ECUADOR: An Introduction to Tax

Ecuador Tax Overview 

By: Almeida Guzmán & Asociados

General Insights 

Ecuador is a constitutional democracy governed by an executive president and a legislative National Assembly. It has an independent judicial system and two additional constitutional branches: the National Electoral Power and the Council for Citizen Participation and Social Control.

The US Dollar is legal tender in Ecuador since the year 2000.

Legislative bills relating to tax enactments, modifications, exemptions, or the elimination of taxes are proposed by the president. Such bills must be enacted by the National Assembly. Economic policies are directed 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.

During the first year of the government of President Guillermo Lasso, Ecuador has directed its policies towards developing and boosting international trade. In this sense, the freight costs were eliminated from the taxable base of tariffs and taxes. Customs duties were reduced. Likewise, the Capital Remittance Tax (ISD) is expected to be fully eliminated. The ISD has already been reduced from 5% to 4.5%. By the end of 2022, the ISD rate will be further reduced to 4%.

Furthermore, the President ratified his commitment to promoting free trade and is expecting to sign ten free trade agreements by 2025 with different countries. Ecuadorian shrimp and banana exports will be especially promoted. An expected reform to customs tariffs procedures and regulations will seek to optimise the administrative procedure for imports and exports.

Overview of the Tax Authority 

Tax compliance in Ecuador is overseen by the Internal Revenue Service (IRS). The IRS is the state entity legally entrusted to manage and collect most taxes in Ecuador, as well as to require relevant information from taxpayers.

Taxpayer audits are performed by the IRS. The outcomes of such audits may be appealed at an administrative level. District tax courts have the authority to hear claims filed by taxpayers challenging administrative resolutions.

Tax Incentives on Investments 

Since the enactment of the Law for Economic Development to Manage the Effects of COVID-19, new or existing companies may benefit from a reduction of 3 percentage points of the income tax rate whenever new investments are made in Ecuador (starting in 2022).

These incentives will be applicable only to income directly attributed to such investments. The reduction will be applicable for up to 15 years or until the invested amount exceeds the incentive.

Another incentive is the benefits obtained from investment contracts. The law establishes that investment contracts are a legal tool for making investments in the Ecuadorian territory. Investment contracts are concluded with the Ecuadorian government through a public deed that stipulates the investment’s terms and conditions, its amount, tax regime and other legal benefits. The investment may be undertaken in any economic sector (investment contracts were previously limited to the industries specified by the Ecuadorian government).

To conclude an investment contract, corporations must follow a formal procedure before the competent Ecuadorian authority. Investors must develop a viable project that must be filed before the Ecuadorian authorities for approval. Investment contracts provide legal stability and incentives agreed upon with the Ecuadorian government. Tax benefits may not exceed the amount to be invested.

The term of investment contracts may not exceed 15 years, except where the investment is related to public works or industries such as the oil and mining sectors, where the concession or licence has a term exceeding the aforementioned term. Investment contracts may be renewed for up to the same term stipulated in the contract. Contracts will not be renewed automatically; companies must follow a specific procedure for that purpose.

As of 2022, companies that sign investment contracts with the Ecuadorian government will benefit from:

• A 5-percentage-point reduction on the income tax rate (25%), which will apply during the contractual term or up to the moment when the incentive exceeds the invested amount.

• An exemption from customs duties and capital remittance tax (ISD) levied on payments remitted abroad for importing raw materials and capital goods required by the investment. This exemption must be provided for in the investment contract.

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.

In certain cases, an additional 12% 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, multilateral institutions and specialised non-financial institutions that are registered with the Superintendence of Banks, as long as the interest rate does not exceed the maximum interest rate authorised by the Central Bank of Ecuador, which varies periodically.

Tax Withholdings on Payments made within Ecuadorian Territory

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

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

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.

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 the 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 help 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 to allow the assessment of compliance with the arm's length principle in related party transactions.

Tax System: COVID-19 Response 

Also as a result of COVID-19, the government enacted the Humanitarian Support Law, which provides tax incentives to 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 its provisions expired once the state of emergency ended.

Other Tax-Related Matters 

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