Living wage 2020

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On March 18th, the Labor Ministry -by Ministerial Agreement MDT-2021-087- set the living wage for 2020 on US$447,41 monthly and stablished the payment procedure.

On those cases, that living wage compensation is applicable, employer shall pay it to employees no later than March 31st, 2021.

For living wage payment, “profit” shall be understood as the value declared by the employer as accounting profit deducting: (i) employees profit  sharing, (ii) tax  or advance payment fixed for the fiscal year declared, and (iii) statutory reserve.

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Amendments to the rules for applying advance pricing agreements for operations carried out between related parties

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Regulation NAC-DGERCGC21-00000013 issued on March 11, 2021 by the General Director of the Internal Revenue Service and published in the Fourth Supplement to the Official Registry 409 of March 12, 2021, amended the following regulations:
  • NAC-DGERCGC14-00001048, which establishes the content, procedure and other matters related to the filing and resolution of the advance pricing agreements for increasing the limit of deductibility (20%) of royalties, technical, administrative, and consulting services paid to related parties, and.
  • NAC-DGERCGC15-00000571, which establishes the rules for the applying the advance pricing agreements.

The following is a summary of the changes introduced in each Regulation:

Regulation NAC-DGERCGC14-00001048

Information to be included of the parties and the transactions subject to consultation:

a. Names and surnames, company name, tax identification number, country of tax residence and income tax rate of the taxpayer and the parties with whom the operations covered by the consultation are carried out,

b. Detailed description of the operations, including among other elements, their nature, characteristics, amount in US dollars of the last three fiscal years, and the effect on the taxpayer’s income,

c. If the transaction is a service, documentation must be submitted to identify its invoicing, periodicity, and form of payment. In the case of royalties, in addition to the above, the intangible asset, its owner, administrator (if applicable), the method of valuation of the intangible asset and its calculation must be fully identified,

d. Comparability analysis according to the terms described in the tax legislation, including the following elements: i) characteristics of the operations; ii) analysis of the functions or activities performed, including the assets used and risks assumed; iii) contractual terms; iv) economic or market circumstances, and v) business strategies, both of the taxpayer and its related parties involved in the operations subject to consultation,

e. Details of the search performed in the respective databases to obtain the comparable to be used. The date on which the search was performed attaching the screenshots of the filters applied in the databases, the selection and discarding matrix of the comparable. The reasons for the selecting the proposed method, in the terms contemplated for the Integral Transfer Pricing Report,

f. Copies of existing contracts, agreements or arrangements entered into by the taxpayer with related or unrelated parties, which affect, directly or indirectly, the operations covered by the valuation consultation. If applicable, copies of the cost sharing agreements, including the cost sharing criteria,

g. Audited balance sheet and income statement of the taxpayer for the last tax year as of the date of filing the consultation, including the notes to the financial statements. If the taxpayer is not required to have audited financial statements, the balance sheet, income statement and accounting books at the highest level of detail,

h. Audited balance sheet and income statement of the taxpayer’s related parties subject to the analysis, including the notes to the financial statements. If the taxpayer’s related parties are not required to have audited financial statements, the balance sheet, income statement and accounting books at the highest level of detail,

i. Balance sheet and income statement of the companies proposed as comparable for the last fiscal year. This requirement is not applicable if the taxpayer proposes the Comparable Uncontrolled Price (CUP) Method, and

j. Any other relevant information, data, or documentation that the applicant considers necessary to support the methodological proposal for valuation of related party transactions.

Application report:

In the application report the taxpayer must include the following information:

a. The working papers in Excel including: the indicator (or price) of the taxpayer, the indicators (or prices) of the comparable, comparability adjustments, interquartile range, among others, depending on the methodology.

b. Description and reasoning of any particular fact or circumstance of the fiscal year analyzed that affected the valuation of the prices or financial margins of the analyzed party.

c. The taxpayer may not file a new report when the tax authority has initiated an assessment procedure.

Regulation NAC-DGERCGC15-00000571

Deadline for submitting the request:

The request may be filed until the last working day of February of the tax period in which the application of a higher limit of deductibility is intended. For fiscal year 2021, the request may be filed until the last business day of March.

Report of transfer pricing adjustments:

In the event that, upon application of the methodology approved, there is a transfer pricing adjustment, the taxpayer must report such on the income tax form.

Substitute tax returns:

If the increase of the deductibility limit is approved, the taxpayer is able to file substitute tax returns regarding the years which income tax returns was filed prior to the notification of the response to the request. The substitute tax return must be filed within 60 days after the notification of the response.

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Reform to General Guidelines for Internships

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Labor Ministry through Ministerial Agreement MDT-2021-042, reformed the “General Guidelines for Internships”.

The Agreement establishes that students under a dual training modality may be considered for the mandatory percentage of interns.

Students under dual training are those whose professional training process occurs in educational environments and production or real services environments.

According to the Internship Law, for every 100 regular employees, employers are ordered to hire interns in a number equal to 4% of their employees who hold a professional degree. Consequently, the obligation to hire interns is subject to 2 conditions: (i) company has 100 or more employees; and (ii) at least 4% of such employees hold a professional degree.

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New deadlines for filing the personal expenses annex

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Regulation NAC-DGERCGC21-00000009 issued on February 4, 2021 and published in the third supplement to the Official Registry 386 of February 5, 2021, the General Director of the Internal Revenue Service established that the personal expenses annex of the fiscal year 2020 may be filed, for this time, until the following dates:

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Special labor regime for private higher education institutions academic staff

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The Labor Ministry by Ministerial Agreement MDT-2020-286 regulated the special labor agreement for private Higher Education Institutions academic staff:

– Scope: Mandatory implementation to hire academic staff on private Higher Education Institutions.

– Term for Regular Staff:  Up to 1 year (continuous or discontinuously) renewable up to 2 years. A 90-day trial period may be agreed.

– Term for Non-Regular Staff: Up to 1 year (continuous or discontinuously). The agreement may be renewed as many times as necessary. A 90-day trial period may be agreed.

– Weekly working day: Up to 40 hours per week, that may be distributed in no more than 6 days a week. A noninterrupted rest of 24 hours per week is guaranteed.

– Special leave regime: The Higher Education Institutions may grant, at the employee´s request, a special leave with or without payment.

If the leave is without payment, the employee is not entitled to labor and social benefits. The employment relationship is suspended; therefore, no seniority will be generated during it.

– Termination of the agreement: The employment relationship ends once the term has concluded, without any other formality.

– Termination for cause: Under Labor Code provisions to terminate an employment relationship with cause, prior Labor Ministry authorization (“Visto Bueno”), the following definitions shall be included:

  • Indiscipline: Breach of terms to return in cases of licenses or mobility.
  • Ineptitude: If employee obtains results below the minimum for 2 consecutive times or 3 times throughout his/her career. The term for request the Labor Ministry authorization will run from the date on the employer’s decision to separate the employee.

– SUT´s registration: Within a period of 15 days upon its execution.

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Amendments to the tax regime for small businesses

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Executive Decree 1240 issued on February 3, 2021 by the President of the Republic amended the Internal Tax Regime Regulations regarding the Tax Regime for Small Businesses.

It establishes that, in order to calculate the income tax, taxpayers subject to such regime must apply a 2% rate over the net sales derived from the business activity subject to this regime and subtract: (i) the income tax withholdings made in the same period with respect to the activities subject to the regime; and, (ii) the income tax credit.

It is also stated that taxpayers subject to the regime, that in the fiscal year 2020 did not obtain any profit (calculated before paying the income tax) from the economic activities subject to the regime, may:

1. Pay the applicable income tax for the fiscal year 2020 until November 2021; and,
2. Pay the applicable income tax for the fiscal year 2021 until March 2022.

Those taxpayers who have paid the tax with interest and penalties will not be entitled to request a reimbursement.

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Foreign shareholders information

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Regulation NAC-DGERCGC21-00000005 issued on January 21, 2021 by the General Director of the Internal Revenue Service establishes the transitory regime applicable in 2021 for filing information of foreign shareholders.

Prior to the enactment of the Law of Modernization of the Companies Law, on December 10, 2020, limited liability companies and corporations were required to submit to the Superintendence of Companies, in the month of January of each year, the list of foreign shareholders.

The aforementioned Modernization Law established that this information had to be filed before the Internal Revenue Service, in accordance with the terms and conditions established for such purpose.

However, Regulation NAC-DGERCGC21-00000005 issued by the Internal Revenue Service establishes that, for this one time only, companies must file this information through the web portal of the Superintendence of Companies (www.supercias.gob.ec) until January 31, 2021.

Compliance with this obligation does not exempt taxpayers from filing the Shareholders’ Annex (APS).

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Regulations issued by the superintendency for the control of market power

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Three regulations were issued by the Antitrust Authority (“SCPM”) and published in the Supplement of Official Gazette No. 374.
1. Reform of the Guidelines for Administrative Procedures:
(i) Regulates the process of meetings that precede the mandatory filing for antitrust clearance of economic concentration operations, determining that the meetings will be recorded and do not exempt the applicant from submitting the notification within 8 calendar days after the conclusion of the agreement leading to the economic concentration operation.
(ii) It establishes specific times for analysis by the National Intendancy for Control of Economic Concentrations (in the investigation stage) and in the Resolution Board (in the resolution stage), both in Phase 1 (resolution within 25 business days following the declaration of completeness of the filing) or Phase 2 processes (resolution within 60 business days following the declaration of completeness of the filing).
(iii) Determines the criteria to be considered by the National Intendancy for Control of Economic Concentrations to evaluate the innocuousness of an economic concentration operation and based on this, the determination of a resolution in Phase 1 or Phase 2.
(iv) Regulates information requests and the sanctioning procedure applicable for infractions of the Organic Law for Regulation and Control of Market Power that do not constitute anticompetitive practices (for example: breach of duty to collaborate, non-delivery of information required in the times and form determined by the Antitrust Authority, or failure to comply with corrective measures).
(v) Modifies the disposition and evaluation of corrective measures regime. The most relevant change being that the implementation of corrective measures is not mandatory every time a sanction is imposed, but that these measures will be imposed only when they are deemed necessary to restore the market.
2. Guidelines for the identification and review of regulatory barriers
Regulates the procedure to be applied by the National Competition Advocacy Office for the identification and review of regulations that impose illegitimate or disproportionate restrictions/entry barriers. This procedure, which can only be initiated by the SCPM´s own decision, has a maximum duration of 90 days from the date when the start of the analysis is resolved.
The legal review is composed of two stages: (i) a legality analysis by which the authority´s competence to issue the regulation under review, and (ii) a review of the consistency of said regulation with the existing regulation considering the hierarchy of norms.
If the reviewed regulation passes the legal analysis, the reasonableness and proportionality of the restriction it imposes will be analyzed in the second stage, weighed against the protected legal asset: the public interest. For this analysis, its suitability, necessity, and proportionality in the strict sense must be determined.
If it is determined after these analyses that the reviewed regulation is illegal or that it imposes an unreasonable barrier to entry, the Antitrust Authority will propose to the issuing Authority its elimination or modifications aimed to correct the undesirable effects.
3. Comprehensive modification of the guidelines for the filing fee for review of economic concentration operations
Prior to this modification, the fee to be paid for the analysis of economic concentration operations was determined based on the financial statements of the immediately preceding fiscal year of the entity over which the change of control that gives rise to the economic concentration operation falls. It corresponded to the highest resulting value of the following alternatives:
  • 0.25% of income tax
  • 0.005% of total revenue
  • 0.01% of the asset value
  • 0.05% of equity
With the modification (i) the calculation method is simplified with the determination of a base fee that will be defined on a yearly basis by the SCPM, based on the real costs of the analysis of economic concentration operations and (ii) solves the inconvenience for operations submitted from January to April of each year, period in which there are no audited financial statements, by expanding the possibility of calculating the fee based on the financial statements of the second immediately preceding year.
The simplification of the calculation occurs as follows:
(i) Considers a scale for applying the base fee, which is applied only based on the income of the entity that bears the change of control that gives rise to the economic concentration operation:

(ii) Determines that the rate applicable to the analysis of economic concentration operations notified for information purposes (not mandatory filing) is half the base fee, regardless of the value of the total revenue.

(iii) Allows payment via wire transfer.

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Unified basic salary and minimum wages for economic sectors 2021

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The Ministry of Labor by Ministerial Agreements: MDT-2020-249 of November 30, 2020 and MDT-2020-282 of December 22, 2020, resolved to maintain for 2021, the same values of the unified basic salary (“SBU”) and the minimum wages for economic sectors of the year 2020.

The Authority underpins its decision considering that the registered inflation at the end of 2020 was negative (-0.73%), therefore, an increase in minimum wages for 2021 is not justified.

In this regard, the SBU for 2021 is $400.00.

Current regulations provide that in no case will a SBU be set lower than that of the previous year.

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Income tax payment for taxpayers subject to the microenterprises regime

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Regulation NAC-DGERCGC21-00000002 issued on January 6, 2021 by the General Director of the Internal Revenue Service and
published in the Official Registry 366 on January 8, 2021, approved the tax form 125 for the semi-annual payment of income tax for taxpayers subject to the microenterprises tax regime.

The tax form 125 and its instructions were published on January 14, 2021 on the IRS website at the link:
https://www.sri.gob.ec/web/guest/formularios-e-instructivos 

Taxpayers subject to the tax regime for micro enterprises must file an income tax return each semester basis, even if: (i) they are subject to file a monthly value-added tax return; or, (ii) they have not obtained income related to the regime.

During January 2021 and only for this occasion, taxpayers who belong to this regime are required to declare and pay the income tax of the first and second semester of 2020 accumulated.

In order to liquidate the tax, the taxable base is equal to the net sales from the business activity subject to this regime and the rate is equal to 2%. Any income tax withholdings may be reduced if applied during the same fiscal year and if related to the activities subject to the regime.

The tax form must be filed in the months of January and July each year depending on the ninth digit of the tax ID. Taxpayers whose ninth digit o is 1, 2 or 3 may -only for this occasion- file the tax return and pay the income tax applicable to the first and second semester of the 2020 on different days, according to the following calendar:

Taxpayers subject to the microenterprises tax regime that have also been qualified by the IRS as special taxpayers may – only for this occasion- file the tax return and make the payment of the income tax applicable to the first and second half of 2020, until January 19, 2021.

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