822.6341 South American Development Co./48a
The Department of State to the Ecuadoran Embassy40
Memorandum
In view of the long and cordial relationship which has existed between the Government of Ecuador and the Government of the United States, and between their nationals, it has been with genuine regret that this Government has been compelled to take notice of certain recent actions reflecting the attitude and policies of the Government of Ecuador. These actions have given cause for concern to responsible United States companies which have been carrying on their business for many years in Ecuador, many of them on the basis of concessions or contracts entered into with the Ecuadoran Government and approved by the Ecuadoran Congress. The Government of the United States of course is deeply sensitive of the difficult financial situation of the Ecuadoran Government, and understands that many of the policies recently adopted or under consideration have for their purpose the alleviation of that situation. At the same time, the Government of the United States feels constrained to observe that these policies if carried into effect will be extremely burdensome and onerous to certain United States interests. A brief statement of some of these actions may be sufficient by way of illustration.
On December 14 [13], 1937, a Decree was promulgated obliging foreign companies established in Ecuador to pension their employees who have been in their employ for twenty years or more. Apparently, the obligation is made applicable only to foreign enterprises, and the pension prescribed would be in excess of the salary received at any time prior to retirement. An examination of the effects of this measure reveals that it would impose upon the interested American concerns heavy financial obligations not contemplated at the time of the granting of their concessions by the Ecuadoran Government. Moreover, [Page 544] the retroactive feature of the measure affords no opportunity to the companies to make provision for the contingency by setting up funds or reserves for pension purposes.
Reports indicate that the Government of Ecuador has canceled the exemption from customs duties granted in accordance with contracts formally concluded pursuant to Ecuadoran law, which exemption was accorded to encourage and facilitate the establishment of industry. This cancellation seems to be in the nature of a unilateral action abrogating contractual rights acquired by virtue of a general law or by way of compensation for special and specific tax commitments.
On January 5, 1938, a memorandum was presented to the South American Development Company setting forth the modifications which the Government wishes to be incorporated in the contract of May 8, 1934, namely, increase of the production tax from 6% to 12%, an advance payment of these taxes in the sum of $600,000, a new tax of 50 sucres per kilogram of cyanide precipitates exported, and the cancelation of all tax exemptions. The company has estimated that its tax obligations for the year 1937 will amount to about 26% of its net profits. The modifications proposed would bring this percentage up to 50% of net profits, without taking into account the taxes which would become payable as a result of the cancellation of the free entry privileges enjoyed by mining and other companies, and the pensions prescribed for employees. In making these proposals for the revision of a valid contract duly approved by the Congress of Ecuador, a time period of only ten days was granted the company in which to acquiesce.
The mining industry is one involving considerable risks and uncertainties. Exploration and development work may occupy years during which income is nil and outlays of capital heavy. Therefore, the inherent risks, the years when no profits are made and the eventual exhaustion of the property, necessitate the averaging of profits over a period of years. The proposed modification of the bases on which the company is operating its old mine and developing its new properties is said to be so drastic as to require the suspension of operations.
The Government of the United States does not request or expect special or preferential treatment for United States citizens and their interests in Ecuador. It does, however, have every confidence that the Government of Ecuador in its dealings with them will give full observance to the principles of equity and justice.
It is its earnest hope that an opportunity may be afforded the legitimate interests of the United States to discuss their problems in a friendly manner with representatives of the Ecuadoran Government, and that solutions, based upon equity, may be found which will safeguard the best interests of all concerned.
- Handed to the Ecuadoran Ambassador by Under Secretary of State Sumner Welles on January 28.↩