This country-specific Q&A provides an overview to tax laws and regulations that may occur in Ecuador.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-second-edition/
How often is tax law amended and what are the processes for such amendments?
Over the last 10 years, Ecuador tax law has been amended 29 times (at least 2 amendments/year) to increase tax revenue, fight tax evasion and discourage aggressive planning.
The National Assembly has the power to create, amend or eliminate taxes. Notwithstanding, only the President is empowered to promote tax bills.
Bills are generally approved in 180 days minimum. However, tax amendments are usually proposed by the President under an economic urgency proceeding for approval in 30 days.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Income tax returns must be filed annually. VAT and withholding tax returns are filed monthly. Individuals generally file VAT returns every six months.
Taxpayers are required to maintain tax and accounting records for 7 years from the filing date of the income tax return.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
Servicio de Rentas Internas (“SRI”) is the regulatory authority. The tax administration works hard to help taxpayers comply with the tax law. Resources are available through the web, telephone or SRI offices. Taxpayers can easily obtain guidance from a SRI agent on questions related to day to day affairs. Other issues (formal consultation, tax refunds, or tax controversies) may take several months to be resolved.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Administrative tax resolutions can be challenged at court. Once a judicial proceeding is initiated, administrative actions available to the taxpayer become inadmissible. Judicial proceedings may take from 1 to 4 years. The court judgment may be challenged at National Court. In some cases, resolutions of the National Court may be challenged at Constitutional Court.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Corporate Income tax is due in April of every year. Individual Income tax is due in March of every year. Due dates are based on the ninth digit of the tax ID number.
Tax liabilities in administrative proceedings are suspended until final resolution. Tax disputes at court suspend the tax liability but the taxpayer needs to secure 10% of the liability (bond, insurance or cash). Otherwise, the claim will be unadmitted.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
The tax returns as well as any other information related to a tax liability of taxpayers can only be used to fulfill the purpose and duties of the tax administration. The taxpayer´s information available to the tax administration is reserved. Exceptions include information:
a) Of the identity of taxpayers and their tax liability.
b) to identify aggressive planning and ownership/operations of taxpayers doing transactions with tax haven jurisdictions;
c) about the creation, use and ownership of entities in tax haven jurisdictions.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Ecuador is not yet part of CRS. However, Ecuador just adhered to the Global Forum last May. It is expected that the local tax administration will promote amendments to the law to allow implementation of CRS soon.
What are the tests for residence of the main business structures (including transparent entities)?
A foreign entity is assumed to have a trade or business in Ecuador for tax purposes if it:
a) Maintains places or fixed centers of economic activity.
b) Has an office to engage in consultancy or services.
c) has a person or entity acting on its behalf and regularly holds or exercises in the country
some activity of economic nature.
The following activities do not create a permanent establishment in Ecuador:
(i) The use of facilities to display goods or merchandise;
(ii) The maintenance of a place for the sole purpose of collecting and supplying information; and,
(iii) Engaging in activities through broker, agent, representative, distributor or any independent intermediary.
Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Cross border transactions have been a target in tax audits for many years. The use of intermediary entities by exporters/importers in Ecuador to shift income to other jurisdictions (traditionally tax havens) has been a widespread practice among taxpayers. This type of planning is currently considered aggressive if the activity lacks economic substance. Today, transfer pricing rules regulate this type of transactions. Other transactions such as related party foreign financing have been banned by penalizing interest payments as nondeductible.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
There is no CFC regime. However, the SRI contests income tax deferral by applying the concept of economic substance to determine whether an entity exists exclusively for tax purposes. Ecuador tax system includes a definition of phantom and non- existing entities. Cost and expenses charged by these type of entities are considered nondeductible.
Ecuador does have a transfer pricing regime which requires tax payers to report transactions with related parties on a transfer pricing annex if they exceed $3MM in a fiscal year. Related party transactions in excess of $15MM a year, are required to be reported in a transfer pricing complete report. Advance pricing agreements are available with a validity of 3 years.
Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only, etc?
Anti-avoidance rules in Ecuador include transfer-pricing, thin capitalization and interest deductibility restrictions. Although Ecuador does not have CFC rules, the local tax administration combats deferral by applying the concept of economic substance to disregard entities that exist exclusively for tax purposes. Enforcement of GAAR is commonly reviewed in tax audits. The SRI is not empowered to negotiate with taxpayers.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
Ecuador over the years has implement OECD recommendations. Below, the status of implementation:
Action 3. Even though Ecuador does not have CFC regime in place, the tax administration combats tax deferral by applying the concept of economic substance to recognize or disregard foreign entities.
Action 4. Thin capitalization rules are in force. Deductibility of interest on foreign loans is limited to loans from financial institutions.
Action 5. Disincentives to tax haven jurisdictions include: i) a higher corporate income tax rate to entities with shareholders located such jurisdictions, and ii) higher withholding rate applicable to payments and distributions of dividends made to such jurisdictions.
Action 6. Automatic access to treaty benefits has been significantly reduced. Any benefit in excess of the limitation requires submitting a refund. New treaties include antitreaty shopping provision.
Action 8-10. Ecuador does have transfer pricing regime.
How will BEPS impact on the government’s tax policies?
The world is becoming transparent by the day. Ecuador is not an exception. Ecuador just adhered to the Global Forum. Ecuador tax system will continue to change over the years to include OECD recommendations including BEPS and CRS. A tax amnesty program is expected soon. We foresee a sophisticated tax administration combating aggressive tax planning to increase tax revenue.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
Corporations are subject to a flat tax rate of 22% on all income from domestic and foreign sources (including business income, passive income -rents, royalties, dividends, interests-, and capital gains). If 50% or more of the capital of the entity is owned by shareholders domiciled in a tax haven jurisdiction, the income tax rate is 25%. If less than 50% of the capital of the entity is owned by shareholders domiciled in a tax have jurisdiction, the 25% income tax rate only applies to the income attributable to such shareholders. The remaining profits are taxed at 22% rate. The corporate income tax rate may be reduced by 10 points if profits are reinvested for specific purposes provided in the law.
Individuals are subject to progressive tax rates. Taxable income includes domestic and foreign sources, be it business income, employment income, professional fees, passive income -rents, royalties, dividends, interests-, and capital gains). Income tax rates applicable for 2017 are listed below.
Año 2017 - En dólares
Impuesto Fracción Básica
Impuesto Fracción Excedente
Gains from the sale of real estate are tax exempt provided the taxpayer is not engaged in the business of buying/selling real estate.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Income tax is levied on taxable profits, as determined by its books of account kept according to IFRS (International Financial Reporting Standards). However, corporations and certain individuals are subject to an income tax advance determined in the income tax return of the previous year and payable during the current year. The income tax advance is a credit against the income tax liability calculated at the end of the year.
The income tax advance is calculated over the sum of: 0.4% of assets, 0.2% of equity, 0.4% of taxable income and 0.2% of deductible expenses.
If the income tax advance is higher than the income tax liability, the income tax advance becomes the income tax liability, exposing the taxpayer to excessive taxation.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Any vehicle for carrying business in Ecuador is an entity for tax purposes subject to income tax as a corporation would be. These vehicles include de facto entities and independent estates with or without legal personality.
The only transparent entity recognized in the Ecuadorian tax legislation is the “fideicomiso mercantil” if it is not engaged in a trade or business.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Tax residency for corporations is based on registration and therefore, any corporation incorporated in Ecuadorian territory will be considered a tax resident of Ecuador.
Tax residency for individuals is based on any of the following methods: a) residing 183 days or more in Ecuador in any given 12 months period unless being able to proof residency in another jurisdiction, in which case, the 183 days apply only to a calendar year. If the jurisdiction of residency is a tax haven jurisdiction for Ecuadorian tax purposes, the individual will be considered to continue the tax residency in Ecuador for the following 4 years. Sporadic absences from Ecuador (those that do not exceed 30 days) will not be deducted from the day count; b) the principal place of business is located in Ecuador (i.e. The majority of the income/value of assets is sourced in Ecuador); and c) family ties to Ecuador (wife and dependent children residing in Ecuador) provided there is no proof of tax residency in any other jurisdiction.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Our legislation contemplates the creation of Special Economic Development Zones (ZEDE) to carry out activities involving the transfer and disaggregation of technology and innovation, or carrying out industrial diversification operations or developing logistics services. Depending on the activity, the regime may qualify to income tax incentives such as tax holidays of 5 to 10 years. Import and export duties may be deferred or exempted depending on the case.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
There is no tax regimen applicable to intellectual property.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
There is not tax consolidation allowed in Ecuador. Each entity of a business group is taxed separately.
However, for information purposes, the local tax administration is allowed to group several entities into an economic group. An economic group is defined as a sum of parties (entities and individuals), local and foreign, where one or more own directly or indirectly 40% or more of the participation of the other. The tax administration can also take into consideration, for this purpose, common direction/administration and commercial relations between them.
Are there any withholding taxes?
Withholding taxes apply to all payments made locally by withholding agents. It also applies to all payments made by any individual or entity to a foreign beneficiary.
The withholding tax rates applicable to local payments go from 0.2% to 10% depending of the nature of income being paid.
The withholding tax rate applicable to payments abroad is 10%-13%-22%-25% or 35% depending on the nature of the income paid or the jurisdiction of residency of the recipient of payment.
Are there any recognised environmental taxes payable by businesses?
Ecuador tax system contemplate two environmental taxes. One is a tax on vehicle pollution payable by owners of motorized road transport vehicles on an annual basis to disincentive the consumption of fuel.
The other is the tax on nonrefundable plastic bottles to promote recycling and to disincentive the use of this type of bottles. The tax is up to $0.02 per bottle and it is refundable to any one that collects and returns the used bottles.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Dividend income distributed by a domestic entity to an Ecuadorian individual is subject to withholding by the distributing entity at a rate equivalent to the difference between tax owed by the shareholder on the dividend income (grossed up with the tax paid by the entity and attributable to the dividend) as if the dividend were the only taxable income, minus the corporate income tax paid at the entity level.
Dividends distributed to shareholders domiciled in a tax haven jurisdiction are subject to a 10% withholding.
Dividends distributed to domestic entities or to foreign shareholders not domiciled in a tax haven jurisdiction are tax free.
From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?
The Ecuadorian tax system contemplates tax incentives for foreign investment:
- No withholding tax on dividends distributed to shareholders not domiciled in Ecuador provided the shareholder does not reside in a tax haven jurisdiction for Ecuadorian tax purposes. UK is not considered as a tax haven by the Ecuadorian authorities.
- No 5% tax on the exit of the currency from Ecuador to a foreign jurisdiction provided the foreign shareholder does not reside in a tax haven jurisdiction for Ecuadorian tax purposes. As Ecuador does not have a local currency, the tax authority has established a 5% tax to the exit of currency to avoid flight of capitals.
- A 10pts discount to the corporate income tax (22% tax rate) to promote reinvestment of profits in certain activities defined by the law.
- No income tax for the next 5 years to new entities set up to engage in certain activities promoted by Government (“Productive Activities”). The tax holiday starts on the 1st year the entity generates taxable income attributed to the new investment. This tax holiday may extend to 10 years if the Productive Activities are considered basic industries as defined by the law or if the investment is carried out as a public project in a public-private joint venture.
- No income tax advance due for 5 years to new entities starting the date the entity initiated its trade or business.
- No 5% tax on the exit of currency from Ecuador applicable to the repayment of capital invested in Productive Activities.
- Tax incentives stability for a period of up to 15 years by signing an investment agreement with the Ecuadorian Government.
From a tax point of view, Ecuador presents the following disadvantages:
- The income tax advance if applicable, may expose the entity to excessive taxation. Income tax advance is determined based on assets, equity, taxable income and deductible expenses. If the income tax advance is higher than the income tax liability at the end of the year, the advance becomes the income tax due by such entity.
- Indirect taxes calculated over the value of assets of the entity may impact the effective tax rate of the entities.
- Tax law changes frequently.
- The courts frequently dismiss claims of the taxpayers and rule in favor of SRI.