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Income tax – Advance payment regulations

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Regulation NAC-DGERCGC20-00000054 issued by the General Director of the Internal Revenue Service on September 4, 2020 regulates the advance payment of income tax for the year 2020, ordered by Executive Decree 1137 of September 2, 2020.

The regulation confirms the content of Executive Decree 1137 y adds the following:

1. Amount of the advance payment:

In order to calculate the advance payment, the following formula must be applied:

IR = (85% of UC * 25%) – RFIR20

Where:

IR = Advance income tax.

UC = The profit derived from the result of operations carried out from January 1 to July 31, 2020, in accordance with the financial statements and accounting and financial regulations. In order to calculate the profit, the employees profit sharing must not be deducted.

RFIR20 = Income tax withholdings made to the taxpayer from January 1 to July 31, 2020, that the taxpayer is able to use as tax credit.

In order to calculate the advance payment, the taxpayer must issue the financial statements as of the closing of July 31, 2020.

2. Settlement the advance payment:

The settlement of the advance payment will be made through the Income Tax Advance Payment Form (form 115).

Taxpayers whose 2019 taxable income was higher than US$5,000,000.00, must file the return until September 11, 2020, even if: (i) the taxpayer does not generate an amount to be paid; or, (ii) if the taxpayer income in 2020 is considered exempt for income tax purposes.

If the taxpayer files the return once the term has expired, it would be required to pay a fine equal to 3% for each month or fraction of a month of delay. The fine will be calculated over the total of the advance tax or, over its profit if an advance payment is not generated.

The advance tax must be paid until September 11, 2020 through debit from the taxpayer bank account. If the payment is not made until this date, the taxpayer will be required to pay interests.

3. Tax credit:

The advance income tax will be regarded as tax credit for the payment of 2020 income tax.

If the value of the advance payment is higher than the income tax generated, the taxpayer may request the reimbursement or may use the excess as credit tax for the payment of income tax for the three following fiscal years.

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DISCLAIMER: The preceding text has been prepared for general information purposes only. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any given situation requires the specific opinion and view of the firm in Quito / Guayaquil, Ecuador.

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Income tax – Advance payment

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By Executive Decree 1137 issued on September 2, 2020, the President ordered the advance payment of income tax for the year 2020, to finance the expenses associated with the health emergency.

The previous Executive Decree 1109 issued on July 27, 2020 that established the same tax was not applied since it was declared unconstitutional by the Court.

The individuals, companies, and permanent establishments that comply with the following conditions are required to pay the advance income tax:

  1. Generate taxable income, except income derived from a labor relationship.
  2. In the year 2019 received gross income equal to or greater than US$5,000,000.00; and,
  3. During the period from January to July 2020, generated profits, with the exceptions of income and expenses derived from a labor relationship.

Taxpayers who are not included in the assumptions previously described are able to pay the advance income tax voluntarily.

The following taxpayers are not required to pay the advance income tax:

  • Micro, small, or medium size companies.
  • Taxpayers that are exempt from paying income tax on the fiscal year 2020.
  • Taxpayers that have registered the province of Galapagos as their tax address.
  • Taxpayers that are regular exporters of goods, or that 50% of their income derives from the export of goods; or,
  • Taxpayers with one of the following economic activities:
    • The operation of airlines.
    • The provision of accommodation and/or food services.
    • Activities of the agricultural and aquaculture sector.

In order to calculate the advance payment, the following formula must be applied:

IR = (85% of UC * 25%) – RFIR20

Where:IR = Advance income tax.

UC = The profit derived from the result of operations carried out from January 1 to July 31, 2020, in accordance with the financial statements and accounting and financial regulations.

RFIR20 = Income tax withholdings made to the taxpayer from January 1st to July 31, 2020, that the taxpayer is able to use as tax credit.

Taxpayers are able to pay the full amount of the advance income tax until September 11, 2020 and will not be able to request payment facilities. The late payment will generate interest and penalties.

The advance income tax will be regarded as tax credit for the payment of 2020 income tax.

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DISCLAIMER: The preceding text has been prepared for general information purposes only. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any given situation requires the specific opinion and view of the firm in Quito / Guayaquil, Ecuador.

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Renewal – Tax benefits to new investments

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Through Executive Decree 1130 issued on August 19, 2020, the President of the Republic resolved to extend the term for applying the tax benefits for new investments established in the Law for Productive Development, Attraction of Investments and Employment Generation for an additional 24 months, that is, until August 21, 2022.
Therefore, new investments made until August 21, 2022 will be eligible for the following benefits:
  1. New investments made in prioritized sectors will be exempt from paying income tax according to the following:
    • Investments made in the urban areas of Quito and Guayaquil will be entitled to an income tax exemption for 8 years.
    • Investments made outside the urban areas of Quito and Guayaquil will be entitled to an income tax exemption for 12 years.
    • Productive investments in industrial, agro-industrial, and agro-associative sectors, made in border jurisdictions will be entitled to an income tax exemption for 15 years.

In the case of existing companies, the exemption will be applied proportionally according to the following alternatives:

  • If the company is able to divide its assets, liabilities, income, costs, expenses, profits, and labor participation attributable to the new investment, the exemption may be applied by cost center.
  • The company is able to apply the benefit proportionally according to the following formula:

tax-benefits-new-investments-lawyers-ecuador

The reduction in the income tax rate may not be greater than 10 percentage points, unless the Strategic Committee for the Promotion and Attraction of Investments (CEPAI) authorizes a higheer reduction.

  1. Companies that make productive investments in any sector of the economy, and that enter into an investment contract with the Government, will be exempted from paying Foreign Exchange Tax (ISD) over the following payments:
    • Import of capital goods and raw materials necessary for the development of the project, up to the amounts and terms established in the investment contract.
    • Dividends distributed individuals with tax residence in Ecuador as long as the resources come from abroad and the investor demonstrates the entry of such resources in the country.

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VAT – Digital services

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Regulation NAC-DGERCGC20-00000053 issued on August 22, 2020, the Director of the Internal Revenue Service established the provision for withholding Value Added Tax (VAT) on the import of digital services.

In general, the import of services is subject to the payment of VAT. The amendment to the Internal Tax Regime Law issued on December 31, 2019, established that the import of digital services will be subject to the payment of VAT starting September 16, 2020.

 

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Unconstitutionality of income tax advance payment

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Through Judgment 3-20EE / 20A published on August 10, 2020, the Constitutional Court issued an unfavorable judgement regarding Executive Decree 1109 issued by the President of the Republic on July 27, 2020 and declare its unconstitutionality.

Executive Decree 1109 ordered the advance payment of income tax of the fiscal year 2020. Therefore, taxpayers are no longer required to make the advance payment. If the taxpayers paid the advanced income tax, it will be regarded as tax credit or the taxpayers are able to request a refund.

 

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DISCLAIMER: The preceding text has been prepared for general information purposes only. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any given situation requires the specific opinion and view of the firm in Quito / Guayaquil, Ecuador.

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Income tax – Advance payment regulations

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Regulation NAC-DGERCGC20-00000051 issued by the General Director of the Internal Revenue Service published on the Official Registry 854 of August 5, 2020 regulates the advance payment of income tax for the year 2020, ordered by Executive Decree 1109.

1. Taxpayers required to make the advance payment:

The individuals, entities, subsidiaries, and permanent establishments of foreign entities that comply with the following conditions are required to pay the advance income tax:
  1. Generate taxable income, except income derived from a labor relationship.
  2. In the year 2019 received gross income equal to or greater than US $5,000,000.00; and,
  3. During the period from January to June 2020, generated profits. In the case of individuals, in order to calculate the profits, income and expenses derived from a labor relationship should not be considered.

2. Taxpayers not required to make the advance payment:

The following taxpayers are not required to pay the advance income tax:
  • Micro, small, or medium size companies.
  • Taxpayers that are exempt from paying income tax on the fiscal year 2020.
  • Taxpayers that have registered the province of Galapagos as their tax address.
  • Taxpayers that are regular exporters of goods, or that 50% of their income derives from the export of goods; or,
  • Taxpayers with one of the following economic activities:
    • The operation of airlines.
    • The provision of accommodation and/or food services.
    • Activities of the agricultural sector.
    • Activities of the aquaculture sector.

3. Amount of the advance payment:

In order to calculate the advance payment, the following formula must be applied:

IR = (85% of UC * 25%) – RFIR20

Where:

IR = Advance income tax.

UC = The profit derived from the result of operations carried out from January 1 to June 30, 2020, in accordance with the financial statements and accounting and financial regulations. In order to calculate the profit, the employees profit sharing must not be deducted.

RFIR20 = Income tax withholdings made to the taxpayer from January 1st to June 30th, 2020, that the taxpayer is able to use as tax credit.

In order to calculate the advance payment, the taxpayer must issue the financial statements as of the closing of June 30, 2020.

4. Settlement the advance payment:

The settlement of the advance payment will be made through the Income Tax Advance Payment Form (form 115).

Taxpayers whose 2019 taxable income was higher than US$5,000,000.00, must file the return until August 14, 2020, even if: (i) the taxpayer does not generate an amount to be paid; or, (ii) if the taxpayer income in 2020 is considered exempt for income tax purposes.

If the taxpayer files the return once the term has expired, it would be required to pay a fine equal to 3% for each month or fraction of a month of delay. The fine will be calculated over the total of the advance tax or, over its profit if an advance payment is not generated.

The advance tax may be paid with the tax return, either in a single payment or in three installments as follows:

  • The first installment on August 14, 2020;
  • The second installment until September 14, 2020; and
  • The third installment until October 14, 2020.

If the payment is not made within these dates, the taxpayer will be required to pay interests.

5. Tax credit:

The advance income tax will be regarded as tax credit for the payment of 2020 income tax. If the value of the advance payment is higher than the income tax generated, the taxpayer may request the reimbursement or may use the excess as credit tax for the payment of income tax for the three following fiscal years.

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DISCLAIMER: The preceding text has been prepared for general information purposes only. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any given situation requires the specific opinion and view of the firm in Quito / Guayaquil, Ecuador.

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Amendment to the codification of regulations issued by SERCOP

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By Regulation No. RE-SERCOP-2016-0000072 published on the Official Registry on July 29, 2020, the Codification of Regulations issued by SERCOP was amended.
The main amendments are:
  1. In the technical specifications, terms of reference, market research, proforma invoices or quotations, each work, good or service must be broken down and listed.
  2. It is mandatory for public entities and suppliers to execute relevant documents from the pre-contractual, contractual and execution phase by means of electronic signature; and their validation shall be done through the official system FirmaEC. Additionally, suppliers must have a valid electronic signature certificate issued by one of the certification entities, authorized by the Telecommunications Agency. This obligation will be enforceable within 90 days from July 29, 2020.
  3. Individual and entities, both national and foreign, interested in qualifying as suppliers for the State, when registering shall select only those projects, goods and/or services which codes within the Central Product Classifier, CPC, are directly related to their economic activity registered in the tax ID (RUC), and their statutory corporate purpose. In the case of foreign entities, they must justify their commercial activity. If the documents are in a foreign language, the Spanish translation must also be submitted.
    In the case of associations and consortiums, all the participants must have registered the CPC codes related to the procedure. If the contract includes several CPC codes, at least one participant must be qualified for each code. A participant will not be permitted to qualify for the execution of a CPC code that is not related to its activity or corporate purpose.
    In the case of requests for registering new suppliers in the supplier’s registry (RUP), and requests for increasing CPC codes for suppliers already registered, the requirement described above shall be enforceable within 90 days from July 29, 2020.
  4. Government entities that create associations and consortiums shall participate in equal conditions with the other interested suppliers. For this purpose, they would not be able to take advantage of the provisions of article 2(8) of the Public Procurement System Law: without considering the percentage of participation of the members of the association or consortium. 
  5. The award resolution in all public procurement procedures shall be issued in a term not less than 3 days from the date the administrative act that ends the bid qualification, bidding, or negotiation, is issued. This resolution shall be published in the SERCOP portal within 1 day.
    If the procedure is not awarded within 30 days, the entity must notify the SERCOP the reasons.
    In the event of a complaint or claim filed before SERCOP regarding the procurement procedure, or by SERCOP’s own initiative, the contracting entity, once notified, may not award, or enter into the contract until SERCOP decides on the matter.
  6. In public procurement procedures, except for emergency procedures, once the procedure has been awarded, the contract shall be entered into with the awarded bidder after at least 3 working days from the date of the award.
  7. Emergency Contracts: 
    • Public entities, besides being subject to the Public Procurement System Law, shall be subject to the procedures established in the SERCOP regulations.
    • The maximum authority of the contracting entity or its delegate, shall carry out the qualification of suppliers verifying their legal, economic, and technical capacity, through an administrative act.
    • The economic activity of the suppliers shall be related to the object of the contract. In the event of non-compliance, the contracting entity may unilaterally declare the termination of the contract.
    • Regulations establish a specific procedure for public procurement during an emergency. This procedure does not apply for medicines, medical devices, and supplies, biochemical or diagnostic reagents and other strategic goods or the provision of health or funeral services.
      In this procedure, suppliers shall be required to accept the conditions and to expressly adhere to the technical conditions defined by the contracting entity. In the event of non-compliance, the contracting entity may unilaterally declare the termination of the contract.
      The decision to award the contract or to declare it void shall be taken by the highest authority of the contracting entity.
    • Emergency procedures for the procurement of listed goods and services are prohibited unless the highest authority of the contracting entity issues a decision stating the reasons that makes it impossible to meet or overcome the emergency. This resolution will be subject to analysis by the SERCOP.

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DISCLAIMER: The preceding text has been prepared for general information purposes only. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any given situation requires the specific opinion and view of the firm in Quito / Guayaquil, Ecuador.

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Income tax – Advance payment

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By Executive Decree 1109 issued on July 27, 2020, the President ordered the advance payment of income tax for the year 2020, to finance the expenses associated with the health emergency.

The individuals, companies, and permanent establishments that comply with the following conditions are required to pay the advance income tax:

  1. Generate taxable income, except income derived from a labor relationship.
  2. In the year 2019 received gross income equal to or greater than US$5,000,000.00; and,
  3. During the period from January to June 2020, generated profits, with the exceptions of income and expenses derived from a labor relationship.

Taxpayers who do not meet these three conditions are able to pay the advance income tax voluntarily.

The following taxpayers are not required to pay the advance income tax:

  • Micro, small, or medium size companies.
  • Taxpayers that are exempt from paying income tax on the fiscal year 2020.
  • Taxpayers that have registered the province of Galapagos as their tax address.
  • Taxpayers that are regular exporters of goods, or that 50% of their income derives from the export of goods; or,
  • Taxpayers with one of the following economic activities:
    • The operation of airlines.
    • The provision of accommodation and/or food services.
    • Activities of the agricultural sector.
    • Activities of the aquaculture sector.

I order to calculate the advance payment the following formula must be applied:

IR = (85% of UC * 25%) – RFIR20

Where:

IR = Advance income tax.

UC = The profit derived from the result of operations carried out from January 1 to June 30, 2020, in accordance with the financial statements and accounting and financial regulations.

RFIR20 = Income tax withholdings made to the taxpayer from January 1st to June 30th, 2020, that the taxpayer is able to use as tax credit.

Taxpayers are able to pay a higher value than the result of the formula. Likewise, if the taxpayer made voluntary income tax advance payments prior to the date the decree was issued, these payments will be attributable to the value of the advance income tax.

Taxpayers are able to pay the full amount of the advance income tax until August 14, 2020 or, in three equal installments until the 14th of the months of August, September and November 2020. The late payment will generate interest and penalties.

The advance income tax will be regarded as tax credit for the payment of 2020 income tax.

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DISCLAIMER: The preceding text has been prepared for general information purposes only. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any given situation requires the specific opinion and view of the firm in Quito / Guayaquil, Ecuador.

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Guidelines for the application of the Law on Humanitarian Support

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On July 15th, the Ministry of Labor (hereinafter “MdT”) through Ministerial Agreements MDT-2020-132 and MDT-2020-133, issued guidelines for the establishment of the new labor categories contemplated in the “Organic law on humanitarian support to combat the health crisis arising from COVID-19”.

1. Preservation of labor sources agreements (MDT-2020-132 Agreement)

The employer must update in the online platform SUT – Humanitarian Law section – the employee’s information in accordance with the signed agreement, including its validity.

Agreements may be renewed once, for the same period for which they were originally entered.

Note: Agreements may be registered from July 31st, 2020. Employers who signed agreements with their workers prior to the issuance of Agreement 132, will have 15 working days to register the information in the online platform SUT, that is, until August 21st, 2020.

2. Emerging special employment agreement (Agreement MDT-2020-132)

The employer must register in the online platform SUT the information about the employee and the employment agreement, within 15 days from the beginning of the employment relationship.

Note: Employment agreements may be registered from July 31st, 2020. Employers who signed such agreements prior to the issuance of Agreement 132, will have 15 working days to register the information in the online platform SUT, that is, until August 21st, 2020.

3. Emerging working-day reduction (Agreement MDT-2020-133)

The employer may implement the emerging working-day reduction when facing situations of unforeseen circumstances or force majeure in the terms provided for in Article 30 of the Civil Code.

Conditions and characteristics

  • Reduction: The employer may reduce the working hours by up to 50%, prior authorization from the Ministry of Labor.
  • Term: Up to 1 year, renewable only once for an equal term. After the expiration of the term, the employee’s salary will be the same he/ she received before the measure was applied.
  • Salary: It may not be less than 55% of the salary in force before the reduction and must be proportional to the hours worked.
  • Contributions to IESS: Must be based on the salary paid.
  • Labor benefits: The thirteenth and fourteenth remunerations, reserve fund, vacations and profits shall be paid in proportion to the working-day and the income received by the employee.
  • Compensation: In case of layoff, the compensation will be calculated based on the salary received before the reduction.
  • Exceptions: Employees whose working-day have been reduced under the provision of article 47.1 of the Labor Code may not have this measure applied to them while the previous reduction remains in force.
  • Registration in the SUT: Update the worker’s data in accordance with the new working conditions, including their validity. The lack of registration will be sanctioned according to the Labor Code (US$200 fine), as well as the Constitutional Mandate 8, that is, fines from 3 to 20 minimum statutory wages (currently, from US$1,200 to US$8,000).
  • Notification: The employer must notify the employee by any means of the implementation of the measure and its conditions.

Note: Employers who have applied the working-day reduction before the issuance of Agreement 133, will have 15 working days to register the information in the online platform SUT, that is, until August 5th, 2020.

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Payment facilities and exceptional payment plan – IRS

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Regulations NAC-DGERCGC20-00000043 and NAC-DGERCGC20-00000044 issued on June 23, 2020 by the General Director of the Internal Revenue Service, the rules for applying the Second and Third Transitory Provisions of the Law for Humanitarian Support to Combat the Health Crisis arising from COVID-19 were established.

The Second Transitory Provision of said law and Regulation NAC-DGERCGC20-00000043 establish that those taxpayers that applied the tax amnesty provided in the Law for the Promotion of Production, and that from January 2020 to June 22, 2020 have not paid 2 or more installments of their payment facility plan, may cover the amount owed until September 30, 2020 without surcharges, interest or fines.

Furthermore, the Third Transitory Provision of said law and Regulation NAC-DGERCGC20-00000044 establish that those taxpayers that applied the exceptional payment plan provided for in the Law on Tax Simplification and Progressivity, and that as of June 22, 2020 have not paid any of their installments, may cover the amount owed in 12 equal monthly installments, which must be paid on the 28th of each month, beginning July 28, 2020, without surcharges, interest or fines.

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