Where does the money collected in taxes and royalties from extractive industries such as mining and oil go? How is it managed and what is the amount? One of the requirements for the full implementation of the EITI standard, an international initiative that more than 50 countries have joined, is to make transparent the amounts that are collected and how they are used, which is one of the goals that the Ecuadorian chapter of EITI has set for itself.

Indeed, according to EITI International, "the EITI requires disclosure, to a wide range of recipients and in a manner that is accessible, comprehensive and understandable to the public, of any significant payments made by oil, gas and mining companies to governments ("payments") and of any significant revenues received by governments from oil, gas and mining companies ("revenues"). Implementing countries are expected to disclose the required information through regular reporting by government and corporate entities (websites, annual reports, etc.), and EITI Reports will be used to compile this information and address any concerns regarding data gaps and data quality.

In addition, EITI explains that in countries where the standard is applied, including Ecuador, "the following revenue streams should be included: Royalties on host government production (e.g. oil profit), Royalties on production of national state-owned companies, Taxes on profits, Royalties, Dividends, Royalties such as bonuses for signature, discovery and production, License fees, lease fees, revenue fees and other consideration for licenses and/or concessions, and any other significant payments or benefits to the government".

EITI is emphatic in explaining that "implementing countries must ensure that any government entity receiving material revenues from oil, gas and mining companies is required to fully disclose such revenues in accordance with the agreed scope", as well as any oil, gas and mining company making material payments to the government is required to fully disclose such payments in accordance with the agreed scope".

Thus, transparency in how much is paid and how much is collected in taxes and royalties in sectors such as mining and oil is two-way: on the one hand, it is the obligation of governments to report it. On the other hand, companies in the sector must also be transparent. At the same time, EITI recommends a series of measures that aim to guarantee the publication of different oil and mining revenues in the different contractual modalities applied in the countries. 

Secrecy about taxes at the IRS 

This portal contacted four different officials of the Internal Revenue Service (IRS) to obtain information on the current management of tax data in the mining and oil sector and how the IRS would respond to the implementation of EITI in Ecuador.

After several calls and emails, we received a response from Gabriela Valencia, Communication Officer of the SRI in the following terms: "we inform you that the Internal Revenue Service cannot attend the requested interview, because the implementation of the Extractive Industries Information Transparency Standard EITI in Ecuador is led by the Ministry of Non-Renewable Resources, which is responsible for the spokesperson of the issue and for issuing any statement on the matter".

Valencia added that "it is important to take into account that the Internal Revenue Service is only one of several government entities that are part of the Multi-stakeholder Group formed for the implementation process of the referred standard; therefore, we cannot provide information or answer queries about this process".

According to the official, "it should be emphasized that the Ministry as well as the technical secretary of EITI Ecuador are fully aware of the aspects related to the collection of taxes from the extractive industry in Ecuador and the confidentiality and reserve of such information. Regarding the collection statistics, I attach the link to our web page where the respective information can be found, which is of public access".

The link that the official sent to this website leads to a series of statistics, which can be downloaded in Excel format, where taxes are aggregated by economic sectors and they do not include individualized information on mining or oil. 

UAFE asks for reports from the mining sector... but will not disclose them

On June 8, the Financial Analysis Unit (UAFE), an entity of the Ministry of Economy that has the power to investigate unusual movements of money in the country, informed that the general director of the entity, Leopoldo Quirós, signed four resolutions that oblige 283 political parties and organizations, 204 securities transport companies, and, above all, 605 traders of stones, jewelry and precious metals to report to the UAFE their economic operations on a monthly basis.

Among those who will be obliged to report their operations every month are mining concessions, precious metal dealers, beneficiation or processing plants, importers and exporters of precious materials, and jewelry manufacturers. "This resolution will help to combat the illegal commercialization of gold and contraband, determining the illicit financial flows for their respective control."

However, the information handled by the UAFE is neither public nor obtained for transparency purposes. The entity issues reserved reports on unusual operations -always in the approach of preventing money laundering- which it informs to the Prosecutor's Office that, again, appeals to the reserve and secrecy in the investigation, so it is unlikely that, for the time being, this decision will benefit EITI to implement transparency. 

Mining's contribution to GDP, according to the Central Bank 

The way in which mining and oil companies operate in Ecuador is complex and the taxes they pay vary, depending on whether it is a large formal oil company or an artisanal mining company.

One of the entities that manages information on the economic impact of mining in our country is the Central Bank of Ecuador.  In January 2020, the Bank presented a Mining Report that analyzed the information available between 2018 and 2020. The document contains the results as of the third quarter of 2019 of the situation of the five largest and most formal mining projects: Fruta del Norte, Mirador, Rio Blanco, Loma Larga and San Carlos Panantza and a look at the second generation projects: Cascabel, Cangrejos, Curipamba, La Plata, Llurimagua and Ruta de Cobre. The document does not include information on small-scale, artisanal or unregulated mining in Ecuador. 

In the case of Fruta del Norte, the Bank quotes Wood Mackenzie, estimating that government revenues from this project alone could reach USD 1,960.9 million. The taxes expected to be collected are income tax, profits received by the Government, Government royalties, anticipated royalties, capital outflow tax and VAT.

In other words, formal mining companies pay, as any other company, income tax, capital outflow tax and VAT, but they also have to pay royalties and profits specific to each concession.  

Upon receiving the concession, some companies undertake to make an advance payment to the State of the royalties included in the contract. In the case of Mirador, it was estimated that the State royalties would reach 493 million, of which the company deposited USD 100 million to the State between December 2012 and January 2020.

According to the Central Bank report, "Between 2007 and 2018, the latest available date of gross value added by industry, the share of mining and quarrying recorded a slight decrease from 0.49% to 0.48% of GDP. Once the Fruta del Norte and Mirador strategic projects start producing, especially from 2020, this share will increase considerably".

The Central Bank also specified that the data available on gold production in the country until 2020 were as follows: "between the years 2000 to 2012 its average reached around 4,450 kilos per year, from 2013 and 2016 it reached an annual average of around 7,620 kilos; its most relevant production was reported in 2013 with 8,676 kilos. For 2017, a reduction in production is observed until reaching 6,368 kilos and in 2018, it climbed again to 8,213 kilos."

In the case of silver, the Bank specified that "silver production in Ecuador is an artisanal and livelihood activity, through individual, family or associative work, characterized by the use of tools, simple and portable machines". In that sense, it explained that in 2018 the country produced only 192 kilos of that mineral.

Fruta del Norte is one of the large-scale mines already in operation. 

The eternal struggle for profits between the State and the oil companies  

How much the state keeps and how much the oil companies earn is a discussion that is reiterated from time to time. Different contractual modalities, different ways of distributing the money and different mechanisms for collecting taxes form a complex web that EITI also aspires to make transparent. But much of this information, unlike that related to mining, has been at the center of public debate for decades, since oil contracts and how the resources received are distributed have been a central axis of national economic policy. And, also, they have provoked expensive defeats in arbitration tribunals, where the oil companies have gone against the State of Ecuador generally with great success.

In September 2013, the current Minister of Finance, Simón Cueva, together with María Ortiz, analyzed tax revenues from oil exploitation in Ecuador, in a study published by the IDB.

According to the researchers, "Since the beginning of the 20th century, the Ecuadorian state has maintained property rights over all mineral resources, including oil, although its exploitation has been in the hands of foreign private companies. Since the oil boom of the 1970s, laws and contracts in Ecuador have been mainly oriented to regulate oil exploration and its development and production - including the relationship between the Ecuadorian State and foreign oil companies - on the one hand, and to define the payment of related taxes and royalties, on the other".

Since 1973, the issue has been governed by the Hydrocarbons Law, which has had recent reforms in 2018. The axis of control of oil resources has always been the state oil company, which was created under the name of Ecuadorian State Oil Corporation (CEPE) and is currently called Petroecuador. Cueva and Ortiz distinguish several types of oil contracts, according to which the companies' taxes are established.

Types of oil contracts 

The first were the Association Contracts (established in 1973), where "Petroecuador provides the oil fields and the partner company covers all exploration and development costs", which were widely used at the beginning of the exploitation process. Another model was to create a mixed economy company, an association that was carried out with Texaco until 1993.

Starting in 1982, service contracts were created, which, the authors explain, consist of "the State owning 100% of the production, after covering the costs of production and recognizing a profit margin for the private company, which is fixed in the contract. The foreign private company bears all exploration risks, even if the oil field is not commercially viable. If it is commercially viable, Petroecuador assumes the price risk and covers the exploitation costs plus a margin. Only the Italian company AGIP has had this type of contract, originally introduced as an incentive for foreign private companies to invest in the sector".

Another modality is the participation contracts, established in 1993, with a different scheme: "The State receives a part of the crude produced and the private company keeps the rest. The company covers the exploration costs, decides whether the field is viable, and if so, proceeds with its development and exploitation.  The participation that the State receives will depend on the production volumes and the quality of the crude of the field, and is defined in part in the Hydrocarbons Law and in part in each contract".

Marginal field contracts are another form of oil business: "A reference production curve is estimated for the field, and for that production the contract works as if it were a service contract, where the State recognizes a fee for the company. If production increases above the reference line, for the difference the State receives a share of the crude and the company keeps the remainder".

The failed renegotiations that led to millionaire defeats

But this modality has given rise to ligitiums: the researchers point out that "most of the participation contracts signed before 1999 did not have clauses to readjust the proportions of participation if the price of oil rose considerably. Consequently, from 2005 onwards - in an environment of rising prices - the State began to realize that most of the extraordinary income fed the private companies, oil being an Ecuadorian resource".

As the private companies did not want to renegotiate the contracts, the government of the time began a strategy that would lead to international litigation that has proved disastrous for Ecuador. Thus, in 2006 the contract with the OXY Company was declared forfeited, which sued the country for this and in 2016 obtained compensation in its favor of USD 980 million. Under Rafael Correa, the same dubious strategy was followed: it was decreed that the State's participation in the surplus should be 99% and the company Perenco sued in an international court. In 2021, the country was condemned to pay the company USD 412 million for the decision taken. 

For 2010 a new modality was adopted, with contracts that, in theory, are in effect at least until 2025. These contracts established that oil companies must pay a fixed rate of 25% income tax.

At the beginning of the century and before Correa's administration, national oil revenues fed various funds, such as the Oil Stabilization Fund, the Stabilization, Social and Productive Investment Fund, among others. These funds had limits established for spending on issues such as education, health or the purchase of bonds, as well as for payment to Social Security.

According to Simón Cueva, "between 1999 and 2006 approximately US$6,220 million entered these funds (discounting the transfers made between them to avoid double counting of income). Of this amount, around US$ 4.864 billion were used for different purposes, and only 21.8% of the total resources remained as a balance or savings by the end of 2006. According to the Fiscal Policy Observatory (2008), at the end of 2007 the existing oil funds had a balance of approximately US$ 1.4 billion, equivalent to 20% of the revenues accumulated up to that period". These funds were eliminated during the Correa era (Correa mocked them and called them "the little funds") and the money began to enter directly to the State budget, following the criteria of the 2008 Constitution.

In Ecuador, oil revenues have been distributed among the national government, Petroecuador, the decentralized autonomous governments (especially those of the Amazon Region), among other beneficiaries. 

State oil operations are carried out through Petroecuador.  Photo: Petroecuador

Can taxes be made transparent? 

For EITI's technical secretary, Juan Carlos Dueñas, transparency in tax collection is key, but there are some legal reservations that complicate the process. "The SRI handles tax information by sectors, both mining and oil, but it is not possible to access disaggregated information for each company because there is a reservation of information," he explains.

According to Dueñas, what is going to be done in EITI Ecuador is to document these reasons and generate debates on what is required to overcome this type of limitations on the tax information of the extractive sectors.

"For example, mining companies' information cannot be accessed," explains Dueñas, who maintains that a mechanism is being sought to disclose this information without violating current legislation.

For the lawyer Mauricio Alarcón, who is part of the EITI initiative as a member of the Tripartite Group, it is fundamental that the presence of the SRI will permit the transparency of tax and royalty payments. 

Translated by Manuel Novik