When starting a business anywhere in the world, political vigilance is essential. Being aware of the government of the time, their import/export policies and any upcoming reforms can be decisive in the success of your business. Time after time, businesses are caught out by simply not being aware of their current political conditions.
Like most of Latin America, Ecuador is increasing its awareness of international business and investment opportunities. More and more foreign investors are seeing the small nation as an increasingly exciting and fruitful place to do business.
Ecuador’s government recently made a raft of resolutions to support business activity and address other items on its agenda. We outline the potential impacts for business in the country.
Understanding Tax Reforms in Ecuador?Ecuador business and political climate
Cheap labor, an educated workforce, global maritime trade ties, a straightforward business sector, and a stable, business-minded new government make Ecuador one of the most attractive locations in Latin America for foreign investors. Its recent challenge has been to build sustainability and further reinforcement into its economic performance and policies year on year.
Recently, Lenín Moreno, Ecuador’s President since May 2017, announced 6 economic measures and 13 reform proposals. These economic changes have been nicknamed “the package”. The most recent proposed changes are the second round of economic reforms this government has put in place to alter Ecuador’s current negative debt trajectory. The majority of these reforms are positive for business owners whilst others look to be more limiting.
What are the relevant changes?
- Reduction on tariffs for machinery, equipment and raw materials needed for the primary sector (i.e. mining, farming, forestry, and fishing)
- Businesses in the primary sector who export their goods get automatic tax refunds.
- Import tax on technology including mobile phones, computers, and tablets will be abolished.
- Foreign exchange tax for raw materials will be abolished.
- There will be a reduction of tax for vehicles used in the productive sector of less than USD$32,000.
- Workers on occasional or temporary contracts will receive 20% less pay.
- Companies with an income of over USD$10 million will incur an added tax contribution for three years.
- New labor regulations come in meaning new contracts must abide by new maternity/paternity regulations, as well as slightly updated retirement contribution options for employees where they can up their monthly tax-free contribution to their pensions by 2%.
How could these changes benefit business?
On the whole, businesses will be relishing at the opportunities this new ‘package’ of reforms will bring. Particularly those in the primary sector, such as farmers, mining and energy companies could view this as a tax break. Updates in machinery and equipment across the world have rapidly advanced the primary sector, making operations more efficient and more sustainable than ever. Incentivizing new machinery through tax reductions is a sure way to prop up the primary sector and invite more businesses in.
Two other reforms primary sector businesses will be excited about are the abolition of raw materials’ foreign exchange tax when exporting and the immediate tax refund export companies will get. Mining is Ecuador’s largest sector contributing the highest proportion to GDP every year. Other recent law reforms have opened up new mining opportunities in Ecuador for foreign investment. By encouraging this sector to grow, the government is expecting a knock-on effect to take place across the rest of the country, and attract more international mining investors.
The move to reduce temporary contract minimum wage by 20% can definitely be considered an advantage for business owners. The objective of the reduction is to entice occasional workers on to full term contracts with a more stable social security system.
Other potential effects of ‘the package’
On the whole, these changes are expected to boost business in Ecuador however, there are one or two reforms that big businesses should be aware of. Most notably, there will be an increase in tax for USD$10 million-plus income companies. However, this contribution is only payable for 3 years before it becomes null and void. The capital generated from this move is expected to generate an added USD$300 million per year for the government which will be reinvested into health, education, and safety.
There will also be an elimination of fuel subsidies provided by the government. These subsidies exhausted USD$1.6 billion from the government’s budget last year alone and. It is a move that was considered necessary to promote the further growth of the nation as a whole. In place, the government has vowed to offer an extra USD$15 per week to the 300,000 poorest families in the country.
Economic turnaround in Ecuador
Ecuador is at an exciting juncture in its economic history. Just at the start of this year, they released a number of other economic reforms and are focussed on bringing further technology and investment into the country. These were put in place to fix the country’s debt problem, create jobs, protect poorer communities and fight corruption. The program received international recognition with a USD$4.2 billion prop-up fund from the International Monetary Fund.
With the most recent set of economic reforms set by Moreno, it can be expected that Ecuador will make a turnaround from its recent annual GDP losses. With a more hawkish economic policy, there is no reason why Ecuador cannot join its other successful Latin American counterparts. Their maritime trading expertise, their skilled workforce, their rich fertile soils, their mining prowess alongside their new economic platform are sure to make Ecuador a future economic power in the region.
Make the most of these reforms with a Biz Latin Hub partnership
Biz Latin Hub’s regional knowledge of each Latin American political system, market, and legal system makes us the perfect partner for your expansion.
Our services include accountancy, professional employment, legal services, and specialized company incorporation. We can help you make the most of Ecuador’s complementary economic resolutions.
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