Understand crucial reforms of Ecuador’s taxation and accounting compliance regulations, and what should be expected for the year 2020 on Ecuador’s tax front.
The country’s President Lenin Moreno is trying to reform the economy and improve the business environment with the help of the International Monetary Fund (IMF). An important part of these attempts was a major tax reform at the end of last year.
18 tax reforms were implemented between 2007 and 2017. What were the effects on Ecuador’s tax system and how does it look now?
Timeline of changes in Ecuador’s taxation and accounting compliance
President Rafael Correa, who had his presidential term from 2007 to 2017, announced from the beginning of his campaign that his intentions were to remove inequalities, distribute wealth and achieve social justice.
He also sought to eliminate commercial activities connected with tax havens.
As Ecuador is a dollarized economy, it was not an option to use an exchange rate policy as a tool to balance public finances. This led, in 2012, to the creation of the controversial foreign currency exit tax.
In order to support investment in national production, encourage the use of environmentally friendly technologies, support strategic economic sectors and encourage job creation, the government issued the Organic Code of Production, commerce, and investments in 2010.
The Moreno government
The Moreno government is seen as more pro-market than Correa. The Government attempted to make certain reforms last year. But protests stopped the government to make these reforms. This makes it an unsure period for foreign companies and entrepreneurs because they do not know what remains after the dust has settled.
The elimination of the advanced payment of income tax as a minimum income tax and the elimination/reduction of the foreign currency exit tax is what the business sector calls for the most.
Details of the tax reform from December 2019
The elimination of the advance payment of income tax as a minimum tax was one of the most important reforms on Ecuador’s tax system in 2019. Companies were having to pay this tax even when they made losses.
The item which was most strongly rejected by the business sector was the implementation of the single and temporary tax contribution that every company with a taxable income greater than US$1 million had to pay for the first three years.
An additional important reform is the application of a 25% withholding tax on 40% of dividends paid to non-residents. These were exempt from the income tax in the past.
Ecuador taxation and accounting compliance in 2020
In the accounting area since January 2012, Ecuador has been governed by international financial reporting standards (IFRS). For this reason, it is that the Superintendency of Companies, the country’s main financial regulator, requires the submission of financial statements under this regulation. This allows foreign investors to globally analyze the financial situation of Ecuadorian companies.
Also, in Ecuador there is the Internal Revenue Service (SRI), a regulatory body in charge of collecting taxes declared by natural and legal persons.
The main taxes to be declared are the value added tax (VAT), withholdings on the income source, and the annual income tax.
Income tax is considered the most important because based on the financial statements used for its declaration, the profit to be distributed among the workers of the companies is determined. It is important to detail that in Ecuador the income tax is 15% of the profit after taxes.
The Organization for Economic Co-operation and Development (OECD)
Thanks to the Moreno government, the relationship between Ecuador and the OECD has become closer. Ecuador is in need of external financing to cover its debt through loans with multilateral organizations. The country has taken the first steps to join the OECD and comply with international standards.
Ecuador became part of OECD’s Forum of Transparency and Information Exchange in May 2017. In September 2018, Ecuador signed the multilateral agreement between governments on automatic exchange of information. Ecuador can automatically share information with the application of the common reporting standard (CRS). This is related to financial accounts abroad with over 100 jurisdictions in the fight against illegal financial flows.
Comply with Ecuador’s taxation and accounting regulations with the help of an expert
Biz Latin Hub’s regional knowledge of Latin American business environments, markets, and legal systems makes us the perfect partner for your expansion into Ecuador.
Our specialists provide trusted, comprehensive accountancy, professional employment, legal, and other market entry and back-office services. We support foreign executives to make the most of Ecuador’s complimentary economic resolutions.
Contact us today here for tailored advice from our team of experts.
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