INSIGHT: Ecuador—Implications of New Law to Combat Covid-19 Crisis

As a result of the Covid-19 pandemic, the local Ecuadorian economy has suffered a significant hit. The Ecuadorian Country Risk has increased from around 1,400 points in the month of February 2020 to over 3,000 points by mid-June 2020. One of the most relevant indicators that has caused the fluctuation is the decrease in the price of oil.

However, the government has received support from multilateral agencies. Specifically, the country has received a total of $1.8 billion in four disbursements from the IMF, World Bank, and the Inter-American Development Bank. The interest rates of the previously mentioned operations are less than or equal to 2.5%. Grace periods are between three to six years, while payment terms vary from five to 20 years.

The government has implemented reforms to deal with an estimated reduction of 10% in GDP. According to the Central Bank of Ecuador, oil exports in the first quarter of 2020 have suffered a reduction of approximately 44%, compared to those of the same period in 2019.

Tax Reforms

The “Organic Law for Humanitarian Support to Combat the Crisis Derived from COVID 19,” (the Law) was published in the Official Registry on June 22, 2020, and thus became enforceable. The Law introduces minor tax reliefs, labor reforms, and other amendments to facilitate commercial settlements among creditors and debtors.

The Law for Humanitarian Support will complement various efforts by the Internal Revenue Service (IRS) and the Ministry of Economy and Finance to cope with the decrease in tax collection.

Under the Law, the IRS will recognize interest to taxpayers who voluntarily make payments of taxes in advance of the due date. Additional payment facilities are granted to individuals and companies who have not been able to comply with payment agreements under a tax amnesty granted two years ago.

Individuals will be able to deduct for tax purposes their expenses incurred in domestic tourism during 2020 and 2021. To further incentivize the recovery of the tourism sector, the Tourism Law has been reformed by eliminating the annual contribution of 1 x 1,000 over fixed assets that was levied on establishments providing tourism services.

Financial institutions are permitted to consider up to 50% of interest received as non-taxable income, if it comes from commercial, productive and microcredit loans granted to small and medium-sized enterprises. Specific conditions regarding amounts and terms apply to this tax benefit.

Labor Reforms

Several labor reforms are included in the Law. Their main purpose is to ease provisions on hiring and termination of contracts. The Law also provides for new types of temporary labor contracts.

After several changes during the formulation of the bill, the enacted Law includes a compulsorily interpretative rule regarding the application of force majeure as a mean to terminate labor contracts. Overall, it states that such cause will be applicable only when the company ceases its commercial activity.

The Law provides for labor agreements under which contractual parties can modify existing economic conditions in labor contracts. The modifications can be proposed by either the employer or the employees, and are enforceable once a majority of the headcount has come to an agreement with the employer. If the modification is essential for the subsistence of the entity and the agreement is not reached, the employer could apply for the liquidation of the company.

A new “special emergency contract” has also been introduced in the Ecuadorian labor legal regime. This new modality allows employers to hire workers for a one-year period, renewable for an extra year. It is important to highlight that previously in Ecuador, per law, all labor contracts were indefinite after the 90-day trial period. Under the new contract, the work week can be extended to six days per week, with a minimum of 20 hours and a maximum of 40 hours per week, as long as the working day does not exceed eight hours and there is a weekly resting period of 24 consecutive hours.

Employers are now allowed to implement an “emergency reduction of working hours.” To do so, they must justify the need under the argument of force majeure. The reduced working period could be up to 50% of the normal working hours, thus reducing payments proportionally, with a limit of 55% of payments. The cutback will apply for a one-year term, which can only be extended once for the same period. Contributions to the social security system will be determined over the reduced wage.

Companies that have applied for the “emergency reduction of working hours” will not be allowed to distribute dividends and/or reduce the company’s capital while the agreements are in place.

Other Reforms

The enacted law includes new terms under which meeting of creditors could take place. Despite the existence of concordat rules in the Ecuadorian legal system, the law conceives a new expedited method for the resolution of conflicts arising from commercial debts.

The new system facilitates prejudicial accords under which creditors and debtors may agree on exceptional means to extinguish, reduce, capitalize or restructure pending debts, without having to comply with complex procedures provided for by the existing legislation.

For years 2020–2023, the new law has modified the current rules on the priority of credits. Accordingly, debts arising from social security contributions and taxes have been downgraded and will be enforceable after covering other debts such as child support, salaries, medical expenses, and credits guaranteed by mortgages and pledges.

Planning Points

Although the Ecuadorian economy has been one of the most hard-hit in the region, dollarization has prevented inflation and has contributed to the stability of the economy. The new Law, as well as the legal reform projects still being analyzed by the government, will ease the impact of the pandemic on the economy. Currently, the National Assembly is revising an executive veto on the “Organic Law for the Ordering of Public Finances.”

The reduction in consumption from the private and public sector will maintain commercial sales at the minimum levels last seen in the early 2000s. The IRS has reported that sales in April 2020 reflect a contraction of 46% compared to April 2019. On the positive side, oil imports have decreased by approximately 23% compared to the same period last year, while regular imports have decreased by approximately 18%, according to the Central Bank of Ecuador. Bank deposits are nearly equal to those in the same period in 2019.

It will be important to monitor the foreign debt negotiations that are currently in place. The Ministry of Finance and Economy has added new members to the Economic Advisory Council that provides guidance to the Executive Branch in making economic decisions in the country.

International investors can take advantage of tax benefits previously mentioned, as well as exemptions from income tax, reductions of import duties, and application of extraordinary deductions to determine taxable base, among others.

Diego Andrés Almeida is a Senior Consultant and Diego Almeida Guzmán is Senior and Technical Partner at Almeida Guzmán & Asociados.

The authors may be contacted at: daa@almeidaguzman.com; dalmeida@almeidaguzman.com

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