Volume 6, Number 2, Page 2

Ecuador: New Tax System on Movements of Capital

By José Rumazo

Ecuador’s new ICC tax creates a one percent tax on movements of capital and, most importantly, replaces the application of income tax in such transactions. The tax is to be implemented in one-year periods, renewable if revenues of at least three percent of Ecuador’s gross domestic product are received via the new tax. The tax’s provisions are included in the Economic Reorganization 98-17 Law of December 1998, which took effect January 1.

In other words, income tax on movements of capital by individuals and corporations has been replaced as of 1999 by the new ICC tax, which also involves the suspension of constant value units (UVC´s), or in a foreign currency) processed via the institutions that make up the NFS, including offshore institutions.

Tax Event

The ICC tax is applicable to any amounts credited or deposited in checking accounts, savings accounts, term deposits or any other means of investment or savings, remittances of checks, transfers or payments of any kind sent abroad, with or without the participation of NFS institutions. The tax shall be declared and paid by the sender within two working days following the remittance, transfer or payment sent abroad.

Beneficiary of the tax

The beneficiary of the ICC tax is the Ecuadorian State, which shall manage it through the Ecuador Internal Revenue Service (SRI).

Taxpayers

All individuals, private legal entities (such as corporations) and public institutions, regardless of their purpose, that receive remittances are subject to the ICC tax.

All individuals, private legal entities (such as corporations) and public institutions that are beneficiaries of the deposit of capital are subject to the ICC tax.

Anyone, with or without the participation of the NFS, that issues checks, transfers or remits money abroad during the course of business shall become a withholding agent and shall pay the tax two days after such transactions are processed.

Taxable Base

The taxable base for the ICC is the amount credited or deposited or the amount of the check, transfer or draft sent abroad.

Exemptions

Ecuadorian Social Security Institute benefits deposited in checking or savings accounts are exempt; as well as amounts credited and deposits made by way of social security contributions and reserve funds by employers and insured employees to the Ecuadorian Social Security Institute.

Any amounts credited or payments made to Financial System entities to pay for the compensation of public sector employees, as well as the poverty or solidarity allowance are not subject to the ICC tax. Likewise, payments made to the beneficiaries of the above mentioned allowance are also exempt.

Withdrawals from savings accounts or automatic teller machines are exempt.

Prohibitions on the payment of checks

Payment of checks to persons other than their first stated beneficiaries is prohibited. A second endorsement shall be null and void; therefore, banks shall not cash checks with a second endorsement.

However, second endorsement is solely permissible when the holder deposits it with a financial company, savings and loan association or savings and credit cooperative; and then only for purposes of depositing such amounts in the accounts that they represent since they do not resort to the clearing house mechanism of the

Central Bank of Ecuador.

Tax Credit

The tax created under this Law qualifies as income tax. In consequence, taxpayers subject to the tax on movements of capital are entitled to request a certificate from the Internal Revenue Service stating the total amount paid each year on account of the tax created by the Law. This certificate allows payers of income tax abroad to request relevant deductions or reductions in tax in order to prevent double taxation.

The United States does not grant credits for any foreign tax designed to operate in lieu of generally established income tax. Such a tax is designed to impose taxation on a specific group of taxpayers for whom determination of net profits under traditional principles would be difficult from an administrative standpoint. Finally, it should be noted that such a tax is only creditable if an income tax system exists that is applicable in its place.

José Rumazo is an attorney with Pérez, Bustamante y Pérez in Quito, Ecuador.