The President of the Republic issued the Executive Decree 586 on October 31, 2022 which several regulations to Commercial, Investment and Tax Policy. The following is a summary of the main tax reforms:
I. Amendments to the Regulations for the Application of the Internal Tax Regime Law:
1. Professional Services. The term “professional services” is defined as those rendered by professionals accredited with an academic degree, either as an individual or through a legal entity.
2. Ghost Entities. If the Internal Revenue Service notifies a taxpayer that it has incurred in the circumstances to be qualified as a non-existent entity, ghost entity, or taxpayer with non-existent transactions, the taxpayer will have 30 business days to refute such assertion. Previously the term was 5 business days.
The taxable base will not be reduced by transactions carried out with companies qualified as non-existent or ghost entities, except for those cases in which the taxpayer supports the material sequentiality of the expense and its economic essence.
3. Depreciation of fixed assets. The possibility of requesting accelerated depreciation of assets in cases of obsolescence, intensive use or other reasons is eliminated.
4. Losses. In the case of individuals and/or non-financial entities, the loss or discount generated in the sale of financial assets corresponding to commercial credits or portfolio, which are negotiated outside the stock market or with related parties, will not be deductible.
5. Royalties, technical, administrative and consulting services. A limit is again imposed on the deductibility of the sum of expenses for royalties, technical, administrative and consulting services paid to related parties. This limit had been eliminated by Executive Decree 304, published in Official Gazette Supplement 608 of December 30, 2021.
As from fiscal year 2023 the limit will be equivalent to 5% of the taxable income of the respective fiscal year, except in the following cases:
a. Taxpayers that are in the pre-operative cycle of the business, the limit will be equivalent to 10% of the total assets.
b. Taxpayers whose only activity is to provide technical services to independent parties, if the operating margin indicator (operating profit over operating sales) is equal or higher than 7.5%. If the indicator is lower, a specific deductibility limit will be applied.
c. Taxpayers that carry out operations with related parties in Ecuador, as long as the taxpayer that incurs the cost or expense has an effective tax rate equal to or lower than that of its related party with which it carries out the operation.
d. When the total of royalties, technical, administrative and consulting services operations with related parties within a fiscal year does not exceed 20 basic fractions taxed at zero income tax rate for individuals.
The taxpayer may request a higher limit of deductibility through an advance pricing agreement with the IRS.
6. Deferred taxes: The following is added:
a. In the case of non-financial entities, a deferred tax will be recognized for the value impairment of financial assets corresponding to uncollectible credits that exceed the deduction limits. The deferred tax will be recognized on the value impairment generated as from fiscal year 2023.
b. Deferred tax is recognized on the difference between the financial depreciation of property, plant and equipment and the limits established for deductibility. The deferred tax will be recognized on assets acquired as from fiscal year 2023.
7. Reduction of the tax rate for new investments. In the case of taxpayers that make new investments and are not able to maintain a cost center for such new investment, they must calculate the reduction in the income tax rate based on a formula established for such purpose.
8. Legal certainty and stability on tax incentives. During the term of the investment contract, the rules that regulate the application of the tax benefits in force at the date on which the contract was entered into, will remain stable. If there are amendments that establish more favorable benefits to the investment, the investor may apply such benefits.
9. Settlement and payment of VAT. The transfers of goods and rendering of services carried out by micro, small and medium enterprises must be declared in the following month and paid up to 3 months after the fiscal period in which the invoice was issued, if a payment term was granted for more than one month.
10. VAT refund to exporters of services. Exporters of services may request a VAT refund even when: (i) they do not comply with the requirement of habituality; and/or, (ii) the payment for the services is received from a local bank account, provided that the payment is made on behalf of the non-resident.
11. VAT paid to popular businesses. In order to support the VAT paid to popular businesses, taxpayers must issue a liquidation of purchase of goods and rendering of services and withhold 100% of the VAT generated.
12. Excise tax (ICE) taxable base. Refunds made before the goods or services have been consumed will not be consider for calculating the ICE taxable base.
13. Mining activity. The following will apply to the amortization of investments made by companies holding mining concessions and companies that have entered into exploitation contracts:
a. The investments made in the phases of prospecting, initial exploration, advanced exploration and economic evaluation of the deposit must be amortized on a straight-line basis over 5 years from the beginning of production. Amortization shall be directly related to each mining concession.
b. Complementary exploration investments during the exploitation phase must be amortized on a straight-line basis over 5 years from the start of production, subject to certification by the competent entity. The amortization must be directly related to each mining concession.
c. The amortization of investments for the preparation and development of the deposit shall be directly related to each mining concession and shall be made in accordance with the Production Unit Method as from the beginning of production.
d. For depreciation of property, plant and equipment the following shall apply:
i. Depreciable property, plant and equipment associated with mining reserves will be depreciated based on the Production Unit Method as of the commencement of production,
ii. Depreciable property, plant and equipment not associated with mining reserves will be depreciated on a straight-line basis over their useful live from the time they are available for use. The depreciation percentage may not exceed the limits provided for in the regulations.
II. Amendments to the Regulations for the Application of Foreign Exchange Tax:
14. Foreign Exchange Tax (ISD). For the application of the ISD exemption by virtue of investment contracts, the capital goods and raw materials on which the benefit is applied must be classified as such within the CUODE. Otherwise, the Government entity must establish, within the corresponding opinion, that the goods must be exceptionally considered as raw material or capital goods for the project.
III. Amendments to the Regulation of Invoices, Withholding Receipts and Complementary Documents:
15. Settlements of purchases of goods and rendering of services. This type of documents may be issued for transactions of goods and services carried out with individuals who maintain their RUC in suspended status and who, due to their cultural level are not able to issue invoices.
16. Invoice filling requirements. If the transaction does not exceed USD$500.00, the invoice may be issued to “END CONSUMER”. Previously the maximum value was US$200.00.
IV. Amendments to the Investment Regulation of the Code of Production, Commerce and Investments:
17. Procedure for approval of investment contracts. In order to enter into an investment contract, the investor must submit a list of permits, authorizations or any other title necessary for the execution of the project. If the investor does not have such permits, the documentation supporting the initiation of the procedure to obtain them must be submitted.
18. Opinion of the governing body of public finances. The accumulated value of the tax incentives derived from the investment contract may not exceed the amount of the investment. The Government entity of public finances must issue an opinion, verifying the above, within a non-extendable term of 30 days.
19. Addenda to investment contracts. Entities that have entered into investment contracts may request -at any time- the execution of an addenda. Such addenda may maintain the tax and non-tax benefits stabilized at the date of subscription of the contract.
Specialist in Tax
Andrea Moya, partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144
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