When a company decides to move their business into a new market and open up a new office in a new country, one of the first things to be considered is the country’s tax system. Around the world every country has different tax and accounting systems – some are easier to manage than others. Therefore, when moving into a new market, companies have to determine and understand the country’s corporation tax, sales tax, dividend tax, and other applicable tax rates. Additionally, a company must be aware of the accounting standards to be applied in a particular country.
Before moving a business into a new market, it is important that a company fully evaluates these matters to determine if the company’s existing accounting, finance and tax professionals can manage this or if it is necessary to engage a local professional accounting services provider for their business. Hence, when making the management decision to move into a new market, the new country’s tax regime is of high importance and must be taken into consideration.
This article gives further insights on taxation and accounting requirements in Ecuador.
What are the Tax and Accounting Requirements in Ecuador?
The Ecuadorian tax system is friendly for foreigners since they are only taxed on income earned within Ecuador. In Ecuador, International Financial Reporting Standards (IFRS) are applied and financial statements must be submitted annually to the Internal Revenue Services and the superintendence of companies. Ecuador has 19 tax treaties and the national tax authority responsible for taxation matters within Ecuador is the Internal Revenue Service’s (SRI).
The tax authorities have three years from the date of filing to review tax returns and make changes if deemed necessary. If a tax return was filed incomplete or not at all, the period of review can be extended for up to 6 years. Usually, when an economic activity is carried out in Ecuador, companies as well as individuals, have to register before the national tax authority. Once the national tax identification number has been registered for, the RUC can be obtained.
The Ecuadorian Tax System: Corporate Tax & Value Added Tax Rate (IVA)
All companies that reside in Ecuador, are incorporated in Ecuador, or have operations and a management center in Ecuador are subject to a corporation tax rate of 22% on their worldwide income, and have discounts when disabled or senior staff are hired. Companies which are non-resident in Ecuador (all companies not incorporated in Ecuador) only have to pay income on their income sourced within Ecuador. The end of the Ecuadorian tax year is the 31st of December and taxes must be filed in April, the exact date it needs to be filed depends on the 9th digit of the Ecuadorian tax identification number.
All individuals or companies that don’t have accounting records have to pay the taxes in advance. Therefore, they have to consider the income tax of the previous year and file 50% of that tax. All companies that do have accounting records have to pay their tax advance by considering tax rates on items such as total equity, deductible costs and expenses, total assets and total taxable income. On each item, a specific tax rate has to be applied and the advances have to be paid in two parts, 50% in July and 50% in September.
Value Added Tax – IVA
The tax from which most income is generated in Ecuador is IVA, which is the Ecuadorian Value Added Tax. Currently, the tax rate for the IVA is 12% and is paid on almost all purchases of goods, imports and the provisions of services. The tax rate for exports, food, agricultural input, medical goods, books and government purchases is 0%. VAT returns must be filed monthly, between the 6th and the 28th of the following month of the transaction – the exact day depends on the company’s tax identification number, RUC.
Other Relevant Taxes in Ecuador
Apart from the normal taxes that have to be paid within the country, such as the corporation and value added tax, additional tax rates are applied and therefore have to be taken into account. Additional taxes in Ecuador are taxes on property, capital gains tax, foreign money transfer tax, and others.
Property taxes in Ecuador depend on the municipal value of the property and the exact tax percentage of the property tax depends on the city in which the property is situated in. A special part exemption applies for this tax which allows owners over the age of 65 years to pay half of the applied property tax rates. In general, it can be mentioned that the property tax rate at the moment ranges from 0.025% to 0.3% for rural property and from 0.025% to 0.5% for urban property.
Capital Gains Tax
Technically speaking, this tax rate is based on a percentage of 0.5% of the difference between the buying and selling price of the property. If the time between the purchase and the sale of the property is a year or more, discounts on the tax may be applied. However, when the time span is short, a higher capital gains tax will be applied to the sale of the property.
Foreign Money Transfer Tax (ISD) – Capital Outflow Tax
This tax applies to all monetary transactions and operations which are carried out abroad in a foreign currency. The applied tax rate is 5% and has to paid by all foreign and local companies, as well as all individuals and foreign banks when doing monetary transactions.
Penalties & Fines
As in most other countries, in Ecuador, fines, and penalties have to be paid when taxes are filed late or incorrectly. If a tax return is not filled at all, companies, as well as individuals, are subject to prosecution. If the filling is submitted incorrectly, penalties have to be paid for late payment at a fixed rate of 3% and interest has to be paid according to a quarterly changing table.
Frequency of Tax Declarations
In Ecuador, the end of the tax year is the 31st of December. Following the tax year, from the 2nd to the 28th of April corporation taxes have to be filed and paid. The exact filing date depends on the taxpayer’s identification number.
Tax on Employment Income for Individuals
The personal income tax depends on whether you are a foreign resident or a national resident. In Ecuador, all residents are only taxed on their Ecuadorian sourced income but they are not taxed on their worldwide income, meaning taxes have to be paid on all income which is received from any activity within Ecuador. All income taxes are taxed at progressive rates with a personal allowance of USD$ 11,290. If income is generated in a low-tax jurisdiction country, such as Panama, taxes have to be paid in the low-tax jurisdictions country and in Ecuador. Also if foreigners have a resident visa but work abroad for a temporary period and do not work in Ecuador during this period, they are still obliged to pay taxes on their income earned abroad in Ecuador.
Personal Income Tax
As mentioned above, income tax depends on the state of residency – all residents have to pay income tax. In order to be considered a resident, you have to be in the country for more than 183 days within a year. The income tax rate for anon-resident individuals is set at 22%. The tax rate for all residents depend on their income and is therefore taxed at progressive rates from 0% when receiving low income to up to 35%.
The employer has to file the monthly income tax for all employees, so employed individuals don’t have to deal with the tax office themselves. Self-employed income tax has to be filled twice a year: 50% has to be paid between the 10th and 28th of July and the other 50% has to be paid between the 10th to 28th of September. As mentioned before, the exact date of filing depends on the 9th digit of the tax identification number. When foreign individuals decide to move to another country they have to make sure to have paid all their income taxes as well as cancel their taxpayer identification number (RUC) if they have received one during their stay.
Personal Income Tax Table for 2017
|Taxable Income (USD $)|
|Tax on excess (%)|
|From USD $||To USD $|
Other Employee Contributions – Pension & Health
In Ecuador, there are three different agencies for the social security system; the agencies include IESS for employees and workers employed in the private or public sector, ISSPOL and ISSFA for members of the police and the military. IESS covers health, pension and work risk insurance for all employees and workers. All three systems work independently and do not coordinate with one another.
The Social Security System in Ecuador
The social security tax for employees will automatically be discounted from their monthly salary, this tax rate is based at 9.45% on their monthly income. The responsible agency for the system is the ministry of social welfare (IESS) – contributions to social security have to be made by both employer and employees. Generally speaking, all workers and employees have to pay monthly contributions which are deducted from their monthly salary. Additionally, all employers have to make an 11.15 % of the value of the monthly salaries of their workers. This amount is assumed by the employer as they cannot discount it from the salary of the worker. When an employee reaches the age of 65, a pension can be claimed, as long as he has contributed to social welfare for a minimum of 15 years. When the employee wants to retire early at 55, he has to prove a minimum contribution to the social welfare of 30 years. Regarding maternity, this insurance is covered when the employee has worked at least 360 days before leaving for maternity.
Additionally, all employers have to make additional contributions to the Ecuadorian professional training service (SECAP) and to the Ecuadorian institute of education and educational credit (IECE), each additional contribution is 0.5% of each employee’ salary, but this amount has to paid by the employer.
Contribution Rates for Workers in Private Sector in Ecuador
This table gives further insight to the contribution rates of workers of the private sector.
|INVALIDITY INSURANCE, OLD AGE, AND DEATH|
(12 monthly pensions, thirteenth, fourteenth and funeral assistance)
|ORGANIC LAW OF DISABILITIES LOD|
(General Insurance for sickness and maternity, financial allowance, health care for work accidents and occupational diseases, orthoses and prostheses)
|WORK RISK INSURANCE|
(Subsidies, indemnities, 12 monthly pensions, thirteenth, fourteenth, promotion and prevention)
We hope this article has been informative enough to give you the best understanding of the Ecuadorian tax system! If you are interested or have more questions about how valuable an accounting service can be for your business, please feel free to contact David at [email protected]. Our team of local and foreign experts at Biz Latin Hub offer a wide range of professional multilingual market entry and back office services that can help you build your company in Ecuador. If you want to learn about tax and accounting standards in other countries in Latin America, take a look at this report made by our accounting experts across the region!
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