Volume 5, Number 5, Page 3
Ecuador
Congress Considers Emergency Tax Reform Measure
Extensive Changes Proposed by Interim Government
by Miguel Andrade Cevallos
Ecuadoran President Fabian Alarcón has sent Congress an "urgent emergency law" bill that would make extensive changes to Ecuador’s income tax laws. Under the Constitution, Congress must approve or deny a bill within 10 days when sent as an "urgent emergency law."
The bill has several far-reaching provisions — eliminating tax evasion, increasing the number of taxpayers, and making public the use of all taxes collected by the government. It is an extensive proposal, including over 125 articles that would modify or eliminate provisions of the income tax law (Ley de Régimen Tributario Interno).
Although the bill would assist in balancing Ecuador’s deficit, it is unlikely to pass as submitted. (At press time, approval or denial was due to be decided by the end of February.) The bill was proposed by an interim government that will remain in power until August. Moreover, the bill has encountered strong opposition in Congress and is opposed by many private organizations, including the Chamber of Commerce and the Industrial Chamber.
Under the bill, tax would be levied on income minus deductions and exempt income. The personal income tax rate would range from zero to 25 percent, while corporations would be taxed at a flat rate of 25 percent. However, no corporation would pay less than 1.25 percent of gross income without deductions.
The bill calls for the creation of a "tributary control document." Presentation of this document would be required to obtain a bank loan and pay municipal taxes.
Withholding taxes would apply to all payments made by corporations. Withholding rates are as follows: 2 percent on all payments without any deduction, 8 percent on all payments made to professionals such as doctors and lawyers, and 3 percent on reassurance and assignment of insurance agreements. The withholding tax would be considered a tax credit.
Corporations engaged in the exploitation and exploration of oil resources would pay a flat rate of 44.4 percent; however, if income is reinvested, that rate would be reduced to 25 percent. These corporations would also be subject to tax based on their monthly production. Corporations producing up to 30,000 barrels of oil per day or its equivalent of gas would not pay tax. Companies that produce more than 30,000 barrels would pay a basic tax of 3 percent plus 1 percent for each 10,000 additional barrels, up to a maximum of 30 percent. Contractors that find oil of less than 15 grades API are excluded from this tax.
Income obtained through capital investments that generate interest and similar operations will be subject to a flat tax. The following rules would apply:
| # days investments held |
tax rate |
| 90 |
8% |
| 91-180 |
6% |
| 181-270 |
3% |
| 271-360 |
1% |
| 360+ |
0% |
Under the bill, the VAT rate would be 10 percent on transfers of goods and services. Exemptions similar to those now in effect would apply. Some new services, such as professional services, would become subject to VAT. Also, the special consumption tax would be maintained, but rates would be changed. The bill would become effective when published.
Miguel Andrade Cevallos is a lawyer in Quito, Ecuador. This article was reprinted with permission from Tax Analysts.
