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Production Development Law and its Relevance in The Mining Industry

On June 21, 2018, the National Assembly of Ecuador approved the final draft of the Law for Production Development, Investment Attraction, Employment Generation and Fiscal Stability (hereinafter “Production Development Law” or the “Reform”). This law is geared towards the economic sector and modifies various other pieces of legislation. The most significant changes that have a direct impact on the mining industry are summarized hereunder:

  1. Modification of Capital Gains Tax

The Production Development Law modifies the relevant part of the Organic Internal Tax Regime Law that establishes a 22% rate on earnings obtained from transferring share capital of a company or rights arising from concessions, for both residents and non-residents of Ecuador.

Currently, the Reform is confusing and contradictory. Nevertheless, we expect the President’s Office to correct this ambiguity. Based on our review, it is evident that the Reform divides the capital gains tax into two scenarios: i) when the gains arise for a company residing in Ecuador, a progressive table ranging from 0% to 10% will be applied to the earnings generated from said operation; or, ii) when said gains are obtained by a company that does not reside in Ecuador, the tax rate will always be 8%.

By all means, the Reform substantially mitigates the current capital gains tax, which was heavily criticized by the mining industry for being excessive.

  1. Elimination of the Windfall Profit Tax:

The Reform includes one of the most widespread petitions throughout the industry, which is the elimination of the Windfall Profit Tax.

This tax levied a rate of 70% on the difference between the sale price of the metal extracted from the ground and the base price established in the Mining Exploitation Contracts. Although modifications were made to the regulatory standards in order for the calculation of this base price to have a reduced effect on investors, the tax in and of itself reflected the State’s intolerance for investors to earn a fair profit based on the risk that they take on in projects that require significant investments.

Without a doubt, this is the best news the mining sector has received in a long time.

  1. Modification to Royalties:

In accordance with the Reform, mineral royalties will range from 3% to 8%, calculated as NSR (Net Smelted Return), as set forth in the applicable standard.

Currently, the royalty starts at 5% for largescale mining. Said percentage has been negotiated in the signed exploitation contracts. Therefore, it would not be surprising if investors establish reduced, more convenient royalties (3%) with the State in future exploitation contracts.