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Ecuador: Tariffs and Taxes Reduced to Boost Competitiveness

Aug. 10, 2021, 7:00 AM

Since Ecuadorian President Guillermo Lasso took office on May 24, 2021, the beginning of the new administration has been marked by significant social and economic developments and achievements.

During his political campaign, President Lasso offered an ambitious vaccination program that aimed to provide 9 million vaccines in his first 100 days in office to protect Ecuadorians and stimulate the economy. This goal was achieved earlier than expected, as the government announced that it had reached its target on August 1, 2021.

On the economic front, investors have seen significant progress as the returns on the nation’s bonds have significantly improved, surpassing 28% this year according to a Bloomberg Barclays index.

As a petroleum exporter, Ecuador has been aided by rising oil prices, as well as by optimism from private investors resulting from the steady vaccination process, the announcement of import duty reforms taking effect on August 1, 2021, and a potential tax reform to comply with the International Monetary Fund (IMF).

Given the political instability of the South American region as a result of Colombia’s violent protests over proposed tax reform, Chile’s instability ahead of elections, and the Peruvian post-election turmoil, investors in the region have turned their attention towards the market-friendly Ecuadorian regime.

These regional events have also raised awareness of the procedures Ecuador needs to follow to implement the general terms established by the IMF; therefore, careful planning and and discussion with the parties involved is being considered before proposing tax reforms to the National Assembly.

Reduction of Import Duties

On July 9, 2021, the Ecuadorian Foreign Trade Committee (COMEX) issued Resolution No. 009–2021. The Resolution calls for the elimination and reduction of 667 tariffs on supply products, raw materials and capital goods starting on August 1, 2021.

Import tariffs on computers, computer equipment, several spare parts for cars and machinery, agricultural tools, carpentry tools, and industrial tools have been completely eliminated. The Resolution also calls for reducing import tariffs from 25% to 5% on digital cameras, and from 30% to 10% on bicycles.

Officials estimate the cost savings and reductions will total over $180 million, benefiting economic sectors such as agriculture, construction, transport, tourism, manufacturing and healthcare.

In an effort to increase competitiveness, 1,862 tariff subheadings have been eliminated from the list of products subject to the presentation of prior import control documents (DCP), in order to facilitate, expedite and make the management of trade more transparent. The decision was adopted by COMEX through Resolution 010-2021. The Ministry of Production estimates that this action alone will benefit around 30,000 commercial operators in terms of reduced paperwork and additional costs.

Reduction of Capital Outflow Tax

As part of his presidential election campaign promises, President Guillermo Lasso and his economic team, led by Finance and Economy Minister Simon Cueva, have been considering the progressive elimination of the 5% capital outflow tax (ISD) over four years. This tax was initially created with an extra-fiscal nature, as its purpose was to keep money circulating inside Ecuador and prevent capital from being sent abroad.

The first part of the reform related to ISD was announced on August 1, 2021 and includes the elimination of ISD for airlines. Apart from the imminent reduction of costs, eliminating the 5% tax will also benefit Ecuador in its goal to sign commercial treaties with the U.S. and other commercial partners. The reform is also aimed at attracting tourism by increasing connectivity and reducing operational costs for airlines.

Although more eliminations and reductions of ISD are expected, the government has been cautious about announcing further changes, given that the income it receives from this tax is significant, and reductions will impact the national budget in the short term.

Future Tax Reforms

It is important to remember that in 2020 Ecuador approached the IMF and obtained approval for a 27-month extended arrangement under the Extended Fund Facility for Ecuador.

Under the new deal, the country will receive a total of $6.5 billion in order to stabilize the economy, expand the coverage of social welfare programs, ensure fiscal and debt sustainability and strengthen domestic institutions, to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Ecuadorians.

Under the agreement, national authorities were expected to implement a progressive tax reform by the end of September 2021. As a result of the turmoil in the region, the Colombian social unrest, and the re-engineering of Ecuadorian economics, at the date of this article there is uncertainty as to whether President Lasso will present a tax reform to the National Assembly in August or September, or if the IMF will extend the deadline for the implementation of the tax reform. An IMF special mission is due to hold meetings with Ecuadorian officials during the month of August.

Minister Cueva has hinted at potentially initiating discussions on the tax reform with political leaders and the private sector in August and September. Under the Ecuadorian Constitution, proposed tax reforms will need to be approved by the National Assembly.

Regardless of any amendment to the current tax law, it is evident that the Internal Revenue Service (SRI) must implement administrative procedures to optimize its operations: the SRI is perceived by the private sector in Ecuador to be overly bureaucratic. In this context, administrative reform is needed to facilitate tax collection and the resolution of legal disputes between the state and taxpayers.

Other Developments

After a prolonged period of skepticism and caution from the international community, and rejection by past Ecuadorian governments, Ecuador has finally started to discuss potential agreements with important business partners such as the U.S., Mexico, Panama, the Dominican Republic and ultimately the Pacific Alliance.

Signaling an improving commercial relationship with the U.S. (Ecuador´s largest trade partner), in July 2021 a bipartisan delegation of U.S. Senators held in-person meetings with President Lasso and other Ecuadorian cabinet members to discuss economic programs, the growing bilateral trade relationship, and cooperation in matters of security and anti-narcotics surveillance and control.

Discussions are currently being held with Mexican officials in order to relaunch negotiations of a potential trade agreement that will pave the way for Ecuador’s entry to the Pacific Alliance. The government is also holding discussions with Central American and Caribbean countries, as they are perceived as destinations of interest for the exportation of industrial goods such as vehicles and domestic appliances.

Finally, after years of distancing itself from the International Centre for the Settlement of Investment Disputes (ICSID), due to the country’s denouncing the treaty in 2009, Ivonne Baki, Ecuador’s ambassador to the U.S., signed the Convention in June of 2021. President Lasso then ratified the Convention on July 16, 2021, and the Ecuadorian Constitutional Court has ruled that the ratification by the President is binding and does not require approval by the National Assembly. International Investors will once again be able to opt for investment dispute settlement at ICSID, boosting confidence by guaranteeing an impartial dispute resolution process.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Diego Andrés Almeida is Administrative Partner and José Urízar Espinoza is Corporate and Commercial Partner at Almeida Guzmán & Asociados.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

The authors may be contacted at: daa@almeidaguzman.com and jurizar@almeidaguzman.com