Monthly Archives: December 2021

On December 22, 2021, the President issued the Executive Decree 298 by which a progressive reduction of the outflow tax rate was ordered until reaching 4%, according to the following schedule: 

–    As of January 1, 2022, the tax rate will be 4.75%.
–    As of April 1, 2022, the tax rate will be 4.50%.
–    Beginning July 1, 2022, the tax rate will be 4.25%.
–    As from October 1, 2022, the tax rate will be 4%.

Withholding agents must make the necessary adjustments in their operating systems to comply with the rate reduction ordered in the Decree.

Specialist in Tax
Andrea Moya, partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144

Below, we analyze the most important reforms regarding income tax, VAT, ICE and ISD introduced by the Law for Economic Development and Fiscal Sustainability After the COVID-19 Pandemic, published in the Official Registry 587, on November 29, 2021:

1. Income Tax

Deductions: The following deductions are incorporated:

• Additional deduction of 100% for the depreciation and amortization of machinery, equipment, and sustainable construction technologies.
• Additional deduction of 150% on advertising, promotion and sponsorship expenses incurred in favor of athletes qualified by the Sports Ministry.
• Additional deduction of 150% on sponsorships made schools, high schools, or non-profit entities which activity is focused on the eradication of child malnutrition and care of pregnant mothers.
• Additional deduction of 150% on expenses for organization and sponsoring of artistic, cultural events or cinematographic work.
• Additional deduction of 150% on expenses for contributing to the promotion of arts, cinema, and innovation in culture.
• Additional deduction of 100% on donations, investments and/or sponsorships of programs for protection and conservation of the environment, bio-enterprises, environmental restoration duly qualified by the environmental authority, provided that the deduction does not exceed 10% of the annual income.

The following deductions are removed:

• Additional deduction for net increase of the employment.
• Additional deduction for payments to senior citizens and returned migrants over 40 years of age.
• Deduction for the provision for wrongful dismissal and employer retirement pensions.
• Additional deductions for micro, small and medium-sized enterprises.

Payments abroad: Double taxation treaties are automatically applied regardless of the value of the payment made to the supplier. This reform applies from November 30, 2021.
 
Income obtained abroad: Those who receive income abroad that was subject to income tax in the country of origin may use as tax credit the tax paid abroad. This income is no longer considered exempt.
 
Individuals’ income tax: The maximum rate applicable to individuals increases from 35% to 37%.
Individuals will not be able to deduct personal expenses to calculate the taxable income. From the year 2022 individuals will be able to credit against the amount of their income tax an amount equivalent to:

If your annual income does not exceed 2.13 income tax fractions, the maximum amount of the credit will be the amount resulting from the application of the following formula:
 
R=L x 20%
 
R= Personal expense reduction.
L= The lesser value between the declared personal expenses of the fiscal period and the value of 7 times the basic food basket.
If your income exceeds 2.13 income tax fractions:
 
R=L x 10%

Inheritance tax: The following individuals are exempted from paying inheritance tax: (i) beneficiaries within the first degree of consanguinity with the deceased; and (ii) the surviving spouse, if there are no children entitled to inheritance.

1. Single income tax on the sale of shares.

Rate: The progressive tax rate is eliminated and a single tariff of 10% is established.
Exonerations: Transfers made in Ecuadorian stock exchanges are exonerated from payment of the tax provided that:

1. Their value does not exceed fifty income tax fractions, and
2. The amount transferred is less than 25% of the subscribed and paid-in capital of the company.

1. Value Added Tax

The following goods and services are taxed with 0% tariff since December 1, 2021:

1. Masks, oximeters, alcohol, and antibacterial gel with a concentration higher than 70%.
2. Sanitary napkins, tampons, menstrual cups, and popular disposable diapers. The term “popular” shall be defined in the regulations.
3. The importation of fuels derived from hydrocarbons, biofuels, their mixtures, including LPG and natural gas, destined for internal consumption.
4. The leasing of land for agricultural uses.
5. Services rendered by tourist lodging establishments to foreign tourists. Foreign tourists are those who legally enter Ecuador, stay in the country for less than 90 days, and do not have temporary or permanent residence in the country.

The following goods and services are taxed with a 12% tariff since December 1, 2021:

1. LED lamps.
2. Electric stoves for domestic use and those that operate exclusively by means of electric induction mechanisms, including those with electric ovens.
3. Domestic pots to be used in induction stoves.
4. Electric water heating systems for domestic use, including electric showers.
5. Membership fees charged by social clubs regardless of their value.
6. The supply of web page domains, servers (hosting), cloud computing (Cloud Computing).

1. Excise Tax (ICE)

Since December 1, 2021, the following goods and services will no longer be taxed with ICE:

1. Video games.
2. Heaters and water heating systems, for domestic use, that work totally or partially by means of gas.
3. Telephone landline services and plans that commercialize only voice, data and SMS of the advanced mobile service.

Since December 1, 2021, the following goods and services are exempt from payment of ICE:

1. Hybrid vehicles
2. Juices with a natural content of more than 50%. The regulation shall define the requirements to apply this exemption.

Since December 1, 2021, the following ICE tariffs will apply:

GROUP III TARIFF TARIFF OF AD VALOREM Description Tariff TV paid services, excluding streaming services
15% Fees, memberships, affiliations, shares and similar fees charged to members and users by social clubs 30% (before 35%) GROUP IV MIXED TARIFF Description Specific tariff Ad Valorem Tariff Cigarettes US$0,16 Not apply Alcohol (other than alcoholic beverages and pharmaceuticals) and alcoholic beverages US$10 per liter of pure alcohol (previously US$7.22 for alcohol and US$7.25 for alcoholic beverages). 75% Industrial beer US$13.08 per liter of pure alcohol (previously the rate was US$9.49, US$10.58 or US$13.02 according to small, medium, and large-scale production). 75% Craft beer and wines of national production US$1.5 per liter of pure alcohol (previously wine was not included in this category) 75%

1. Outflow tax

The following transactions are exempted from the payment of the Outflow Tax:

1. Payments made for the sale of shares, or any other asset acquired by companies or persons not residing in Ecuador. Although the wording is not clear, it may be understood that the seller is entitled to the exoneration when he receives the price in Ecuador and transfers it abroad, this should be clarified through regulations.
2. Transfers made by entities of Auxiliary Services of the Financial System that correspond to the payment and/or return of values collected for the rendering of services of electronic means of payment.
3. Payments made abroad for the import of capital goods and raw materials made by companies that subscribe investment contracts.

Specialist in Tax
Andrea Moya, partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144

Below, we analyze the wealth taxes created by the Law for Economic Development and Fiscal Sustainability after the Covid-19 Pandemic, published on the Official Gazette 587, Third Supplement, of November 29, 2021:

1.    Wealth tax for individuals:

Taxpayers: Individuals who, as of January 1, 2021, have an individual net worth equal to or greater than US$1,000,000.00; or, marital partnership, with a net worth equal to or greater than US$2,000,000.00, in accordance with the following: 

–    In the case of individuals with tax residence in Ecuador, the contribution will be calculated over the assets located inside and outside the country. 
–    In the case of non-residents individuals, the contribution will be calculated over the assets located in the country.

Substitute taxpayer: Companies located in Ecuador whose shareholders are non-residents will act as substitute taxpayers.

Taxable base: The net worth is equal to the value of the assets (including rights) minus liabilities that are directly or indirectly owned by the taxpayer through any means, as of January 1, 2021. The following must be considered for the calculation of the net worth:


–    The proportional equity value of the shares held in companies that, in turn, are required to pay the corporate wealth tax, and that have made such payment, must be excluded.


–    The value of properties that preserve primary forests and areas of ecological diversity that have limitations for their exploitation should be excluded. 


–    Accounts payable to related parties should be excluded from the liabilities unless the loans were granted under market conditions and were used for productive purposes.


–    The value of the net worth may be reduced in up to US$200,000.00 if the individual owns a first home and/or unproductive agricultural land. 

Tax rate: The applicable tax rate shall be calculated in accordance with the following chart:

 

Tax Return: The tax return and payment of the wealth tax must be made until March 31, 2022. Payment facilities may be requested for a term of 6 months and without any initial installment. 

2.    Corporate Wealth Tax:

Taxpayer: Entities that carry out economic activities and have a net worth equal to or greater than US$5,000,000.00 as of December 31, 2020.

Taxable Base: The taxable base will be equal to the value of the net worth of the entity in the fiscal year 2020 as stated in the income tax return filed for such year.

Tax Rate: The applicable tax rate shall be calculated in accordance with the following chart:

 

Tax return: The tax return and payment of the first wealth tax must be made until March 31, 2022, and of the second until March 31, 2023. Payment facilities may be requested for a term of 6 months and without any initial installment. The law does not establish whether entities that had losses in the fiscal years 2020 and 2021 are excluded from paying the tax.

Sanctions: The following penalties shall apply: 

–    Failure to file the return will be sanctioned with a surcharge equal to 50% of the tax.
–    Inaccurate returns (i.e. those in which the total value of the net worth is concealed) will be sanctioned with a surcharge equal to 20% of the value of the difference.

Specialist in Tax
Andrea Moya, partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144

Below, we analyze the wealth taxes created by the Law for Economic Development and Fiscal Sustainability after the Covid-19 Pandemic, published on the Official Gazette 587, Third Supplement, of November 29, 2021:

1.    Wealth tax for individuals:

Taxpayers: Individuals who, as of January 1, 2021, have an individual net worth equal to or greater than US$1,000,000.00; or, marital partnership, with a net worth equal to or greater than US$2,000,000.00, in accordance with the following: 

–    In the case of individuals with tax residence in Ecuador, the contribution will be calculated over the assets located inside and outside the country. 
–    In the case of non-residents individuals, the contribution will be calculated over the assets located in the country.

Substitute taxpayer: Companies located in Ecuador whose shareholders are non-residents will act as substitute taxpayers.

Taxable base: The net worth is equal to the value of the assets (including rights) minus liabilities that are directly or indirectly owned by the taxpayer through any means, as of January 1, 2021. The following must be considered for the calculation of the net worth:


–    The proportional equity value of the shares held in companies that, in turn, are required to pay the corporate wealth tax, and that have made such payment, must be excluded.


–    The value of properties that preserve primary forests and areas of ecological diversity that have limitations for their exploitation should be excluded. 


–    Accounts payable to related parties should be excluded from the liabilities unless the loans were granted under market conditions and were used for productive purposes.


–    The value of the net worth may be reduced in up to US$200,000.00 if the individual owns a first home and/or unproductive agricultural land. 

Tax rate: The applicable tax rate shall be calculated in accordance with the following chart:

 

Tax Return: The tax return and payment of the wealth tax must be made until March 31, 2022. Payment facilities may be requested for a term of 6 months and without any initial installment. 

2.    Corporate Wealth Tax:

Taxpayer: Entities that carry out economic activities and have a net worth equal to or greater than US$5,000,000.00 as of December 31, 2020.

Taxable Base: The taxable base will be equal to the value of the net worth of the entity in the fiscal year 2020 as stated in the income tax return filed for such year.

Tax Rate: The applicable tax rate shall be calculated in accordance with the following chart:

 

Tax return: The tax return and payment of the first wealth tax must be made until March 31, 2022, and of the second until March 31, 2023. Payment facilities may be requested for a term of 6 months and without any initial installment. The law does not establish whether entities that had losses in the fiscal years 2020 and 2021 are excluded from paying the tax.

Sanctions: The following penalties shall apply: 

–    Failure to file the return will be sanctioned with a surcharge equal to 50% of the tax.
–    Inaccurate returns (i.e. those in which the total value of the net worth is concealed) will be sanctioned with a surcharge equal to 20% of the value of the difference.

Specialist in Tax
Andrea Moya, partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144