ECUADOR Trends and Developments Contributed by: Roque Bernardo Bustamante and Claudia Bustamante, Flor Bustamante Pizarro & Hurtado
Royalties paid to the State The State, as the owner of non-renewable nat - ural resources, has the right to receive royalty payments from mining concessionaires engaged in exploitation activities, and failure to pay roy - alties will result in the early termination of the concession. In this regard, the mining concessionaire must pay royalties equivalent to a percentage of the sales of the primary and secondary minerals, ranging from 3% to 8%. The royalty rate will be determined using criteria such as the conces - sionaire’s production volume, the type and price of the minerals, and progressivity principles. In existing exploitation contracts, some agree - ments have established fixed royalties, while others have set variable royalties, depending on the value of the mineral. The law establishes that mining concessionaires are required to pay a 2% royalty on the total val - ue of each transaction involving the commercial - isation of metallic minerals extracted from their concessions. The 2% payment is considered a prepayment for royalties and will be credited against the concessionaire’s semi-annual royalty declaration. However, an exception to this rule applies to con - cessions where exploitation contracts include an agreement to pay advance royalties. In such cases, the concessionaire is exempt from the 2% transaction-based payment, as the advance royalties are already covered by the terms of the
natural resources, as stipulated in Article 408 of the Ecuadorian Constitution. According to this provision, the State is entitled to receive a larger portion of the profits compared to the company conducting the exploitation. The benefits that the State receives include vari - ous forms of taxation and economic returns. The benefits of the Ecuadorian State to be consid - ered are the following: • Value added tax (VAT) – the State collects VAT on the sale and commercialisation of miner - als, generating revenue from the activities of mining companies (15%). • Income tax – mining companies are subject to income tax on their earnings, contributing to state revenues (25%). • Labour profit sharing – a total of 15%, where 12% shall be paid to the State and 3% to the workers. • Royalties – the State imposes royalties on the extraction of minerals (from 3% to 8%). The sovereign adjustment is calculated using a specific formula designed to determine whether the State is entitled to additional payments from the mining concessionaire based on the ben - efits derived from the exploitation of a mining concession. The formula ensures that the State receives a greater share of the profits than the mining concessionaire, as required by the Ecua - dorian Constitution. If the State’s benefits from the concession are lower than the mining concessionaire’s benefits, the sovereign adjustment is triggered. In this case, the adjustment is calculated and must be paid by March 31st of each fiscal year.
exploitation contract. Sovereign adjustment
The concept of “Sovereign Adjustment” refers to the mechanism through which the State ensures that it receives a greater share of the benefits derived from the exploitation of non-renewable
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