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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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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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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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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Special consumptions tax (ICE) – Tariffs applicable in 2021

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The General Director of the Internal Revenue Service issued three regulations on December 23, 2020, which were published in the Second Supplement of the Official Registry 359 on December 29, 2020, which are:

1. Regulation NAC-DGERCGC19-00000078 establishes the Special Consumption Tax (ICE) specific tariffs applicable in 2021:

Compared to the tariffs applicable in 2020, the tariffs for cigarettes and soft drinks remain the same, the tariff for plastic bags increases -established by law- and the remaining tariffs are slightly reduced compared to 2020.
2. Regulation NAC-DGERCGC19-00000079 adjusted the manufacturer’s and ex-customs’ sales price value by US$4.29 per liter for applying the Ad Valorem tariff on alcoholic drinks, including beer, applicable for fiscal year 2021.
In 2020 the value was US$4.33 per liter.
3. Regulation NAC-DGERCGC19-00000080 established the percentages of increase to be applied over the ex-customs price or the total production costs to determine the referential prices of perfumes and toilet waters marketed through direct sale (the manufacturer or importer sells to final consumers directly and not through commercial establishments), for fiscal year 2021, according to the percentages detailed in the following table:

The values detailed in the table are the same as those established for the year 2020.
For calculating the tax, the total production costs of the nationally manufactured goods must include raw materials, direct labor, and indirect manufacturing expenses.
Any royalty payments calculated on the basis of volume, value or amount of sales will be considered part of the total production costs for calculating the tax. However, if the royalties do not exceed 5% of the sales, they should not be considered as part of the taxable base.

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Tariffs applicable in 2021 for calculating income tax

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Regulation NAC-DGERCGC19-00000077 issued on December 23, 2020, by the General Director of the Internal Revenue Service establishes the tariffs applicable in the fiscal year 2021 for calculating income tax.

1. Tariffs for calculating and paying income tax applicable to income received by Individuals and Undivided Inheritances in the fiscal year 2021:

2. Tariffs for calculating and paying income tax applicable to patrimonial increase derived from inheritances, legacies, donations, discoveries and any type of act or contract by which the ownership is acquired free of charge of goods and rights in the fiscal year 2021:

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Tax regime for small businesses

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Resolution NAC-DGERCGC20-00000060 issued on September 29, 2020 and published in the Special Edition of the Official Registry 1100 on September 30, 2020, the Director of the Internal Revenue Service established the rules for applying the tax regime for small businesses.

1. Definitions

  1. Small business: It is a productive unit that has up to 9 workers and an annual revenue equal to or less than US$300,000.00. For classifying an enterprise as a small business, the amount of income will prevail over the number of workers.
  2. Main economic activity: The economic activity registered in the Tax Registry (RUC) which generates the higher amount of income during a fiscal year in comparison with the other activities.
  3. Commissioner: Individual, corporation or permanent establishment that habitually engages in the sale of goods, rights, or the provision of services in exchange for a commission.
  4. Capital gains: Profits derived from the placement of capital, shares, credits, and investments of any nature, as long as they do not involve productive processes, the provision of services or other work. For example, the lease of real estate.
  5. Self-employed individuals: Individuals who regularly performs an economic activity on his own account without a labor relationship and receives an income different from a salary or wage. Economic activities of liberal occupation are excluded.
  6. Professional services: Services provided by individuals who have a professional title and are directly related to that title. Including activities related to education, teaching and training related to the professional title.

2. Inclusion/exclusion from the microenterprise regime

The Internal Revenue Service will be able to include or exclude ex officio in the register of small businesses those taxpayers who fulfill or no longer fulfill the conditions to be considered as such. This registry will be published on the IRS website until September 30 of each year.

Taxpayers will be subject to this regime from the first day of the fiscal year following their inclusion of the registry.

The ex officio exclusion will be executed without the need for prior notice and will take effect from the first day of the fiscal year following that exclusion.

Taxpayers who have been subject to the regime for 5 years will cease to be part of it from the first day of the year following the date on which the maximum time was reached.

When taxpayers consider that their inclusion or exclusion from the regime is not appropriate, they are able to file a petition to have that decision reviewed in a term of 20 days counted from the publication of the registry.

3. Registration of new taxpayers

When obtaining the tax registry (RUC), the taxpayer must inform the Tax Authority all its economic activities, the income that might be derived from such activities and the number of workers.

If the taxpayer fulfills the conditions to be considered as a small business, it will be able to start its activity under the small business regime. Otherwise, he will begin its activity subject to the general regime and the authority is able to include the taxpayer in the regime ex officio.

4. Limitations to the regime for microenterprises

Taxpayers who exclusively develop one or more of the following activities will not be subject to the small business regime:

  1. Those taxpayers who are subject to the Simplified Tax Regime for Ecuador (RISE) and Simplified Tax Regime for the Organizations of the Popular and Solidarity Economy.
  2. International organizations, multilateral organizations, specialized international agencies, non-governmental organizations, government institutions and public enterprises.
  3. The financial institutions subject to the control of the Superintendence of Banks, and the organizations of the popular and solidary financial sector, subject to the control of the Superintendence of Popular and Solidary Economy.
  4. Those taxpayers who exclusively develop construction and urbanization activities.
  5. Those taxpayers who exclusively develop activities of liberal occupation, as well as individuals whose economic activity is the provision of professional services, notaries, and registrars.
  6. Those taxpayers who provide public transport services to passengers, as well as the services of commercial transport.
  7. Those taxpayers who exclusively obtain income from a labor relationship.
  8. Those taxpayers who exclusively obtain income subject to single income tax.
  9. Those taxpayers that exclusively obtain capital gains, including holding companies.
  10. Those taxpayers that carry out exploration, exploitation and/or transportation activities of non-renewable natural resources.
  11. Those taxpayers that receive income from international transport of passengers, cargo, express airlines, or couriers incorporated under foreign laws and that operate in the country through branches, permanent establishments, agents, or representatives.
  12. Distributors of hydrocarbon derivatives, liquefied petroleum gas, natural gas, and biofuels.

5. Taxpayer’s obligations

Taxpayers subject to the small business regime must comply with the formal and material obligations set forth in the law, including the following:

  1. Entities are required to keep accounting books in accordance with the regulations established by the controlling authorities. In the case of individuals, if they are required to keep accounting books, they must follow the International Financial Reporting Standards for SMEs.
  2. Taxpayers are required to issue invoices and withholding receipts and complementary documents in applicable cases. The documents must contain the caption “Small Business Taxpayer”.
  3. Taxpayers are required to file value added tax (VAT), excise tax (ICE) and income tax returns on a semester basis, in the months of July (first semester) and January (second semester).
    However, taxpayers may file the VAT and ICE tax return on a monthly basis, during the entire fiscal year.
  4. Taxpayers must file an annual income tax return, in addition to the semi-annual income tax returns in the following cases:
    • Entities and permanent establishments in all cases.
    • Individuals who receive income from sources different form the activities subject to the small business regime.
    • Individuals who request the reimbursement of income tax.
  5. Taxpayers who are required to file the Simplified Transaction Annex (ATS) must file it every six months. If they choose to file the VAT return on a monthly basis, the ATS must also be filed on a monthly basis.
  6.  Taxpayers who are required to file the excise tax annex must file it every six months. If they choose to file the excise tax return on a monthly basis, the annex must also be filed on a monthly basis.

6. Withholding taxes

Taxpayers subject to the small business regime are not required to withhold income tax or VAT, except if they are qualified by the IRS as special taxpayers or withholding agents and in other cases established by law.

<p style="text-align: justify;">However, taxpayers under the regime will be subject to income tax and VAT withholding. In the case of income tax, the withholding tax percentage will be 1.75% over the income derived from the business activities subject to the regime. If the taxpayer obtains revenue from sources other than the business activity subject to the regime, such revenue will be subject to the withholding percentages provided in the current tax regulations.

If taxpayers subject to the regime have made withholdings, they must declare and pay them as follows:

  1. Value added tax withholdings on a monthly or semi-annual basis, depending on the periodicity of the VAT return.
  2. Income tax withholdings on a semi-annual basis, in the months of July -first semester- and January -second semester-.
  3. If the taxpayer did not make any withholdings, the return must not be filed.

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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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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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