MINERGIA Magazine – LEGAL MINING, http://www.minergiaec.com/ There are no talks regarding the stoppage of mining exploitation experienced in the country in recent years. After the promulgation of Constitutional Mandate No. 6 – known as the Mining Mandate –

Effective April 13, 2018, the Organic Code of Environment (OCE) will come into force.   This Code  regulates the administrative–environmental matters, and guarantees: i) the right of people to a healthy and balanced environment; and, ii) the rights of Nature.

Following is a summary of the OCE’s effects:

1. In environmental matters: public and private decisions shall incorporate the environmental  principles established in the OCE: comprehensive responsibility, best available technology, sustainable development, the polluter-pays, in dubio pro natura, access to information and participation, caution, prevention and subsidiarity.

2. The OCE incorporates regulations to protect the animals’ well being, including obligations, responsibilities and bans about treatment of animals.

3. The government shall collaterally act in environmental damages in the following cases:

• Unrepaired environmental damages;
• In the absence of identified executors;
• The executors had breached the remediation plan;
• Due to the magnitude of the environmental damage, it cannot be expected the remediation by the executor; or,
• Risk of new damages that the executor is not able to assume.

4. The environmental impact has been classified as follows:

• Non-significant impact: No permit is required, just good practices.
• Minor impact: environmental management plan is required.
• Medium impact: environmental impact assessment is required.
• High impact: environmental impact assessment is required.

5. The government is obligated to make prior consultations to people directly affected by the development of projects. However, the Environmental Authority has the final decision regarding the execution of the activities. For this reason, this consultation is not binding.

6. The government will grant environmental incentives (economic, tax or honorary awards) for subjects that comply with regulations and improve the environment. The Environmental Authority will evaluate and grant such incentives.

7. The executor of the activity is fully responsible for environmental damages. The OCE included further standards to determine responsibilities for environmental damages as follows:

• In case of entities belonging to corporate groups, the responsibility may reach to the company that makes the decisions.
• The responsibility may reach to the person in charge of the control of the activity and the managers during his/her administration.
• In case of several causers, the responsibility will be joint and several.
• In case of death of an individual, the pending liabilities shall be borne by the heirs.
• In case of extinction of the entity, either the partners or the shareholders shall be responsible for the environmental damages in accordance with the regulations.

8. The executors of the activity are obligated to notify the respective authority within 24 hours of the occurrence of environmental damages, and they shall implement the following actions, without delay:

• Pollution contingency, mitigation and correction;
• Environmental remediation and restoring;
• Compensation and indemnification to affected people; and,
• Monitoring and evaluation.

9. The government shall establish sanctions in accordance with the magnitude of the environmental damage. These sanctions may involve several actions to achieve integral reparation.

10. Sanctions may include economic penalties, forfeitures, destruction of goods, suspension of activities, termination of permits, loss of incentives and evictions.

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.

2. 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.

3. 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.

Through Ministerial Agreement No. 28, dated May 22, 2019, the Ministry of Energy and Non-Renewable Natural Resources issued the Update to the Mining Public Policy, which has been in effect since 2016. This proposal was drafted with contributions from the Inter-American Development Bank (IADB).

The prepared document has 6 strategic concepts, for which the respective public policy has been set out with certain guidelines and effective interventions by the State. A brief summary is presented hereunder:

CONCEPT 1 – ECONOMIC DEVELOPMENT: Looks to position mining as a relevant economic sector in the country, by increasing and diversifying the production, allowing for national and foreign long-term private investments. In order to reach this goal, the following effective interventions have been taken into consideration:

• Tax incentives that attract investments, such as tax refunds, tax guarantee and stability contracts, and permits for investments made in border zones.
• National and international forums that allow for establishing international cooperation conventions and agreements.
• Business and contract models between the State and concessionaires, which contain the minimum provisions necessary.
• Articulation for the mining sector with related industries (mining supplies, metalworking, metal processing and smelting); and, the establishment of small-scale mining company territorial concentrations.

CONCEPT 2 – ENVIRONMENTAL AND SOCIAL SUSTAINABILITY: The goals of this concept are: i) promote the adoption of good environmental and safety practices; and, ii) coordinate the relations between mining stakeholders, by strengthening community relations and social responsibility of the concessionaires, and reinforce the governing levels through dialogue. In order to reach this goal, the following effective interventions have been taken into consideration:

• Remediation of environmental liabilities caused by abandoned or inactive mining operations, including incentives, such as works for taxes. Additionally, this requires trusts, and financial bonds and guarantees to cover any potential environmental damage.
• Help regarding environmental regulations, including the provision of information, workshops and assistance for small-scale and artisanal miners.
• Incentives for compliance with labor regulations.
• Channels of communication regarding the benefits of mining.
• Definition and performance of the free and informed prior consultation procedure, including the verification of the presence of villages, nations, communes and communities, in accordance with the juridical framework.
• Articulation of State actions to provide basic services in the areas of influence, covering the needs of the communities, reducing the identified gaps, and obtaining the social license for mining investments.
• Incentives for local governments of the areas of influence to use the resources arising from mining royalties.

CONCEPT 3 – RESEARCH AND DEVELOPMENT: Looks to foster research, innovation, transfer of technology and entrepreneurship in the mining sector, through lines of international cooperation and association between the public, productive and educational sectors. As a result, formation, training and education of skilled and certified workers in the country is expected to be strengthened. In order to reach this goal, the following effective interventions have been taken into consideration:

• Grant funds, direct subsidies, direct public provision of research services and tax incentives for large- and medium-scale mining companies, public research institutes, universities and research centers.
• Adoption of technology and knowledge to support productivity and the growth of small-scale mining.
• Revision of technical aspects (exploitation designs, production volumes, associated infrastructure, tax requirements, among others) for all regimens.
• Creation of the Geological Information Bank of Ecuador.

CONCEPT 4 – MANAGEMENT AND ADMINISTRATION: The goal of this concept is to articulate the functions and authorities of the public institutions involved in the mining sector, through intra- and inter-sectorial coordination, transparency, and access to public information. In order to reach this goal, the following effective interventions have been taken into consideration:

• Reduction of processes to obtain mining rights and for authorization of operations. Additionally, centralized means (exclusive portals), and multi-sectorial and inter-governmental information systems will be fostered.
• Reduction of processes required to legalize small-scale and artisanal activities.
• Verification of mining areas mapped and implementation of operational security measures for transparent handling of information.

CONCEPT 5 – REGULATION, CONTROL AND COMBATING ILLEGAL MINING: : Looks to strengthen State regulation and control through audit, fiscalization and monitoring processes of mining activities. Additionally, it promotes the prevention, combat and sanctioning of illegal mining. In order to reach this goal, the following effective interventions have been taken into consideration:

• Identification, prioritization, performance and evaluation of actions geared toward eradicating illegal mining, defining clear attributes for each one of the entities that make up the Special Illegal Mining Control Commission (CECMI).
• Use of technology in smelting plants, ports and border zones to control the traceability of minerals being processed and exported, as well as to verify compliance with tax standards.

CONCEPT 6 – STANDARD: The goal of this concept is to promote improvements to legal standards, allowing for juridical security, while fostering mining development according to the requirements of the sector. In order to reach this goal, the following effective interventions have been taken into consideration:

• Coordination with the Judiciary Council to train judges and attorney generals regarding mining legal framework.
• Revision of what is indicated in the strategic concepts to identify and propose reforms that reduce the critical bottlenecks in the management model of the sector.

Finally, it is worth mentioning that, within 180 days of the publication of the aforementioned document, the update to the National Mining Development Plan is expected