Navigating Ecuador’s Tax Reforms Requires Negotiation, Planning

Ecuador has implemented a series of fiscal reforms to improve its standing with international organizations, show its commitment to fiscal stability, and prove its ability to meet international financial commitments.

The reforms increase value-added tax and tax on outbound currency transfers, or ISD; implement special contributions; create tax benefits for new investment; and implement self-withholding tax for large taxpayers.

Ecuador also can take advantage of a 48-month arrangement with the International Monetary Fund that gives the country access to $4 billion. The IMF executive board’s May 31 decision allows an immediate disbursement of $1 billion to Ecuador.

The government also announced on June 26 plans to eliminate decades-old fuel subsidies sometime in July. Subsidies for liquefied natural gas and diesel will remain in effect but fuels known as “extra” and “ecopais” used by taxis and small vehicles will be affected. Officials have said that taxi owners will be compensated with a monthly bonus to prevent an increase in their prices.

The fiscal reforms,while controversial to some, are necessary to address the country’s economic and fiscal challenges. By balancing the need to increase revenue with incentives to promote investment and economic growth, the government seeks to stabilize public finances and foster sustainable economic development. Below is a breakdown of the most significant changes and some steps companies should consider to adjust.

Increase in VAT. The VAT rate rose to 15% from 12% effective April 1. The increase aims to finance public spending on security and reduce the fiscal deficit.

While the higher VAT rate may slow down short-term consumption, it enhances the country’s fiscal sustainability by increasing state revenues. In the long term, more balanced fiscal management stabilizes the economy and fosters investor confidence.

Taxpayers operating in the Ecuadorian market should analyze in detail the applicable tax rate on the goods and services they market, as well as the inputs that make up their cost (depending on the goods or services, rates may be 0%, 5%, or 15%). Doing this will mitigate the impact on cash flow and results, as well as on pricing strategies.

They also should leverage VAT paid as a tax credit or expense, defer tax payments for credit sales, and establish robust accounting systems to ensure proper compliance and optimization of the tax burden.

Increase in ISD. The ISD, which taxes outbound currency transfers, rose to 5% from 3.5% effective April 1. This hike aims to control capital outflows and protect international reserves. Although the ISD increase may have some short-term costs, it It boosts fiscal revenue, enhances internal investment, and strengthens economic sovereignty in a country that doesn’t print its own currency.

To mitigate the impact of this measure, taxpayers operating in the Ecuadorian market should focus on using fiscal benefits, investment contracts, and exemptions provided by law to help in their capital structure. They also should consider negotiating balance compensation agreements, optimizing international costs and expenses, planning international transfers by splitting payments, taking advantage of favorable exchange rates, and using tax credits to import goods.

Special contributions. Non-individual Ecuadorian residents must pay temporary contributions. Companies and permanent establishments are levied with a temporary security contribution, or CTS, payable in two installments due in March 2024 and 2025. Financial institutions such as banks and credit unions paid a temporary contribution, or CTUBC, in May 2024.

These contributions aim to strengthen Ecuador’s capacity to finance urgent needs and improve economic and social stability.

The base for calculating these contributions is the taxable income for income tax for fiscal year 2022 for CTS, and 2023 for CTUBC, so taxpayers should verify that the income tax settlements for these periods are consistent with fiscal regulations—determination of taxable and exempt income, deductible and non-deductible expenses, and other reconciliation items.

If the tax base isn’t correct, taxpayers may end up paying more than necessary, affecting their financial results with non-deductible expenses.

The legality and compliance of these contributions with the constitutional tax principles of Ecuador could be questioned, as they may cause double taxation. The country’s Constitutional Court is analyzing this issue.

Tax benefits. To promote economic growth, the Ecuadorian government has implemented exemptions and tax reductions for new investments in strategic sectors, including:

• Inclusion of nonresident individuals in the special tax residency regime (paying income tax exclusively on income earned in Ecuador)
• A 0% income tax rate for the first five years for operators or users of free trade zones
• A 10-year income tax exemption for new investments in renewable energy generation projects and natural gas or green hydrogen industrialization
• A seven-year income tax exemption for new investments in tourism projects in Ecuador
• A tax stability agreement for general income tax, applicable for up to five years
• ISD exemption for payments abroad by national and foreign airlines operating within, from, and to Ecuador with an operating permit issued by the aviation authority.

Self-withholding for large taxpayers. Implementing self-withholding for large taxpayers is an administrative measure aimed at improving tax collection efficiency and reducing tax evasion. This system obliges large companies to self-withhold and pay the tax authority a rate between 1.25% and 10% on their taxable income, ensuring a constant and predictable source of fiscal revenue.

To comply, large taxpayers must thoroughly verify and determine the income received, ensuring it’s accrued according to accounting standards and determining whether it’s subject to income tax. Taxpayers may request a review and reduction of their assigned tax rate.

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 and Andrés Álvarez Toapanta are partners at Almeida Guzmán Asociados.

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