1. RESIGNATION OF THE MINISTER OF MINING

Transcription

1 1. RESIGNATION OF THE MINISTER OF MINING For more information please contact us: Xavier Andrade Cadena Dirección/Address: Av. República 396 y Diego de A, Edificio Forum 300, Of. 504 Quito, Ecuador Telf/Phones: (+593 2) Web: By Executive Decree 309, signed on January 30, 2018, President Lenin Moreno accepted the resignation of the Minister of Mining, Javier Cordova. The former Minister Cordova resigned from office after being in charge of this Ministry since February The President entrusted Rebeca Illescas Jiménez as Mining Minister, who previously served as Deputy Minister of Mining. Minister Illescas is a specialist in Management and Public Policies. Her experience is in developing public policies for the financing of strategic sectors such as mining, hydrocarbons, telecommunications, and energy.

2 2. REFERENDUM REFORMS THE CONSTITUTION Through the referendum of February 4, 2018, the Constitution was reformed to include the prohibition of metallic mining in all its phases in urban centers, adding to the existing prohibition to mining in protected areas and areas declared as intangible. This reform will be applied for the future and should not affect the mining titles that have been granted by the Ministry of Mining before the consultation. certain infrastructure, basic services and a certain number of inhabitants. Therefore, municipalities must determine the urban areas within these parameters. The Organic Environmental Code (hereinafter the "COA") was also reformed after the referendum. Article 45 of the COA now prohibits non-metallic mining in protected areas and areas declared as intangible, indicating the possibility of obtaining an exception by the National Assembly in cases of national interest, as allowed by the Constitution. It also expressly prohibits metal mining in all its phases in protected areas, areas declared as intangible and urban centers. Municipalities, in accordance with the Constitution, will determine the limits of urban centers and the use of land within their jurisdictions. However, Ecuadorian legislation is not clear when determining what an urban center implies. Therefore, a subsequent law or rule should establish what an urban center consists of. International law and comparative law consider that urban centers must have

3 3. BENEFITS OF AN INVESTMENT CONTRACT The Organic Law for the Reactivation of the Economy, Strengthening the Dollarization and Modernization of Financial Management (hereinafter the "LOREF") modifies the Organic Code of Production, Trade and Investment (hereinafter "COPCI"). With this reform, the 25% rate of income tax on investments for the exploitation of large and medium-scale metal mining is established as a general rule. It should be remembered that the COPCI established that for the exploitation of large and medium-scale metal mining the rate of income tax was 22% when investment contracts were signed. The LOREF also provides a rate of 22% income tax in investment contracts for the exploitation of large and medium-scale metal mining if they are signed before December 29, Therefore, the LOREF seems to encourage mining companies to sign investment contracts for large and medium-scale mining in the short term. "The investment contracts for the exploitation of large and mediumscale metal mining that are signed within the year following the entry into force of this Act, will establish a general rate of income tax for companies minus three (3) percentage points within the tax stability clauses ". For this reason, mining companies that have not signed investment contracts and seek medium and large-scale mining to evaluate should consider signing an investment contract to be able to benefit from this type of tax incentive and other benefits contemplated by the COPCI and other related regulations. Investment contracts for mining exploitation do not require a minimum investment commitment. Those mining companies that do not yet seek exploitation activities could sign an investment contract as long as two conditions are met: (i) commit an investment amount greater than US $ 100

4 million and (ii) obtain a technical report by the Ministry of Industries and Productivity, regarding the economic benefits of the investment committed to Ecuador. When signing an investment contract, companies that invest in medium and large-scale metal mining will receive tax and legal stability during their term, usually for 15 years, with a possibility to renew for the same period of time, or for the term of the mining concession title. The effect of this stability is that, in case of a reform of the legal rules in force at the time of signing the investment contract, such change or reform will not affect the investor or the new investment and its project, which will be governed by the tax incentives detailed in the investment contract, the mining exploitation contract, the specific sectoral regulations and the applicable tax regime, in accordance with the regulations in force on the date of their subscription. Therefore, in an investment contract, any reference to applicable legislation will be applied respecting the rights of tax stability and legal stability. If the necessary conditions are met, mining companies should consider the possibility of negotiating and signing an investment contract to access the benefits considered in the Law. Below is a summary of tax and other benefits. 1. Tax stability during the term of your investment contract a) Income Tax i. As indicated above, the companies that make investments for the exploitation of medium and large-scale metal mining receive a 22% rate of income tax with tax stability during its term, if the investment contract is signed up to December 29, ii. The tax stability consists in keeping all the legal rules, regulations and general resolutions of the Internal Revenue Service (hereinafter the "SRI") that allow the determination of the tax base and the amount of income tax (hereinafter the "IR") that are in force when the investment contract was signed, to remain unchanged during its term. Stability does not apply to norms referring to the faculties, procedures, methods and formal obligations that the SRI uses and establishes for the control and exercise of its competences.

5 iii. Exoneration of the advance payment to the IR for five years for the new investment. For purposes of the calculation, the investor will only be subject to the payment of the advance payment to the IR after the fifth year of effective operation, after the initiation of the productive and commercial process. In the case of mining companies, this includes the production and commercialization of mineral products from the mining area, within the terms and rates established in the investment contract and in the applicable regulations. The period of exoneration can be extended if the production process so requires, with the prior authorization of the SRI and the competent authority of foreign trade and industries and productivity (Technical Secretariat of the Sectoral Council for Production). iv. Additional deduction of 100% of the costs for calculating the IR for the implementation of cleaner production mechanisms, such as mechanisms to encourage the improvement of productivity, innovation and for ecoefficient production. v. Deferral of the payment of the IR and its advance payment for up to five fiscal years, with the corresponding payment of interest, calculated on the basis of the corporate active rate, in the terms established in the regulation of the Organic Law of the Internal Tax Regime (hereinafter the "LORTI"), for the transfer of the share capital of the company in an amount not less than 5% on behalf of at least 20% of its workers, provided that such shares remain in the property of the workers. vi. Deduction of the additional compensation for the payment of the living wage that a company makes, when calculating the income tax. vii. Deduction of 100% of the cost of hiring new workers for five years from the time the new investment is executed. This investment must generate new jobs, if the new investment is made in economically deprived areas. viii. Reform to the calculation of the IR advance. ix. The smelting and refining of copper or aluminum, as a basic industry, receives an exemption from IR for 10 or 12 years if it is carried out in border provinces. b) Value Added Tax i. Likewise, for these companies, whose production is destined for export, they will receive tax stability with respect to the

6 Value Added Tax (hereinafter the "VAT") with respect to tariffs and exemptions. c) Currency Exit Tax i. Tax stability of the Foreign Currency Exit Tax (hereinafter "ISD"), with respect to tariffs and exemptions in force at the time of signing the investment contract. The same applies for other direct national taxes. ii. Exemption from ISD for external financing operations. d) Other taxes i. Payment facilities in taxes on foreign trade, according to the Tax Code. ii. Right to request the competent authority to grant, under its criteria and powers, the total or partial reduction of tariffs for the importation of capital goods related to the project, subject to the investment contract, in the amounts and for the time necessary for its execution and development in the terms established by the resolutions issued for that purpose. 2. Stability of the legal regime of the strategic sectors a) Stability of the specific sectoral regulations declared as essential in the mining titles or a Mining Exploitation Contract. 3. Other benefits that are governed by the stability of the legal regime a) The investment contract may include an international arbitration clause that allows the parties to submit their disputes to the decision of arbitral tribunals, after exhausting local administrative instances, as well as the negotiation and mediation mechanisms. If arbitration is not initiated under the conditions established in the COPCI and in the investment contract, it does not imply a waiver of the right to submit the disputes to the processes contemplated in the Bilateral Investment Treaties signed by Ecuador. b) Non-discriminatory treatment, except for the treatment of public companies, mixed-economy companies and other associative forms with State participation. Also, the investment contracts consider protection from arbitrary or discriminatory measures of investment. c) Protection of property according to the Constitution and relevant laws. Confiscation of domestic or foreign investments is prohibited.

7 d) Freedom of production and commercialization of licit, socially desirable and environmentally sustainable goods and services, and free pricing according to the Law. e) Access to administrative procedures and other measures established by the State to avoid any practice contrary to Competition Law. f) Freedom of import and export of goods and services, in accordance with the Law. g) Free foreign transfer, in currency, of the profits from the new investment, in accordance with the Law. The investor shall have the right to control, use, convert to any currency and transfer or remit abroad any of the funds related to the new investment or the investment contract. The investor will have no obligation to keep the funds in Ecuador, convert them into national currency, or to be subject to any other restriction, except for the applicable taxes and withholdings established in the investment contract, the Mining Contract and the Law. The investor will be entitled to receive payments owed and to the use the services from national and foreign financial system institutions. h) Right to suspend mining activities and investments related to said activities, in whole or in part, in the event that the investor reasonably determines that the technical or market conditions make it necessary, convenient or for legal reasons. i) Freedom to acquire, transfer or sell shares, participations or property rights over their new investment to third parties in Ecuador or abroad, in accordance with the Law. j) Freedom to negotiate totally or partially the new investment and the project with national or foreign investors, and to transfer or cede the investment that has been negotiated, totally or partially. If it is transferred or ceded to foreigners, the Technical Secretariat of the Sectoral Production Council must be notified. The transferee or acquirer of the investment will be replaced as an investor in the transferred or assigned part. k) Right to transfer the mining rights with authorization in accordance with the Mining Law and the Mining Exploitation Contract. The investor can also deliver or assign as collateral mining rights and obligations under the Mining Exploitation Agreement as part of the guarantees given to the project's financiers. Additionally, in this case, the investor may assign its rights and obligations under the investment contract to the project's financiers.

8 l) Free access to the national financial system and the securities market. m) Free access to mechanisms of promotion, technical assistance, cooperation, technology and others of similar nature. 4. TEMPORARY CLOSURE OF THE NATIONAL MINING CADASTRE n) Access to other benefits and incentives of the COPCI, according to the Law. o) The right to establish stable differentiated rates for the preferential purchase of energy, whose value will be established in the investment contract per kilowatt hour, according to the Mining Exploitation Contract. The tax and legal stability, and the benefits that could be obtained and maintained intact during the term of the investment contract, are attractive for the mining investor. The LOREF seeks to motivate mining companies seeking to carry out the medium and large-scale metal mining exploitation to sign investment contracts. If they do so before December 29, 2018, they will receive a 22% rate of income tax and the other benefits described. Therefore, mining companies should consider this possibility. The Executive Director of the Mining Regulation and Control Agency (hereinafter "ARCOM") approved the temporary closure of the National Mining Cadastre for the granting of mining concessions in the regimes of artisanal mining, small mining, medium mining and large-scale mining. The closure has the purpose of allowing the Ministry of Mining to execute planning for mining concessions, as established in the Mining Law. The closure is temporary and will last until the annual planning for mining concessions is completed and the Ministry of Mining requests that the Cadastre opens again.

9 5. ELIMINATION OF DIFFERENTIAL PAYMENT OF WINDFALL TAX In this way, the mining industry was differentiated from others dedicated to the exploration and exploitation of nonrenewable resources, which have no deferral for the payment of this tax. 6. FIRST PROTECTED NATURAL AREA IN THE CITY OF QUITO With the repeal of the Organic Law to Prevent Speculation on the value of Land and Taxation (hereinafter the "Surplus Value Law"), a reform favorable to the mining industry has been eliminated. The Surplus Value Law amended article 165 of the Reform Law for Tax Equity in Ecuador (hereinafter the "LET"), indicating that windfall revenues only apply to earnings acquired 48 months after the first month after pre-operational investments 1 have been fully recovered, from a financial perspective. 1 Pre-operational investments involve preparation and development of the mining concession area performed prior to the start of production, declared by the Ministry of Mining. Ordinance No. 88 of June 23, 2011 was published in the Official Gazette, by which the Municipality of Quito declared the microbasins of the Mashpi, Guaycuyacu and Sahuangal rivers as the first protected natural area of the Metropolitan District. The area covers 17,156 hectares and is located in the Pacto parish that is integrated into the Metropolitan Subsystem of Protected Areas. Due to the characteristics of this conservation area,

10 the land use of the area will be of ecological protection, prohibiting extractive activities of non-renewable resources. The incorporation of these areas into the National System of Protected Areas (SNAP) is possible at the request of the Decentralized Autonomous Governments (GAD) to the Ministry of Environment. According to article 405 of the Constitution of the Republic of Ecuador, the SNAP "will guarantee the conservation of biodiversity and maintenance of ecological functions The system will be integrated by the state, decentralized, community and private autonomous subsystems, and its rector and regulation will be exercised by the State. " incorporation of their Protected Areas to the SNAP (Ministerial Agreement 83, Official Register Supplement 829 of August 30, 2016). * * * Warning: The views contained in this document do not represent the position of our clients or cases. This document is for academic and informational purposes only, and cannot be used for other purposes without the authorization of Andrade Veloz. Article 3, letter e), of the Organic Code of Territorial Organization, Autonomy and Decentralization (COOTAD), establishes that, according to the Principle of Complementarity, "The Decentralized Autonomous Governments have a shared obligation to articulate their territorial development plans to the National Development Plan and manage their competences in a complementary way [...] This is the role of the GADs in the declaration, delimitation and management of protected areas and regulations of the Ministry of the Environment for the