Ecuador’s $154-million tax claim against Lundin Gold (TSX: LUG) is fuelling calls for an independent review of how the state calculates its share of mining profits and accounts for companies’ investments.
The country’s Internal Revenue Service, known as the SRI, assessed Lundin Gold for the 2023 fiscal year under Ecuador’s sovereign adjustment mechanism. The proposed payment consists of $73 million plus $81 million in potential fines and penalties, excluding interest, the Vancouver-based miner said.
“Based on our review, we believe the assessment results from a misinterpretation of the calculation methodology set out in our Exploitation Agreement,” president and CEO Jamie Beck said in a statement. “We remain confident in our interpretation and will take the appropriate steps to escalate this issue to protect our rights under our agreements.”
The dispute over Fruta del Norte, one of the world’s highest-grade operating gold mines, raises a broader question over how Ecuador values the benefits accruing to mining companies compared with those flowing to the state.
The sovereign adjustment is designed to ensure the government receives at least half of the cumulative benefits generated by an operation, with companies required to make an annual payment when the state’s share falls below that threshold.
Independent review
Analysts say the disagreement should prompt the government to consider hiring an international consulting firm to examine project investments and expenses and provide greater clarity over when the sovereign adjustment applies.
Under Fruta del Norte’s Exploitation Agreement, the government’s cumulative benefits from the mine cannot fall below 50%. The company’s benefits are calculated using the net present value of the mine’s cumulative free cash flows, while Ecuador’s side includes taxes, royalties, state labour profit sharing, non-recoverable value-added tax and previous sovereign adjustment payments.
The mine’s fiscal framework also includes a 22% corporate income tax rate, a 5% net smelter return royalty net of advance royalty payments and state profit sharing equal to 12% of taxable profits, along with payroll, withholding and other statutory charges.
Operations continue
Lundin Gold maintains that the SRI’s assessment does not conform with the methodology established under its agreements with Ecuador and plans to challenge the determination through the appropriate channels. The Exploitation Agreement and Investment Protection Agreement together establish the fiscal, legal, tax and dispute-resolution framework governing Fruta del Norte.
The disagreement has had no operational impact so far. Lundin Gold noted Fruta del Norte continues to operate normally and that its existing guidance, exploration and expansion plans and capital-return strategy remain unchanged while the matter proceeds.
