Ecuador Tax Overview
By: Almeida Guzmán & Asociados
Ecuador is a constitutional democracy governed by a president, and a legislative power held by the National Assembly. Ecuador has an independent judicial system, and two additional constitutional branches (National Electoral Tribunal and Council for Citizen Participation and Social Control).
The currency in Ecuador has been the US dollar since the year 2000. This has fostered an international interest in investing in the country, due to the certainty and stability of the currency.
Tax enactment, modification, exemption or elimination is a constitutional faculty held by the President, despite the fact that bills on the matter must be approved by the National Assembly. Economic policies are managed by the executive authority. Import duties and public service fees can be established by the executive branch and certain state institutions, which do not need approval from the National Assembly.
Ecuador's national budget funding has historically been heavily composed of income originating in oil exports and tax collection. During the last three years the drop in the international price of oil has gravely affected the Ecuadorian national economy. In the first quarter of 2020, oil exports suffered a decrease of approximately 44% in comparison to those of the first quarter of 2019.
In the 2020 budget, the sale and/or granting of concessions for state assets was budgeted in an amount of USD2 billion. Negotiations and due diligence processes continue, but finalisation of any agreements will surely be delayed by the current health crisis.
Overview on the tax authority
All tax compliance in Ecuador is overseen through tax returns and similar reports filed before the Internal Revenue Service (IRS). The IRS is the state entity legally empowered to administer and collect most taxes in Ecuador, as well as requiring from the taxpayers all information needed to assess the adequate compliance with the tax regime and to audit tax returns.
Audits on taxpayers are regularly performed by the IRS. Results of such audits can be challenged at the administrative level. The Ecuadorian tax district courts are empowered to resolve claims filed by the taxpayers against administrative resolutions.
Tax incentives for investments
Currently, the Ecuadorian government has focused its efforts on promoting several laws and regulations for: (a) promoting foreign investment; (b) securing tax rates on long-term investments; and (c) reducing the amount of administrative procedures for business establishments, to ease up potentially flourishing industries. The aim of new legislation, particularly tax reforms, is to obtain economic resources for the government in order to make up for the lowered collections as previously explained.
Local legislation provides for several tax incentives for investments in new strategic industries and the development of the latter in regions outside the two main cities of Ecuador (Quito D.M. and Guayaquil). There are several companies in the pharmaceutical, food and beverage, automotive and other industries that have signed investment contracts with the government. Such contracts provide juridical certainty and legal stability in the event of tax reforms, provided that the contractual parties have complied with certain milestones.
Tax withholding on remittances abroad
Ecuadorian source income remitted abroad is subject to income tax withholding. The following rates apply: (a) 25% on transactions without a specific rate, interests, royalties, technical assistance and services; (b) up to 10% on capital gains; and (c) 25% on 40% of dividends paid.
Note: In certain cases, an additional 10% withholding tax applies when the beneficiary is domiciled in a tax haven country or territory.
0% withholding tax applies on interest paid to private international financial institutions, specialised non-financial institutions duly registered before the Superintendence of Banks, and multilateral financial institutions, as long as the interest rate does not exceed the maximum authorised by the Central Bank of Ecuador (which varies periodically).
Tax withholding on payments with the Ecuadorian territory
Overall, payments made by economic agents within the Ecuadorian territory are also subject to income tax withholding.
The amounts withheld are credited to the annual income tax of the economic agent to whom the withholding is applied.
The following rates apply: (a) 2.75% on transactions without a specific rate; (b) 0%-1% on interest and commissions paid to financial institutions; (c) 1%-10% on capital gains; (d) 1.5% on monthly income obtained by certain companies in the oil industry (self-withholding); (e) 1.75% on acquisition of movable property, construction activities, insurance, leasing, and monthly income obtained by telecommunications companies and financial institutions (self-withholding); and (f) 2%-8%-10% on fees and commissions paid to individuals.
Value-added tax on digital services
The Ecuadorian tax system may well be perceived as complex. However, the efforts of the IRS have simplified the forms, returns and tax reports, so complying with a recently enacted law (Administrative and Progressive Tax Simplification Law). The aforementioned law lays out provisions that levy value-added tax upon the provision of digital services to Ecuadorian residents.
In order to guarantee tax collection, such law provides that credit card issuers, intermediaries and certain residents are responsible for tax withholding, whenever the service provider is not registered before the Ecuadorian tax authority. In this manner, the law institutes a special registry for non-resident digital services providers.
Treaties and multilateral instruments
Ecuador has entered into double taxation treaties with the following countries: Argentina (applies only to air transport), Belarus, Belgium, Bolivia, Brazil, Canada, Chile, China, Colombia, France, Germany, Italy, Japan, Mexico, Peru, Qatar, Romania, Russia, Singapore, South Korea, Spain, Switzerland and Uruguay.
Ecuador signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and ratified the Convention on Mutual Administrative Assistance in Tax Matters. Further local legislation has been issued pursuant to the Common Reporting Standard (CRS).
Transfer pricing regime
The Ecuadorian transfer pricing regime is mainly based on the OECD principles and technical guidelines, provided that the latter do not oppose particular national provisions on the determination of the taxable base for income tax.
Taxpayers must file transfer pricing reports under certain conditions, in order to assess the fulfilment of the arm's length principle in transactions with related parties.
Covid-19 response (tax regime)
As a result of Covid-19, the government enacted a law that provides tax incentives for financial institutions, granting additional deductions on the entities’ income arising from interest collected in economic reactivation loans.
Tax incentives for other economic activities such as tourism are also considered in this law.
Other tax-related matters
Due to the industry's great potential and largely unexploited resources in the sector, mining has become an activity to follow in Ecuador.
Some other tax benefits and exemptions have arisen from the international trends of legislation promoting eco-friendly living. For instance, plastic bags are being gradually taxed at as much as USD0.10 per unit on top of the regular taxes.