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ECUADOR: An Introduction to Tax

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Ecuador Tax Overview 

By: Almeida Guzmán & Asociados

General Insights 

Ecuador is a constitutional democracy governed by a president and a legislative power held by the National Assembly with an independent judicial system and two additional constitutional branches, the National Electoral Tribunal and the Council for Citizen Participation and Social Control.

The currency in Ecuador has been the US Dollar since the year 2000.

Bills relating to tax enactment, modification, exemption or elimination shall be proposed by the president. In order for such bills to be enacted, the National Assembly vote and approve or reject the bill. Economic policies are set and managed by the executive branch. The executive branch and certain state institutions have the authority to set and modify import duties and public service fees, which do not need approval from the National Assembly.

Over the last few years, the drop in international oil prices significantly affected the Ecuadorian economy, including tax collection. Rising crude oil prices in 2021 should result in a boost to the economy and help the government meet its budget. Furthermore, recently elected President Guillermo Lasso has announced plans to increase oil production by nearly 100,000 barrels over the next four years.

Pursuant to projections made by the former government, an expected USD860 million is expected to be earned from granting concessions for state assets in this process, resulting in more income for the state.

Overview of the Tax Authority 

Tax compliance in Ecuador is overseen by the Internal Revenue Service (IRS) through tax returns and similar reports filed. The IRS is the state entity legally entrusted to administer and collect most taxes in Ecuador and request relevant information from taxpayers.

Audits on taxpayers are performed by the IRS. Results of such audits can be appealed at an administrative level. The Ecuadorian district tax courts have the authority to resolve claims filed by taxpayers against administrative resolutions.

Tax Incentives on Investments 

The current president announced a tax reform that should be enacted this year, becoming effective for the 2022 fiscal year, and has offered dialogue with different sectors and relevant stakeholders to receive input before presenting the bill to the National Assembly. A draft of the bill has not been made public, however, the president has disclosed some of the points the government will focus on: (i) eliminating the 2% income tax on total sales levied on small businesses, the aim of the new measure is to tax such businesses on the basis of their profit and not on their gross income; (ii) gradually reducing the currency remittance tax, currently set at 5%, in order to promote local and foreign investment and the return of capital; (iii) eliminating or reducing the country’s Value Added Tax (VAT) during 4 holidays every year to promote tourism; (iv) increasing control to combat tax evasion, given that tax evasion has plagued Ecuador for decades, and eliminating some tax exemptions.

The president has assured that taxes on corporations will not be increased, as corporations currently suffer from a high tax burden. A system of differentiated VAT rates for different products is also being analysed.

Local legislation provides for several tax incentives on investments in new strategic industries, and the development of said industries in regions outside of the two main cities of Ecuador, Quito and Guayaquil. There are several companies in a variety of industries that have signed investment contracts with the government. Such contracts provide legal and tax certainty and stability.

Tax Withholdings on Remittances Abroad 

Income earned in Ecuador and remitted abroad is subject to income tax withholdings at the following rates: (i) 25% on transactions without a specific rate, interests, royalties, technical assistance and services; (ii) up to 10% on capital gains; and (iii) 25% on 40% of dividends paid.

Note: In certain cases, an additional 10% is withheld when the beneficiary is domiciled in a country or territory considered to be a tax haven.

A 0% withholding tax applies on interest paid to private international financial institutions, specialized non-financial institutions that are registered with the Superintendence of Banks, as long as the interest rate does not exceed the maximum interest rate authorized by the Central Bank of Ecuador, which varies periodically, and multilateral financial institutions.

Tax Withholdings on Payments made within Ecuadorian Territory

Overall, payments made by economic agents within Ecuadorian territory are also subject to income tax withholdings.

The amounts withheld are credited to the annual income tax of the economic agent to whom the withholding is applied.

The following rates apply: (i) 2.75% on transactions without a specific rate; (ii) 0%-1% on interest and commissions paid to financial institutions; (iii) 1%-10% on capital gains; (iv) 1.5% on monthly income earned by certain companies in the oil industry (self-withholding); (v) 1.75% on the acquisition of movable property, construction activities, insurance, leasing, and monthly income obtained by telecommunications companies and financial institutions (self-withholding); and (vi) 2%-10% on fees and commissions paid to individuals.

VAT on Digital Services 

In compliance with a recently enacted law, the Administrative and Progressive Tax Simplification Law, the IRS has made significant efforts to simplify its forms, returns and tax reports. The aforementioned law also contains provisions that charge VAT on digital services provided to Ecuadorian residents.

The law provides that credit card issuers, intermediaries and certain residents are responsible for withholding taxes whenever the service provider is not registered with the Ecuadorian tax authority. As such, the law institutes a special registry for non-resident digital service 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 Information and ratified the Convention on Mutual Administrative Assistance in Tax Matters. Further local legislation has been enacted pursuant to the Common Reporting Standard (CRS). On 7th April 2021, Ecuador and the United States of America signed an agreement for the exchange of information relating to tax matters, which should be helpful to strengthen fiscal transparency and decrease tax evasion.

Transfer Pricing System 

The Ecuadorian transfer pricing system is mainly based on the OECD principles and technical guidelines, providing the latter do not oppose particular national provisions on assessing 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 related party transactions.

Tax System: COVID-19 Response 

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 on economic reactivation loans. Tax incentives for other economic activities such as tourism are also considered in this law. However, most of the provisions of this law expired once the state of emergency ended.

Other Tax-Related Matters 

Due to the industry's potential, mining has become an activity to follow in Ecuador. This industry could become a very important source of tax income for the government in the near future.