not subject to separate quality assurance. In line with previous years, payments for the improvement of infrastructure have been made to two companies in the lignite sector. The total amount is almost at the level of the previous year.

Structuring of the project concept

The EITI standard provides for reporting at project level (EITI requirement 4.7). The MSG has decided to implement the content and scope of the project concept analogously to the application of the legal regulation of Section 341 r No. 5 HGB. Payments to government agencies are then generally reported per project if the reporting company has operated more than one project during the reporting period. Section 341 r No. 5 HGB specifies the concept of a project (“project level”) as the grouping of operational activities which form the basis for the payment obligations towards a government agency and are based on a contract, licence, rental contract, concession or similar legal agreement or on a set of operationally or geographically associated contracts, licenses, rental contracts or concessions or related agreements with a government agency which essentially provide for similar conditions.

For the payment flows “corporate tax” and “trade tax” therefore, no project-related reporting is generally provided for, since these are payment flows that are based on a legal regulation and not on one of the legal agreements referred to in Section 341 r No. 5 HGB.

The payment obligations exist for “mine site and extraction royalties” at the level of the federal states and are defined accordingly as a project concept. In addition, by specifying the corresponding licensed/approved field within the scope of the data reporting, a further breakdown of the information can be ensured below the level of payment obligations to a government agency defined as “project level”.

With regard to lease payments and payments for the improvement of infrastructure, the data collection templates also provide for a further distribution of payments.

Materiality of payments

The commercial regulations for the preparation of (group) payment reports provide that the companies concerned must report payments from a reporting year starting from an amount of EUR 100,000.00 per government agency (see Section 341 t para. 4 HGB). A government agency to which less than EUR 100,000.00 was paid in the reporting period does not need to be specified.

The MSG has decided to also adopt these regulations for the eighth D-EITI report. If payments were made that did not reach the amount of EUR 100,000.00 per government agency during the reporting year 2023, the data collection templates provide a corresponding indication of the existence of payments, without the amounts of these payments being mentioned. If, however, voluntary disclosure is made by the companies, these have been taken into account accordingly.

With regard to trade tax payments, quality assurance included the 20 municipalities that received the highest trade tax payments from participating companies for the 2023 reporting year.

¹ These are based on the requirements of the EU Balance Sheet Directive 2013/34/EU of 26 June 2013, which was transposed into German law by the BilRUG at the end of 2015. The stated objectives and specified payment flows of the EITI initiative are largely identical as regards the content. The EU Balance Sheet Directive even explicitly refers, in the recitals in paragraphs 44 and 45, to the fact that this is intended to assist in the implementation of the EITI.

² Detailed explanations on the subject of tax groups can be found, for example, at Steuerkurse/Körperschaftsteuer-Vertiefung