Volume 5, Number 22, Page 2

Update on Ecuador

by Pérez Bustamante y Pérez

New Monetary Law and the State Bank

The Monetary Law has been amended with respect to the Central Bank of Ecuador. Article 70 of the Law defines the Central Bank as a public corporation having indefinite duration, technical and administrative autonomy and its own corporate assets. Its function is to establish, control and enforce the State’s monetary, financial, credit and foreign exchange policies, and its objective is to stabilize the local currency. The Central Bank’s organization, functions and powers are governed by this Law, its statutes and internal regulations, and the regulations and resolutions issued by the Bank’s Board of Directors.

According to the amendments, the Board of Directors (which replaces the existing Monetary Board) is the top governing body of the Central Bank. The Board shall be composed of five members, as established in the Constitution, elected by the National Congress based on a proposal submitted by the President.

Members of the Board of Directors are to be elected to a six-year term, with partial renewal every three years. One of its members shall be elected Chairman for a three-year term.

Removal of a member or members shall be proposed, upon justifiable grounds, by the President and resolved by the National Congress.

(Law 12 of the National Congress, Supplement to Official Register No. 20 of September 7, 1998.)

Reforms of the Law on Development of Production of the Province of Loja

The Law for Developing Production and Preventing Population Drift from the Province of Loja, which was published on August 12, 1996, has been amended. The Law provides tax benefits for new industries and for existing industries that expand their capacities in farming, handicraft, mining, forestry and tourism.

The above-mentioned amendments consist of the following:

Activities in the following industries have been added to the list of enterprises eligible for tax benefits: the hotel industry, education, health, transfer of technology, generation of electric and alternative power, defense of ecology and the environment, industries involving goods not available domestically, and those engaged in the transformation of raw material or mineral resources into materials required for the manufacture of medicines.

The period for which tax exemption is applicable has been extended from ten to fifteen years as per the following rates:

1. The period for which 100 percent exemption from customs duties, income tax and VAT on imports of machinery and equipment applies has been extended from five to eight years.
2. The period for which 75 percent exemption from the above mentioned assessments applies has been extended to four years.
3. The final period of 50 percent exemption from such assessments has been extended to three years.

The following benefits have been added:

1. Exemption from real estate taxes for five years.
2. Exemption from taxes on the incorporation of companies and other corporate acts.
3. Full exemption from taxes on transfer of ownership or contribution of real estate.

Foreign investors shall have the same rights, benefits and obligations as national investors. Their investments shall not require an authorization but must be registered; and they shall be entitled to transfer abroad, in freely convertible currency, the amount corresponding to their investments or reinvestments as well as profits, royalties and income derived from intangible assets.

(Law 98-11, Supplement to Official Register No. 20 of September 7, 1998.)

Health Registration

Decision 418 of the Andean Community Commission contains rules on the issuing of health registrations. These regulations apply to goods registered in a member country that require a health registration for marketing in the other member countries. Such other countries shall ensure that the appropriate national authorities issue a resolution within thirty business days following filing of the corresponding application; and in the event of the failure to issue a resolution in relation to the application for registration within such term, the application shall be deemed granted. Against this background, regulations to the above-mentioned Decision 418 have been issued, which establish, among other things, the following:

1. For the purposes of Decision 418, it is understood that the goods referred to therein are those manufactured, marketed and used in the member countries.
2. The goods referred to in the above-mentioned Decision originating from one of the member countries shall be pharmaceutical products.
3. Should the General Secretariat decide to issue evidence of approval of health registration, it shall previously notify the interested member country on the adoption of such measure.
4. It is made clear that the above-cited procedure for health registration does not include anti-plague agents.

(Decision 437 of the Andean Community Commission, Official Register No. 23 of September 10, 1998.)

Reforms of the Tax Regime Law

The Tax Regime Law has been reformed with regard to the Value Added Tax. Some of the most important reforms are the following:

Article 54 concerning goods and services taxed at a zero rate was amended as follows:

1. Olive oil was included in the list of VAT-exempt commodities.
2. With regard to canned seafood, only tuna fish and sardines are now exempt from the VAT, as the generic term “seafood” was deleted.
3. In order for fertilizers, insecticides, pesticides, fungicides, herbicides and parasiticides to be VAT-exempt they shall fulfill the requirements of not being harmful to the environment or health.
4. Chassis of vehicles for passenger transport were removed from the list of goods taxed at a zero VAT rate, and are therefore subject to such tax.
5. Anyone who transfers goods or renders services taxed at a zero VAT rate has been released from the obligation to file monthly VAT reports.
6. Anyone who transfers goods or renders services taxed at a zero rate shall file a biannual report of such transfers.

(Law 98-13, Official Register No. 31 of September 22, 1998.)

Comment

Law No. 124 in Official Register No. 379 of August 8, 1998, re: income tax deductions.

This law contains provisions that may be of great importance to individuals since they permit deduction, under certain conditions, of the VAT paid by individuals from the amount payable as income tax.

In the case of individuals who are ultimate consumers of goods and services subject to the VAT, they may deduct the VAT from income tax, provided the following conditions are fulfilled:

1. The amount of each invoice must be between 2 and 100 constant value units.
2. Up to 50% of the income tax may be offset.
3. Invoices must correspond to the tax year to which the report refers.
4. Individuals under a work relationship may offset the VAT every month against advances or in the annual tax report.
5. Invoices must fulfill all regulatory requirements.

The law is obscure and uses several terms improperly:

1. Deduction: which means an expense or cost deductible from gross income to determine net income.
2. Offset: which means the compensation of tax debts against excess tax payments.
3. Tax credit: which means a direct imputation to taxes payable for the fiscal year.

Although these three terms are used as synonyms in the law, the actual intent is to provide for a tax credit, which means that the VAT paid under the conditions established may be imputed to the fiscal year’s income tax up to 50% of the latter.

The law firm of Perez, Bustamante y Perez is located in Quito, Ecuador. Its practice areas include corporate, commercial, banks, mines and oil.