Category Archives: Bulletin

1. For calculating the income tax for individuals and undivided estates, the applicable chart for the fiscal year 2023 is:

1. For calculating the tax on inheritance, legacies, donations, finds and any type of act or contract by which the domain of goods and rights is acquired, free of charge, the applicable chart for the fiscal year 2023 is:

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

The Internal Revenue Service issued the Circular NAC-DGECCGC22-00000012 on December 19, 2022, to clarify the application over time of the deductibility limit applicable to expenses for royalties, technical, administrative, and consulting services paid to related parties (hereinafter the “Deductibility Limit”).

1. Background

The President of the Republic issued the Executive Decree 304 published in the Second Supplement of the Official Gazette 608 of December 30, 2021, which contained the Regulations to the Law of Economic Development and Fiscal Sustainability after the COVID 19 Pandemic by means of. Said regulations eliminated the Deductibility Limit established in article 28 #16 of the Internal Tax Regime Law Regulations.
The President of the Republic issued the Executive Decree 586 published in the Third Supplement to Official Gazette 186 of November 10, 2022, which amended several regulations and incorporated once again the Deductibility Limit established in article 28 #16 of the Internal Tax Regime Law Regulations.

1. Consequences:

Considering the amendments detailed above, the Internal Revenue Service issued Circular NAC-DGECCGC22-00000012 whereby it clarifies:

1.    For calculating the income taxable base for the fiscal year 2022, the Deductibility Limit will not apply.

2.    The advance pricing agreements that have been notified to the taxpayer and which approved an increase in the deductibility limit in force until December 31, 2021, will maintain its legal effects for the year 2022.


3.    For the calculating the income taxable base for the fiscal year 2023 and subsequent years, a deductibility limit equal to 5% of the taxable income of each fiscal year will apply, 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.

4.    For the fiscal year 2023, the taxpayer may request a higher limit of deductibility through an advance pricing agreement with the Tax Authority, until the last business day of February 2023.

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

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

On October 28, the Constitutional Court issued the ruling 110-21-IN/22 by which it declared the partial unconstitutionality of the Law for Economic Development and Fiscal Sustainability After the COVID-19 Pandemic. The following are the main effects of such ruling, which has not yet been published in the Official Gazette:

1. The amendments to the Law of the Special Regime of the Province of Galapagos are declared unconstitutional. This change will be effective as of the publication of the ruling in the Official Gazette.
   
   
2. The amendments to the Hydrocarbons Law are declared unconstitutional, except for the exemption of foreign trade taxes on the importation of fuels, hydrocarbon derivatives, biofuels and natural gas made by individuals or national and foreign entities. This change will be effective as of the publication of the ruling in the Official Gazette.
   
   
3. The tarriff applicable to the popular businesses of the RIMPE regime is declared unconstitutional. This change will be effective as of the fiscal year 2024:

1. The following are declared unconstitutional on the merits with effect as of publication of the ruling in the Official Gazette:
   
   
   • The exemption from payment of Inheritance Tax to beneficiaries within the first degree of consanguinity with the deceased.
   • The exemption from criminal liability for any crime, including those of a tax nature, to taxpayers who apply the Regime for the Regularization of Assets Located Abroad is eliminated. The Internal Revenue Service must notify the Financial and Economic Analysis Unit (UAFE) of any suspicious activity.

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

Through Executive Decree No. 458 of June 18, 2022, published in Official Gazette Supplement 87 of June 20, 2022 (“RGLOSNCP“), the new Regulations to the Law of the National Public Procurement System were issued, effective as of August 20, 2022. 
 
The main changes concerning the previous regulation are the following:

1. The National Public Procurement Service (“SERCOP“) must manage the data and information of the “COMPRASPÚBLICAS” Portal under open data and information concepts.
2. In addition to the physical procurement file, contracting entities shall maintain an electronic file.
3. Under no circumstances the electronically signed documents may be required to be printed. Once printed, they lose their legal validity.
4. To encourage and promote local and national participation, a margin of preference must be granted to local and national suppliers. Therefore, SERCOP should establish the margins for each public procurement procedure.
5. Disclosing the beneficial owners shall not be required in small-amount procedures.
6. The supplier selection procedures for electronic and inclusive dynamic catalogs do not require the Relevance Report by the Comptroller General of the State, which aims to determine the relevance and favorability of the procurement according to the law.
7. Suppliers interested in being included in the electronic and inclusive dynamic catalog may do so on a permanent and uninterrupted basis throughout the term of the respective framework agreement.
8. The reverse auction procedure is divided into electronic reverse auctions and simplified reverse auctions. In the first case, the economic bids must be qualified prior to bidding. In the second, the qualification will be done a posteriori.
9. Rules are established to apply the disqualifications set forth in Article 62 of the Organic Law of the National Public Procurement System (“Law“).
10. Subcontracting is defined as “…the contractual practice under which the contractor, entrusts to another, called subcontractor, the performance of a part of the contract, prior authorization of the contracting entity.”
11. Subcontracting shall not be considered as “…the acquisition or leasing of raw materials, inputs or indispensable means necessary for the development of the contractor’s activities to comply with the object of the contract…”
12. The application of the price adjustment system shall be based on the principle of the economic equilibrium of the contract. Such application shall only be for reasons beyond the parties’ control that were not foreseen when the contract was signed.
13. Rules are established to determine the commencement of contractual performance, depending on the type of contract or form of payment.
14. The procedure to be followed by contractors to request extensions of the contractual term is regulated.
15. The procedure for the termination of contracts by mutual agreement and the content that such agreement must contain are established.
16. In the acquisition of goods, the contractor, the receiving committee, and the warehouse keeper of the contracting entity must sign the receiving act referred to in Article 81 of the Law.
17. SERCOP shall implement technological tools in an open and easily accessible format on public procurement subject to the Law to facilitate subsequent control by the competent authorities.

Specialist in Corporate and Public Contracting Law
Mario Fernández, associate at CorralRosales
mfernandez@corralrosales.com
+593 2 2544144

The Constitutional Court issued the ruling 44-16-IN/22 by which it declared the second paragraph of the Third Reformatory Provision of the Law of Solidarity and Citizen Co-responsibility for the Reconstruction and Reactivation of the Areas Affected by the Earthquake of April 16, 2016, as unconstitutional (hereinafter the “Solidarity Law”):
 
Such paragraph amended the Internal Tax Regime Law and provided that:
 
“Promoters, advisors, consultants, and law firms are required to report under oath to the Tax Authority -according to the forms and deadlines established by general resolution issued for such purpose-, a report on the incorporation, use and ownership of companies located in tax havens or lower taxation jurisdictions by Ecuadorian beneficial owners. Each failure to comply with this rule will be punished with a fine of up to 10 basic fractions of income tax, without prejudice to any criminal liability that may arise.”
 
The Constitutional Court considered that the rule did not comply with the principle of unity of law established in Article 136 of the Constitution of the Republic of Ecuador since:

1. It regulates a permanent obligation which purpose does not coincide with the purpose of the Solidarity Law, the reconstruction and reactivation of the areas affected by the earthquake of April 16, 2016.
2. Its inclusion implies an inadequate dispersion or the rules applicable to matters involving professional secrecy and client-attorney confidentiality.
3. The obligation did not allow in any way to immediately collect any economic resources to face the natural disaster. Therefore, it lacks thematic and teleological connection with the Solidarity Law.

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

Regulation NAC-DGERCGC21-00000026 issued by the Tax Authority on 2021, established a special regime for income tax and value added tax (VAT) withholdings applicable to payment aggregators and online markets. This regime was amended by Regulation NAC-DGERCG22-00000035 issued on July 20, 2022 and published in the Supplement of the Official Registry 110 of July 22, 2022. The most important points are summarized below:

1. Definitions

• Payment aggregators: Administrators of auxiliary payment systems authorized as such by the Central Bank of Ecuador for the provision of payment aggregation services.
• Online marketplaces: Entities that, through technological platforms, allow: (i) the online supply and demand of goods and/or services of third parties or of several affiliated commercial establishments, and (ii) to accept and collect the corresponding payments on behalf of the commercial establishments.

1. Requirements

To apply the special withholding regime, the following requirements must be met:

• Payment aggregators shall:

1. File an application before the Internal Revenue Service (IRS),
2. Have the authorization of the Central Bank of Ecuador to operate as an administrator of auxiliary payment systems, for the provision of payment aggregation services, and
3. Be qualified as special taxpayers or withholding agents by the SRI. If the entity has not been previously qualified as a withholding agent or special taxpayer, such qualification may be requested in the same application.

• Online marketplaces shall:

1. Have an entity incorporated in Ecuador,
2. Have as its corporate purpose, activities that reflect its role as an online marketplace, particularly, intermediation through technological platforms for the online offer and sale of goods and/or services of third parties and/or affiliated commercial establishments,
3. Be registered in the Single Taxpayers Registry,
4. File an application before the IRS detailing the payment aggregator or payment gateway with which they will work.
5. Be qualified as special taxpayers or withholding agents by the SRI. If it has not been previously qualified as a withholding agent or special taxpayer, such qualification may be requested in the same application; and,
6. To not apply any simplified tax regimes, or single income tax regimes.

Online marketplaces may apply the special regime provided that the amounts collected on behalf of third parties come from: (i) payment aggregators registered with the IRS, or (ii) are processed through administrators of auxiliary payment systems authorized as such by the Central Bank of Ecuador for the provision of payment gateway services.

1. Special Regime

The following payments shall not be subject to income tax or VAT withholding:

1. Those made by entities of the financial system and credit or debit card issuers to entities considered as payment aggregators and/or online marketplaces, for the transfer of goods and/or services rendered by third parties and/or affiliated commercial establishments.
2. Those made by payment aggregators to entities considered as payment aggregators and/or online marketplaces, for the transfer of goods and/or services rendered by third parties and/or affiliated commercial establishments.

Notwithstanding the foregoing, payment aggregators and/or online marketplaces shall issue a monthly settlement of payments or credits registered as income.

1. Transitory Provision.

Taxpayers registered in the ‘online marketplace registry’ of the IRS must submit the request described in section II above, detailing the payment aggregator or payment gateway with which they will work within 10 working days from the publication of the regulation in the Official Registry, i.e., until August 4, 2022. If the application is not submitted within such term, the registration will be revoked, and a new request must be filed.

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