Ecuador Introduces Reforms on Tax and Labor Issues for 2023

The Ecuadorian government recently enacted several measures to regulate tax and labor issues to be applied during the 2023 fiscal year. In late December 2022, the Internal Revenue Service (or SRI) issued a resolution updating the ranges for calculating income tax as well as the tax on inheritance, legacies, and donations, or contracts by which the property of goods and rights is acquired with non-onerous title. In the same month, the Ministry of Labor published a decree regulating the statutory minimum wage for employees for 2023, which is set at $450 per month, plus any applicable compensation.

In early January, the president issued three executive decrees by which he ordered the reduction of capital outflow tax, value-added tax levied on the provision of services related to tourism activities during specific holidays, and excise tax for specific goods.

Income Tax Rates for 2023

The SRI published Resolution No. NAC-DGERCGC22-58, which set the income tax rates for natural persons and undivided estates applicable in the 2023 fiscal year, as follows:

In 2022, beneficiaries within the first degree of kinship of a deceased individual were exempt from this tax according to law. The exemption also applied to the surviving spouse of the deceased individual, provided there were no other heirs. In 2023, beneficiaries of income from inheritances, legacies, donations, and any type of act or contract acquired with non-onerous title, will be taxed. The applicable rate ranges from 5% to 35%.

Reduction of Indirect Tax Rates

Capital Outflow Tax

Executive decree 643 orders the gradual reduction of capital outflow tax as follows:

As of Feb. 1, the rate will be 3.75%;
As of July 1, the rate will be 3.50%;
As of Dec. 31, the rate will be 2%.

This reduction is seen as a positive measure by the Ecuadorian public, as it reduces import costs while protecting the dollarized economy.

Value-Added Tax

Executive decree 644 orders the reduction of the VAT rate, from 12% to 8%, levied on the provision of services related to tourism activities during the following holidays:

Carnival: Feb. 18–21;
Easter: April 7–9;
All Souls’ Day and Cuenca Independence Day: Nov. 2–5.

Local tourism operators and customers will greatly benefit from this reduction, as the public will be incentivized to spend locally. Economic operators will have to adapt their electronic invoicing systems to comply with the reduction and issue electronic invoices. On May 27, 2022, the SRI published a resolution to establish the parameters for electronic invoicing: The main purpose of this resolution was to reduce tax evasion and paper waste when issuing sales receipts, withholding vouchers, and other supporting documents.

Excise Tax

Executive decree 645 provides for the reduction of the excise tax rate on the sale of various goods, in particular the following:

Other Tax Reforms

The SRI issued Circular NAC-DGECCGC22-12 on Dec.19, 2022, to clarify the tax deduction limits related to royalties, technical, administrative, and consulting services paid to related parties. For calculating the taxable base for the fiscal year 2023 and subsequent periods, the above will be tax deductible up to a limit equivalent to 5% of the taxable income of each fiscal year, with certain exceptions.

For fiscal year 2023, the taxpayer may request a higher limit of deductibility through an advance pricing agreement with the tax authority. The request must be filed by the last business day of February.

Going Forward

On Feb. 5, Ecuador held regional and municipal elections that have served as an indicator for the next presidential and legislative elections of 2025. Due to the effects of the pandemic on the economy as well as the security crisis that the country has faced in the past two years, it is expected that the parliamentary opposition will gain more influence in key regional governments, further obstructing the central government´s agenda, including on tax measures, for the remaining period.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Diego Andrés Almeida is the managing partner and Andrés Alvarez is a tax partner at Almeida Guzmán & Asociados.