Ecuador was a private investment-oriented country until 2006, when the government changed its direction and unilaterally amended the participation contracts for oil exploration and exploitation, introducing a clause establishing a legal requirement for government participation of up to 99 per cent of the difference between the international price of crude oil in force at the time such contracts were entered into (mostly in 1995) and the actual price. Shortly after this, during 2007 and 2008, the Constitutional Assembly heavily amended the taxation laws, imposing barriers to the judicial discussion of tax determination, increasing the taxation rates for private individuals and limiting tax incentives for corporate reinvestment of profits. Additionally, the scheme of taxation on corporate profits was also amended to double tax dividends, with both a corporate tax on profits and tax on personal income, and introducing a system where, even without taxable profits, companies and corporations were submitted to income tax on unearned profits, based on a rate of taxation of net worth. Public enterprises, on the contrary, were widely promoted, and privatisation was eliminated.
Bilateral investment treaties (BITs) were affected by Constitutional Court decisions holding some of them as contrary to the Constitution. Several BITs were denounced by Ecuador between 2007 and 2016, as was the ICSID Convention. The still-in-force BITs with Italy, Peru, Spain, the United States, Canada, Venezuela, France, the Netherlands, Sweden, Switzerland, China, Germany and the United Kingdom were denounced last May 2017, during the last days of the term of former president Rafael Correa.
Although Ecuador had announced that it would not enter into any free trade agreement with the European Union, during 2015 and 2016 negotiations with the European Union for that purpose were conducted, and a text for a treaty was approved and finally signed to incorporate Ecuador to the existing commercial agreement between the European Union and Colombia and Peru. Such commercial agreement has been in force since 1 January 2017.
Ecuador has threatened to lead a movement to dissolve the Organization of American States, mainly because of the protection that the Inter-American Commission and the Inter-American Court on Human Rights grant to fundamental freedom and civil liberties.
The new government of Lenin Moreno, inaugurated on 24 May 2017 announced changes to encourage new investments, but no actual efforts have been conducted in such direction.
The Constitutional Court has decided that the judges should not fulfil the provisional measures ordered by international investment arbitration panels, under the theory that they affect the sovereign state.2
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
For taxation purposes there is no distinction between corporations (stock corporations), limited liability companies, partnerships, joint ventures, consortia or any other kind of business associations for profits, whether legally established or formed de facto.
The most commonly used forms of business structures are stock corporations (SA) and limited liability companies. The main differences between these two kinds of enterprises are that shares may be freely negotiated in stock corporations, while quotas of limited liability companies may only be transferred with the unanimous consent of all the partners or quota holders, and as a consequence, quotas of limited liability companies may not be seized or sold in public auction, although profits declared as dividends may be subject to seizure by debtors of the partners of limited liability companies.
All of the above types of associations for business are considered under the general term of ‘companies’, and all of them are taxed under the same taxation principles. All companies are under a duty of registration before the Internal Revenue Service (SRI).
Branches of foreign companies authorised to conduct business in Ecuador are also taxed under the same general rules, as are permanent establishments of foreign companies.
Commercial trusts conducting entrepreneurial activities, independent or autonomous patrimonies (whether with or without juridical personality), and any other entity with economic unity not linked with its members are considered as companies for the purposes of taxation, and their benefits are treated in the same way that corporate profits are and are subject, in general, to the same formal tax obligations. Managers of trusts are liable for estate and donation taxes when trusts are devised to transfer assets.
Limited liability unipersonal enterprises (i.e., established by only one person as managing owner) are treated for taxation purposes as stock corporations concerning profits and declared dividends.
In practice, ‘civil and commercial companies’, which are not recognised by any law, have also developed as businesses, and are subject to the same taxation treatment as all companies.
III DIRECT TAXATION OF BUSINESSES
i Tax on profits
Companies are subject to a flat-rate income tax of 22 per cent, which is calculated after the 15 per cent workers’ and employees’ profit share is deducted. However, companies intending to use their profits to increase their capital for the purpose of investments in new industrial plants or other specially determined capital investments are taxed at a rate of 12 per cent.
All company revenues and earnings are subject to income tax in Ecuador, except income obtained abroad if it was taxed abroad unless such income is obtained in tax havens. Under specific tax treaties implemented to avoid double taxation, including the Andean Community of Nations regulations on double taxation, source-of-income principles on income taxation are applicable.
All expenses directly incurred to obtain, maintain and increase revenues by the company are deductible provided that they are shown in legally approved invoices, and if such expenses were incurred for payments abroad, a withholding income tax of 22 per cent is withheld.
Generally, 20 years’ amortisation is applicable to buildings and constructions, while three to five years’ amortisation is applicable to moveable property, although under specific conditions faster amortisation might be applied considering the obsolescence of the assets, while amortisation of investments, including pre-operational investments, is five years. Intangibles are amortised over 20 years. However, under international accounting standards rules, companies may establish their own amortisation and depreciation rates according to the effective life of each asset. Amortisation of 100 per cent is provided for the acquisition of equipment destined to improve clean production, the generation of renewable energy or reduction of environmental harm.
Losses may be amortised or carried over for a period of five years, with a maximum of 25 per cent of the losses per year.
Individuals, including those conducting commercial business without a company structure, are taxed at a progressive rate from 5 to 35 per cent. Dividends earned from companies are added to individuals’ income, but income tax paid by the company is deemed as tax credit unless it is higher than the applicable tax on such dividends received by such individuals.
Fiscal years correspond to calendar years. Income tax returns are filed during the first four months of the year by companies, and during the first three months by individuals, when the income tax or any balance thereof is also paid. Advanced income tax payment for the next year is equivalent to 50 per cent of the income tax of the preceding year, calculated after deduction of the amounts withheld at the source of the income. This is paid in two instalments during July and September. Such advanced income tax is calculated on the basis of the mathematical addition of 0.2 per cent of the net worth, 0.2 per cent of the expenses, 0.4 per cent of the total assets and 0.4 per cent of taxable income if such sum is higher than the advanced payment calculated on the basis of 50 per cent of income tax. Tax returns and tax payments are filed and made through private banking institutions.
The SRI is the only national administrative body regarding income tax, VAT, tax on special consumption and tax on remittances of money abroad, and other national taxes except customs duties, which are under the control of the National Customs Corporation. Municipalities administer and control municipal taxes such as, inter alia, real property tax, tax on transfers of real property, tax on capital gains derived from the sale of real property, tax on business capital assets and business year authorisation tax. The SRI has offices and agencies in all cities in Ecuador.
The SRI and other tax authorities have the power to regulate the application of taxes and answer matters raised by taxpayers, which become binding. The SRI has the power to audit national taxes and to decide on administrative claims filed by taxpayers concerning the results of tax decisions. Taxpayers may claim against original tax decisions or final administrative decisions before the courts. However, to bring judicial claims, a bond equivalent to 10 per cent of the difference between the taxes established by the tax authorities should be granted. If such bond is granted in cash, the corresponding amount should be transferred to the SRI’s account.
Holding companies – that is, companies whose only corporate purpose is to own shares, quotas or rights in other companies with the purpose of having direct control over such other companies – may consolidate the financial results of all of the controlled companies, but for the purposes of taxation, each company forming the economic group is an independent taxpayer.
For the purposes of control by the SRI and other tax authorities, economic groups are those where one or more persons have at least a 40 per cent participation in other companies. The importance of economic groups relates to the rules on transfer pricing either internally or externally.
ii Other relevant taxes
VAT is applicable to the transfer of ownership or to the importation of moveable goods of a corporeal nature in all phases of trading, as well as to the transfer of copyright and connected rights, and industrial property rights, and to services rendered as provided in the law. The ordinary rate is 12 per cent of the price or value of the good or service, except for some transactions that are subject to a zero per cent rate (which means that, in practice, there is tax).
Transfers for the purposes of the application of VAT are any act or contract intended to transfer ownership of the above-mentioned goods or rights, either by sale or gift, and the use or consumption of corporeal moveable goods produced by the user or consumer.
Certain transactions are not subject to VAT, including:
- a contributions to the capital of companies;
- b sales of total assets and liabilities of all kinds of businesses;
- c adjudications in the case of partitions of estates or liquidated companies, or dissolved marital property;
- d mergers;
- e company divisions;
- f donations to public entities or to non-profit organisations; and
- g transfers of shares, quotas or participations in companies.
VAT paid in the acquisition of goods or services are tax credits with respect to VAT generated in the transfer of goods or rendering of services by a taxpayer subject to VAT.
Tax on special consumption is applicable to the importation or transfer of specific moveable goods of a corporeal nature or to specific services determined by law, such as cigarettes, alcoholic beverages, sodas, perfumes, video games, firearms, incandescent bulbs, vehicles, aeroplanes, ships, paid television services, casino services and social club affiliation services. The rates vary from 10 to 300 per cent of the price of the goods or services.
Other important taxes are:
- a the 5 per cent tax on any transfer of money abroad, except importations and the payment of registered foreign loans;
- b the annual contributions to the Superintendence of Companies by companies controlled by such entity, mainly stock corporations and limited liability companies, and to the Superintendence of Banks and Insurance by the companies controlled by such entity;
- c the annual municipal taxes on total assets of commercial business (at a rate of 0.15 per cent); and
- d customs duties.
All transfers of assets or rights to juridical persons or individuals domiciled in tax heaven jurisdictions are deemed as donations and subject to the applicable tax.
The municipalities also collect taxes on real property and on the transfer of real property, including taxes on capital gains derived from the sale of real property. There is also a tax on funds maintained abroad by financial companies and banks, and by companies managing funds and trusts.
Under the Environmental Development and State Resources Optimisation Act of 2012 (Act of 2012), banana production is subject to income tax calculated on the basis of a rate of 2 per cent on gross revenues. This way of determining income tax might be applicable, if requested by the producers’ associations, to agriculture, fisheries and aquaculture activities. The Law on tax incentives for certain sectors, in force since 12 October 2016, imposes on other subsectors of agriculture activities, as well as on other subsectors of the fishery industry and of the aquaculture industries, a tax of 1 to 2 per cent on gross revenues.
Under the Act of 2012 and its amendments, rates for a special consumption tax on beer and cigarettes were increased through different models of calculations of taxation on units and ad valorem, or a mixture of both. Special consumption tax rates on other goods were also changed, especially in connection with vehicles, to encourage the production and importation of hybrid or electrical vehicles.
A special tax on environmental contamination is applicable to persons or companies that are owners of motor vehicles. The rates are established on the basis of the impact to the environment (based on the size and the age of the vehicle).
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
Companies incorporated in Ecuador should determine the city of their domicile. Foreign companies that have decided to conduct activities in Ecuador may obtain the approval of the Superintendency of Companies to establish a branch in Ecuador, while financial institutions, insurance companies and banks may obtain the same authorisation from the Superintendency of Banks and Insurance. With such authorisations, the entities involved establish the tax domicile of such branches as Ecuador at the same time. Like most taxpayers in Ecuador, they should register as taxpayers with the SRI.
Foreign companies receiving earnings from an Ecuadorian source may appoint an attorney-in-fact to represent them with respect to tax obligations in Ecuador. Taxpayer registration should also be obtained.
Financial institutions may have representatives in Ecuador, but they are not allowed to transact business.
ii Branch or permanent establishment
Branches of foreign companies authorised to conduct business in Ecuador are subject, in general, to the same tax regime as domestic companies.
Permanent establishments of foreign companies are qualified by the SRI if specific factors or elements of permanent presence in Ecuador exist, such as places to conduct economic activities in Ecuador, factories, warehouses, offices or a person with enough power to act as an agent of the foreign company. Such permanent establishments are taxed on the same basis as other companies doing business in Ecuador, whether incorporated in Ecuador or established as branches of foreign companies.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Holding company regimes
Holding companies, namely, companies whose only corporate purpose is to acquire and maintain shares in other companies for the purposes of controlling them, may consolidate their balance sheets with the controlled companies, but each one of the controlled companies has an independent taxation regime. It is deemed that economic groups are formed by companies whose shares are owned in a proportion of 40 per cent or more by the same company or by the same group of companies, or belonging to the same physical persons. Holding companies are not subject to advanced payment of income tax that other companies and other taxpayers are.
ii IP regimes
No special beneficial tax regimes are allowed in Ecuador.
iii State aid
Investors conducting business as concessionaires of state-owned resources may enter into investment contracts with the government, whereby the state may guarantee that the economic equilibrium in the contract will be maintained if laws increasing the taxation affecting the concessionaire are implemented.
Reinvestments of company profits through capitalisation, if such capitalisation is destined for the acquisition of capital assets destined for production and scientific development (except real property), are subject to income tax at a rate of 12 per cent instead of 22 per cent.
Foreign investors not domiciled in tax havens are not subject to income tax on profits or dividends earned from local companies in which they own shares or have participation. However, as previously explained, the companies pay income tax on the companies’ profits, which, with the exception of dividends received by physical persons, dividends received by companies as stockholders or partners of other companies, are not double taxed.
Special deductions are granted for five years for expenses incurred in training aimed at research, development and innovation conducted by medium-sized companies, as well for the expenses of such companies aimed at improving productivity or incurred during travel for commercial promotion and access to international markets.
Newly incorporated companies that have their activities in cities other than the urban areas of Quito and Guayaquil, and that are carrying out food production, forestry and products thereof, or are producing or involved in metal mechanisms, petrochemicals, pharmaceuticals, tourism, renewable energy, logistical services in foreign commerce, biotechnology, software and strategic sectors determined by the president, are income tax-exempted for five years after starting productive activities on revenues derived from new investments.
However, private financial companies, banks and issuers of credit cards do not enjoy the benefit of a 10 per cent deduction on income for reinvestment of profits, and have the duty to anticipate income tax on the basis of 3 per cent on gross revenues (with a possible reduction to 1 per cent). The monthly tax rate on funds and investments abroad of financial institutions and companies devoted to investment funds and trusts is established at 0.25 per cent, which increases to 0.35 per cent in the case of deposits or investment in tax havens.
Financial services are subject to 12 per cent VAT, instead of zero per cent.
Banks and financial institutions are under the duty to supply the SRI with any requested information of concern to taxpayers as the clients of such entities, without restriction.
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding on outward-bound payments (domestic law)
All kinds of payments or credits abroad representing taxable income or reimbursement of taxable income are subject to 22 per cent withholding by domestic companies and business entities. Since companies’ profits are taxable income for the companies, no withholding is applicable on taxes, unless the person or company receiving the dividend is a resident of a tax haven or of a country having a tax burden lower than the tax rate in force in Ecuador. Withholding is not applicable to reimbursement of expenses if certified by international firms of auditors doing business both in Ecuador and in the foreign country, unless reimbursement corresponds to fees, royalties or commissions.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
No withholding is applicable to:
- a payments for imports;
- b commissions paid for exports and tourism promotion if they do not exceed 2 per cent, except if the beneficiary is a party related to the exporter, a beneficiary of the tourism promotion or domiciled in a tax haven;
- c 60 per cent of the interest in foreign loans registered with the Central Bank;
- d payments abroad incurred by air or sea transportation companies connected with their operations in Ecuador, and similar expenses of high sea fishing companies related to such high sea activities;
- e 96 per cent of reinsurance premiums paid to reinsurers not established or not having a representative in Ecuador;
- f 90 per cent of payments made to international press agencies registered in Ecuador;
- g 90 per cent of ship freight; and
- h payments for international leasing of capital assets if the interest is no higher than the LIBOR rate, unless the lessee does not opt to acquire the leased assets, provided that the leasing is not made with persons linked with the lessee or payments made to tax havens, or the lease term is lower than the estimated life of the asset.
Indirect expenses charged from abroad to companies domiciled in Ecuador by their related parties are deductible expenses for the local company or the company doing business in Ecuador, provided such expenses do not exceed 5 per cent of the basis of the taxable income. In the case of companies conducting activities in the area of non-renewable natural resources, expenses connected with technical and administrative services are also considered among these indirect expenses.
iii Double tax treaties
Ecuador is a member of the Andean Community of Nations (CA) and is, therefore, ruled by Andean decisions on double taxation that establish, as a general principle, that income tax is only applicable in the country where the activity of the company is located, and that no withholding tax may be applied in connection with payments from one member country to another member country of the CA.
Treaties to avoid double taxation are in force with Argentina, Belgium, Brazil, Canada, Chile, France, Germany, Italy, Mexico, Romania, Spain and Switzerland. The treaty with Argentina is limited to air operations.
Ecuador is also a member of the 1979 Madrid Convention to avoid double taxation on copyright royalties and droit de suite.
Bilateral treaties are framed on the basis of the principle of origin or source of the income to establish the power to tax and the right of taxpayers to credit tax paid abroad. Some of them, such as the treaty with Italy, provide for a maximum rate of withholding tax.
Income that has been taxed abroad to companies domiciled in Ecuador is not subject to taxation in Ecuador, irrespective of any treaty provisions, unless income was taxed in tax haven jurisdictions.
iv Taxation on receipt
All companies should withhold 22 per cent of all dividends paid or advanced. In the case of dividends received by physical persons residing in Ecuador, such withholding constitutes a tax credit. If received by other companies established in Ecuador, it is a final income tax. If dividends are remitted abroad, the withholding is attributed as income tax for the person who has received the dividends so as to enable such foreign taxpayer to use it as a tax credit.
VII TAXATION OF FUNDING STRUCTURES
Together with original capital contributed by stockholders, quota holders or, in general, partners, companies are funded with credit, including credit from partners and issuance of debentures or bonds, which is only permitted for stock corporations.
i Thin capitalisation
Tax laws do not establish restrictions on debt or equity restrictions, but regulations on banks do provide such restrictions. Company losses should not exceed 50 per cent of net worth, otherwise companies should be dissolved unless such losses are offset either by direct contribution of the stockholders or partners, or through an increase of capital.
Investment funds should reach a net worth of at least US$52,578 within six months of starting operations provided they have at least 75 participants, otherwise they should be liquidated. Funds are under the control of the National Securities Council that works within the Superintendency of Corporations, which issues regulations for their operations.
Investment funds and complementary funds are tax-exempt, provided they withhold income tax, as applied to dividends, to participants.
ii Deduction of finance costs
In general, all finance costs are tax deductible except costs, including interest on foreign credit if the credit has not been registered with the Central Bank, or interest exceeding the tariffs established by the board of directors of the Central Bank, on the portion above the tariff. To deduct interest on foreign loans registered with the Central Bank, the amount of such loans should not exceed 300 per cent of a company’s net worth or 60 per cent of the total assets of physical persons.
iii Restrictions on payments
The general principle is that net profits should be distributed unless intended for other uses, such as capital contributions or the offset of losses. Stock corporations and limited liability companies should distribute at least 50 per cent of net profits unless there is a decision otherwise unanimously approved by the general meeting of stockholders or quota holders. Therefore, the payment of dividends on such 50 per cent of net profits is compulsory, unless otherwise approved unanimously by such general meetings. To overcome the objection to direct profits towards other objectives, after declaring dividends on the proportion established in the law, the general meeting may approve a capital increase by the offset of credits on the amount declared as dividends.
iv Return of capital
Reduction of capital is allowed if the remaining capital permits the company to continue the business. Such reduction of capital does not generate income tax.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
Unless foreign companies already have a corporate entity in Ecuador, they acquire companies in Ecuador through a company incorporated abroad. Normally the business is created through an acquisition of shares, after due diligence, since such transfer does not generate any tax.
Mergers do not generate any taxes. The surviving company is liable for all tax obligations of the merging companies. Only mergers between companies established in Ecuador are allowed.
Divisions of companies do not generate taxes. The agreement to split a company must determine how the companies will divide the profit and losses for the period the division is registered. Such agreement may provide that one of the companies will have the profits and losses of the original company. If the losses and profits are divided among the new companies, the profit and loss statement should establish an equitable allocation of the revenues with the costs.
A change of corporate domicile within Ecuador does not incur any tax penalties or effects. A change to a domicile abroad causes the dissolution of the company.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
Companies established in tax havens or low-tax jurisdictions, when transacting with local companies, are deemed related companies and, therefore, the costs incurred in such transactions are tax deductible only if their value corresponds to the commercial principles of arm’s-length dealings.
Dividends received by companies established in tax haven jurisdictions or low-tax jurisdictions are not tax-exempt, and are therefore deemed taxable income.
An important decision was entered on 18 July 2013 by the Taxation Chamber of the National Court of Justice3 declaring as acceptable tax-deductible expenses the interest paid to related companies based on a contract between the Republic of Ecuador and a company operating an oil pipeline. However, through an action for extraordinary protection that under the Constitution is designed to guarantee due process of law, and to defend constitutional, human rights and civil liberties, the SRI obtained from the Constitutional Court vacation of the final decision4 and ordered the alternate judges of the Taxation Chamber of the National Court of Justice to enter a new decision, which was issued on 24 July 2014,5 by newly appointed associate judges, which considered that interest paid by the company operating the pipeline under a contract with the Republic was not a deductible expense, and established a new income tax with a surcharge of 20 per cent as a sanction for the taxpayer corporation. Previously, the Council of the Judiciary, without granting the judges that issued the 18 July 2013 decision the right to a hearing, had suspended and dismissed these judges.6
ii Controlled foreign corporations (CFCs)
No special tax rules exist with respect to companies established in Ecuador that are controlled by foreign corporations.
All companies under the control of the Superintendency of Banks or the Superintendency of Companies having foreign companies as share or quota holders should remit to such entities the list of the partners of such foreign companies or a certificate providing evidence that they are public companies whose shares are registered on a stock exchange.
iii Transfer pricing
The transfer pricing regime is established with the purpose of ensuring that prices between related parties are established under the same parameters as prices between independent parties. Therefore, such prices should reflect principles of competition and comparability, and a methodology for establishing such prices is submitted for the approval of the SRI.
However, the transfer pricing regime is not applicable if the taxpayer pays income tax equivalent to at least 3 per cent of total gross revenues, does not conduct business with residents in tax havens or low-tax jurisdictions and does not have contracts with the state for the exploration and exploitation of non-renewable resources.
iv Tax clearances and rulings
It is possible to consult the SRI or other tax authorities on the interpretation and application of tax laws. The answers to such consultations are compulsory for both the tax authorities and the taxpayer, which constitutes a risk for the taxpayer. There are no cases of legal requirements to have such tax ruling in advance with respect to acquiring local business or in other cases linked to income tax.
X YEAR IN REVIEW
Since 2009, all physical persons having a patrimony higher than US$200,000 have been required to present each year a declaration concerning their assets and liabilities. Purportedly, this information will permit the establishment of a tax on the patrimony of physical persons in the future – a tax that has the support of the SRI’s main officers as a means to reduce alleged inequalities. Regulations enacted during 2012 have established that physical persons not having the obligation to bear accounting books but with a certain level of gross revenues should report (in online form) all their expenses on a monthly basis to the SRI.
The Organic Law on Incentives for Production and for Avoidance of Tax Fraud, in force since 1 January 2015, subjected to income tax both the revenues from the direct or indirect transfer of stock, shares, quotas, participation or other rights of companies domiciled or having permanent establishments in Ecuador that have concessions or rights for exploration or exploitation (without explanation of the kind of these activities), and the unjustified patrimonial increase and any other revenue earned by companies or physical persons residing in Ecuador, considering as residents of Ecuador all physical persons living in Ecuador for 183 days or more during any period of 12 months. It also eliminated the existing income tax exemption on dividends if the beneficiary is a physical person residing in Ecuador. Companies having direct or indirect ownership of physical persons residing in tax heavens or companies established in such tax heavens are subject to a tariff of 25 per cent on income tax, and not to the regular tax of 22 per cent.
As a consequence of the complete reorganisation of the judicial system during 2012, constantly ongoing, the judges appointed for the majority of the tax courts are former officers of the SRI, which has led to suspicion regarding their impartiality.7
Surcharges on imports for a period originally ending on March 2016 were established to correct alleged deficiencies in foreign trade and balance of payments. After being partially suspended, most of the surcharges have been extended until June 2017.8
The president introduced a bill in Congress to try to increase estate taxation to 77 per cent, but popular unrest and demonstrations for several days forced him to withdraw the proposed amendment. However, he introduced a new bill to impose estate tax on trusts and financial funds or similar structures established in Ecuador or abroad having residents of Ecuador as beneficiaries. Such bill was approved and enacted on 21 June 2016, as the Organic Act to avoid eluding income tax derived from earnings from estates, legacies and donations, which established special rules to extend inheritance and donation tax to beneficiaries of trusts, maintaining the old progressive rates of 5 per cent (on the basis of US$71,320) to 35 per cent (on amounts exceeding US$854,620).
A Public and Private Alliance Act establishing tax exemptions or benefits for energy and mining investment projects, supported by government planning, entered in force on 18 December 2015. Such law aims to encourage public projects in association with private investors by avoiding the rules for public contracting for specific projects.
VAT returned to 12 per cent from mid year 2017. A special law on capital gains derived from sale of real property was enacted on 31 December 2016 establishing a rate of 75 per cent on the difference of the price at the time of acquisition after 1 January 2017 and the price of the first sale thereafter. President Lenin Moreno has proposed a plebiscite to overturn such legislation. The plebiscite depends on the approval of the Constitutional Court.
An emergency bill to several changes on taxation has been submitted by the new president to the National Assembly. The maim proposed amendments are to:
- a eliminate the exemption of income tax on reinvestment of corporate profits;
- b increase personal income tax on different rules for accounting for professionals;
- c grant the SRI authority to establish presumptive profits;
- d return to the old income tax rate of 25 per cent for corporate income in major companies;
- e establish special tax reductions of value added tax if payment is made electronically;
- f increase the term for the expiration of customs duties and other taxes based on statute of limitations;
- g declare that the stockholders and partners of companies are jointly liable for the tax obligations;
- h grant additional powers to the SRI for tax collection, without considering the effects of a judicial claim against tax determinations;
- i create a special gazette destined to inform taxpayers of audits and observations;
- j increase the powers of the Superintendency of Banks.
If approved by the National Assembly, the amendments will be applicable from 1 January 2018.
XI OUTLOOK AND CONCLUSIONS
No decisions of the Constitutional Court (which, in a clear act of confiscation, ordered the courts to declare as abandoned and shelved all cases where no bonds were granted in litigation with the government) concerning certain provisions of the Environmental Development and State Resources Optimisation Act have been issued, and such law continues to be applied following some amendments. One of the main banana exporters was subject to embargoes on its properties on the basis that no actions against the SRI disputing taxes are allowed if no bonds are established.9 Further, no new laws or regulations on green taxes have been contemplated; therefore, issues affecting the environment (e.g., the use of low-octane fuel and the existence of state subsidies for fuel) remain unaddressed. The elimination of such subsidies has not even been discussed, in spite of the financial crisis in Ecuador that has resulted in the public debt reaching 40 per cent of the gross national product. The government has appropriated and confiscated the revenues of private pension funds, and has used funds destined to cover the social security benefits of retired persons in the public healthcare sector. The retirement pensions of members of the armed forces and of members of the national police have also been reduced. The net worth and the cash flow of companies devoted to prepaid medical care has been affected by a law ordering that such companies should reimburse the amounts covered by the Social Security Institute.
The Executive Branch’s authority over the judiciary, including the Constitutional Court, does not permit taxpayers to contest the use of information on them that the SRI has obtained from the banks (indeed, such information can be obtained by the SRI without taxpayers even being informed that this has occurred). Consequently, taxpayers may not contest such constitutional violations before courts that are under the control of the Executive. Nor may they contest the illegally established practice of blocking private bank accounts for tax payments without allowing the right of judicial review or of unconstitutionally imposing a prohibition on supposed tax debtors travelling abroad.
A new Criminal Code, in force since 10 August 2014, considers as criminal offences subject to imprisonment several acts connected with accounting books and supporting documents triggering a reduction in taxes. Criminal liability is also established for juristic persons and corporations subject to the sanction of extinguishing their legal existence. Since the Executive Branch controls the judiciary, criminal cases under these new provisions may be brought even without sufficient evidence.
A new Organic Monetary and Financial Code, in force since 12 September 2014, contains provisions that may ease the elimination of the dollar as the country’s legal currency and the introduction of a new local currency. The president has continually expressed his position against having the dollar as the currency of Ecuador. However, he has not taken such decision on the matter.
1 Alejandro Ponce Martínez is a senior partner at Quevedo & Ponce.
2 Prophar SA v. Judge Gabriela Lemos.
3 Compañía Oleductos de Crudos Pesados v. Servicio de Rentas Internas.
4 Servicio de Rentas Internas v. Taxation Chamber of the National Court of Justice, 26 December 2013.
5 Oleducto de Crudos Pesados (OCP) Ecuador v. Servicio de Rentas Internas.
6 Disciplinary action Servicio de Rentas Internas v. Judges José Suing and Gustavo Durango, 20 December 2013.
7 In Juan Quevedo v. Servicio de Rentas Internas, the tax court of first instance ruled that even companies not having net worth and that only represent individuals are subject to anticipate income tax, which applied to double tax individuals. The National Tax Court refused to hear the case.
8 Resolution of the Foreign Commerce Committee dated 10 October 2016.
9 Bananera Noboa SA v. Servicio de Rentas Internas.