Tax Initiatives in Ecuador Stall After Lasso Dissolved Congress

On May 17, Ecuador President Guillermo Lasso made a historic decision to dissolve Congress and to call for early elections. This measure, never previously applied, is known as “muerte cruzada” and is allowed by the 2008 Constitution. Even without the National Assembly, the president will have a difficult, if not impossible, task of governing in the next six months.

Until the new authorities take office, the president can enact laws considered to be of economic urgency, subject to the favorable opinion of the Constitutional Court. The outcome of two such laws is discussed below.

Strengthening the Family Economy

After Lasso dissolved the National Assembly, the project for the Organic Law for the Strengthening of the Family Economy was issued as a decree-law under the provisions of Article 148 of the Constitution of the Republic. It will enter into force, as the constitutional court issued its favorable opinion on June 16.

The objective of the law is to strengthen the family economy and small businesses, following the principle of progressiveness of the tax burden.

The law provides that natural persons may apply for a reduction in income tax payable. In order to establish the maximum amount of the rebate, certain rules apply. Deductible personal expenses include clothing, education, food and health care, as well as expenses attributable to pets. Expenses for rent or interest paid on house loans, payment of alimony, and national tourism in registered establishments are also deductible.

Regarding the RIMPE (special income tax regime for entrepreneurs and small businesses), taxpayers categorized as entrepreneurs must charge tax value-added tax on transfers of goods, rights, and provision of services, in accordance with the provisions of the law. However, the transfer of ownership of movable property, rights, and the provision of services carried out by popular businesses will be taxed at a 0% VAT rate. Small businesses are exempt from filing VAT returns.

Likewise, payments made to taxpayers categorized as small businesses won’t be subject to income tax withholding. Payments to taxpayers defined as entrepreneurs will be subject to withholding of income tax and VAT according to the percentages established by the Internal Revenue Service through secondary regulation.

The law establishes that no withholding of income tax or VAT will be made for taxpayers categorized as entrepreneurs when payments are made through credit or debit cards, collection or debit agreements, or other electronic means.

Promotion of Foreign Investment

On May 23, the president announced a new decree-law regulating free-trade zones. This decision came as a result of the failings of the current free-trade regime.

The new law was oriented to the promotion of exports, with the purpose of implementing a series of newly executed commercial treaties between Ecuador and countries including China, South Korea, and Costa Rica.

Under the new law, the free-trade zones would have benefited from an exemption from income tax for 10 years, and if the zones were located in certain areas, for up to 15 years. After that period, they would have had a reduction of 10 percentage points in the income tax rate until the expiration date of the free-trade zone. In addition, free-trade zones would have been exempted from certain taxes and tariffs levied on imports and exports, as well as from the capital outflow tax, the Impuesto a la Salida de Divisas, ISD.

According to a statement from the constitutional court, judges Carmen Corral and Richard Ortiz issued an “unfavorable opinion” on June 16, considering that the provisions of the decree on investments and free trade zones “disrespect article 148 of the Constitution,” meaning that the court doesn’t consider the decree of economic urgent importance.

Looking Forward

The president’s low popularity is a cause for concern. Even with the issuance of the constitutional measure described above, he may experience turmoil related to the issuance of new laws during the remaining period of his term. The president has notified the National Electoral Council, so that it can call for elections. These will take place during August, and in September if no candidate obtains at least 50% of the vote.

At the date of writing, eight candidates have expressed their intention to participate in the elections. There is a high possibility that candidates associated with Rafael Correa’s movement will have a good chance of winning the elections, despite Otto Sonnenholzner’s and Yaku Pérez’s prospects of advancing to the second round of the elections. There are also outsiders, like Jan Topic, who have been shown to have popular support.

The current political instability is a cause of concern for investors, who will likely choose to withhold investment until after the new elections.

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 Marco Moya is director at Almeida Guzmán & Asociados.