This section provides you with a summary of the Ecuadorian tax overview reported by International Business (2016). The Internal Revenue Service (IRS) is the public entity in charge to act as the maximum and central administrative tax authority for national taxes. The Customs National Service is the central administrative authority regarding customs taxes. Both authorities are entitled to issue administrative resolutions or circular letters in order to improve and clarify the application of tax laws, to provide a better understanding of the rules, to establish additional regulations, or any other similar.
The following are the most important taxes to be paid in Ecuador:
- Individual income tax
Individuals are subject to income tax at a variable rate from 0% until 35% depending on the amount of the obtained income.
- Corporate income tax
Local and foreign entities, domiciled in Ecuador or not, are subject to this tax on their corporate worldwide taxable income. The standard rate of Corporate Income Tax (CIT) is 22%. CIT rate could be increased up to 25% if 50% or more of the corporate capital of the entity is owned by shareholders, stockholders, beneficiaries, or similar domiciled in tax heavens or lower tax jurisdictions. In cases where the beneficiaries’ participation is less than 50%, the CIT rate will be 25% only over this portion (as a proportional corporate income tax rate). Companies that reinvest their profits in Ecuador and use them to acquire assets for productive activities in Ecuador are entitled to a reduction of 10% in the corporate income tax rate on the reinvested amount. This only applies if they retain the reinvested profits by 31 December of the tax year following the tax year in which the profits are earned.
- Transfer pricing regime
Transfer-pricing regulations in Ecuador are based on the Organization for Economic Co-operation Development (OECD) rules, requiring that all transactions among related parties must be conducted in accordance with Arm’s Length Principles. The Fiscal Authority has established that, in order to determine the compliance with the Arm’s Length Principle by the transactions between associated parties, the taxpayer must establish the most appropriate valuation method. Taxpayers involved in transactions with related parties are exempt from the application of the transfer-pricing regime if it satisfies the following conditions:
• Their corporate income tax is higher than 3% of taxable income.
• They do not conduct business with residents in tax havens or lower-tax jurisdictions.
• They do not have contracts with government institutions for the exploration or exploitation of non-renewable resources.
For those taxpayers that executed operations with related parties for more than US$ 3,000,000 it is mandatory to file the transfer pricing annex. If the operation amount is higher than US$ 15,000,000 in addition to the Annex, the taxpayer will have to file the TP Report.
- Income tax advance payment
Tax payer’s entities should be subject to determine an income tax advance payment after the fifth year of initial operation. The law understands as initial operation when start production and sells. This payment is made in two installments due in July and September.
- Withholding income tax
All payments made by companies to third parties, whether in Ecuador or abroad, are subject to an income tax withholding rate. A 22% income tax withholding is generally imposed on cross border payments.
- Value Added Tax (VAT)
Value Added Tax rate is 12%. Nonetheless, some transfers are subject to a 0% rate. Ecuadorian legislation states that the importation of services is subject to VAT. The Ecuadorian tax payer that acquires imported services is compelled to pay the 100% of VAT through a self-assessment method and could consider this payment as Tax Credit for VAT monthly tax returns. The importer of the services will add the 12% VAT to the price of the services and withhold the VAT and pay it on behalf the Ecuadorian IRS. VAT return shall be filed in the next month in which the levied transactions were made.
- Customs taxes
• Ad Valorem Import Duties: The duties on imports are variable between: 5%, 10%, 15% and 20% (35% for vehicles).
• Value-Added Tax (VAT): 12%, except some goods subject to a 0% VAT rate.
• Special Consumptions: applies to the import of cigarettes, beer, soda, alcoholic beverages and alcoholic products other than beer, motor vehicles for land transportation of up to 3.5 tons of load capacity, airplanes, small airplanes, helicopters, personal watercrafts, three-wheeled vehicles, four-wheeled motorcycles, yachts, and recreational vessels.
• FODINFA (Children Development Fund): 0.5% tax on the CIF value of the import earmarked for the Children Development Fund. Other applicable taxes.
- Currency Exportation Tax: All Ecuadorian taxpayers are subject to a 5% tax on currency transferred abroad, regardless of whether the transaction is made with the intervention of a financial institution.
- Real Property Tax: It is based on the value of the property.
- Profit Sharing is required by the Labor Code to be payable to all company’s employees as the right of employees to participate in the profit
of a business for an amount equivalent to the 15% over the net profit (income less costs and expenses)
The two most relevant tax incentives are:
• Companies will not have to pay Income Tax advance payments for 5 years counted since that the taxpayer begins its operation.
• Companies are allowed to 100% depreciation and amortization deduction related with technology and equipment to: clean production, renewable energy generation, reduce environmental impact, and reduce greenhouse gas emissions.
The Organic Production Code, aiming at sustainable developing the country its economy, defines a new investment as the discharge of economic resources in order to increase the national economy, improving the productivity and increasing employment opportunities. For these investments Corporate Income Tax will be exempted for 5 years starting the first year that the new investment generates incomes. The rules only apply to entities incorporated after January 2011 which are located outside Quito and Guayaquil. The incentives apply to a number of sectors including fisheries and aquaculture production.
ZEDE zones are designated as custom zones which have additional benefits (on top of those above mentioned) for legal entities established in this area. The following incentives apply:
• A five-year exemption of income tax payment for new investments in sectors that contribute renewable energy, substitution of imports and the promotion of exports.
• After the fifth year, the CIT tax rate will be 5% lower than the general applicable CIT (currently 22%)
• In addition, imported goods will be levied with 0% VAT rate.