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Abstract

Natural resources and the extractive industries play a central role in the economy of developing countries and the lives of nearly half of the world’s population. The increasing demand for oil, gas, and mineral resources has led some countries to prioritize the extractive industries; yet, there is growing empirical evidence that in some cases governments have neglected other sectors of the economy, making them highly dependent and vulnerable to volatile commodity prices. Latin American countries face the challenge of changing their model of primary-export specialization and move away from their dependence on natural resource-intensive exports in order to avoid being vulnerable to commodity cycles. In this context, given the limited literature available on measuring the dependence on the extraction of oil, gas and minerals of the Ecuadorian economy, the objective of this article is to twofold. First, to provide a snapshot of the historical and current situation of Ecuador’s natural resource dependence. Second, to estimate the Extractives Dependence Index (EDI) scores for Ecuador for the years 2003 to 2017. The EDI is a generally accepted method for measuring a country’s aggregate dependence on natural and mineral resources. Based on the EDI scores obtained, we analyze the variation of this indicator and investigate the effect of extractives dependence on the Ecuadorian economy. Results show that despite the government’s significant efforts to diversify Ecuador’s economy, the country has a persistent dependence on the extractive sector.
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Abstract

The extraction of mineral deposits is usually charged with additional taxes or royalty fees that go beyond the general income tax. As a rule, countries prefer stable sources of fiscal revenues based on the volume of raw material extraction, and investors prefer models based on profit tax, i.e. taking operating costs and risks lower than the expected profitability of the project into account. As a rule, too high a burden for the mining sector affects investors’ decisions regarding the introduction of new investments. There are a number of examples where excessive fiscal burdens force investors to move to countries with more favorable tax systems. An analysis of various forms of taxation of mining enterprises around the world has been presented and compared with the system implemented in Poland. Usually, the countries that apply the royalty fee in the mining sector at the same time introduce a number of adaptation mechanisms. This is crucial for new investments due to the fact that they may to some extent compensate for the high costs of transition from the investment to the operational phase. In most cases, several incentive mechanisms are used at the same time, e.g. the accelerated settlement of investment expenditures and the unlimited settlement of losses. The copper and silver mining tax introduced in Poland increased the discounted effective tax rate (ETR) from 38.5% to 89% for the entire investment period, which resulted in a 11-year return on investment, as well as a drop in the internal rate of return (IRR).There are currently no mechanisms in Poland which would balance the burden of this tax for a new investor. In order to balance the extraction tax for certain minerals in terms of the IRR and ETR key indicators, the introduction of several adaptation mechanisms has been proposed. For new investments the most essential mechanism is the preferential settlement of capital expenditures incurred in the pre-production phase of an investment. The others include accelerated amortization, the ability to deduct certain expenses for the exploration phase from the tax base, along with an extended tax loss settlement period, or a mechanism for deducting a certain percentage of investment expenses directly from the tax.
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