Amendments regarding income Tax, VAT, Excise Taxand Outflow Tax – Law for economic development and fiscal sustainability after the COVID-19 pandemic

Amendments regarding income Tax, VAT, Excise Taxand Outflow Tax - CorralRosales - Abogados Ecuador

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:

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%)
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.

Andrea Moya - CorralRosales - Lawyer Ecuador

Specialist in Tax
Andrea Moya, partner at CorralRosales
+593 2 2544144

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NOTE: The above text has been prepared for informational purposes. CorralRosales is not liable for any loss or damage incurred as a result of acting or failing to act on the basis of the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm in Quito / Guayaquil, Ecuador.