An extract from The Inward Investment and International Taxation Review, 10th Edition
Direct taxation of businessesi Tax on profits
Companies are subject to a flat-rate income tax of 25 per cent, which is calculated after the 15 per cent workers' and employees' profit share is deducted. The tax rate is increased to 28 per cent if 50 per cent of the corporate capital is owned by residents or beneficiaries located or resident in tax-haven jurisdictions. However, companies intending to use their profits to increase their capital for the purpose of investments in new industrial plants or other specially determined capital investments are taxed at a rate of 12 per cent.
All company revenues and earnings are subject to income tax in Ecuador, except income obtained abroad if it was taxed abroad unless such income is obtained in tax havens. Under specific tax treaties implemented to avoid double taxation, including the Andean Community of Nations regulations on double taxation, source-of-income principles on income taxation are applicable.
All expenses directly incurred to obtain, maintain and increase revenues by the company are deductible provided that they are shown in legally approved invoices, and if such expenses were incurred for payments abroad, a withholding income tax of 22 per cent is withheld.
Generally, 20 years' amortisation is applicable to buildings and constructions, while three to five years' amortisation is applicable to movable property, although under specific conditions faster amortisation might be applied considering the obsolescence of the assets, while amortisation of investments, including pre-operational investments, is five years. Intangibles are amortised over 20 years. However, under international accounting standards rules, companies may establish their own amortisation and depreciation rates according to the effective life of each asset. Amortisation of 100 per cent is provided for the acquisition of equipment destined to improve clean production, the generation of renewable energy or reduction of environmental harm.
Losses may be amortised or carried over for a period of five years, with a maximum of 25 per cent of the losses per year.
Individuals, including those conducting commercial business without a company structure, are taxed at a progressive rate from 5 to 35 per cent. Dividends earned from companies are added to individuals' income, and taxed on the amount equivalent to 40 per cent of the received dividend.
Fiscal years correspond to calendar years. Income tax returns are filed during the first four months of the year by companies, and during the first three months by individuals, when the income tax or any balance thereof is also paid. Advanced income tax payment for the next year is equivalent to 50 per cent of the income tax of the preceding year, calculated after deduction of the amounts withheld at the source of the income. This is paid in two instalments during July and September. Such advanced income tax is calculated on the basis of the mathematical addition of 0.2 per cent of the net worth, 0.2 per cent of the expenses, 0.4 per cent of the total assets and 0.4 per cent of taxable income if such sum is higher than the advanced payment calculated on the basis of 50 per cent of income tax. Tax returns and tax payments are filed and made through private banking institutions.
The SRI is the only national administrative body regarding income tax, VAT, tax on special consumption and tax on remittances of money abroad, and other national taxes except customs duties, which are under the control of the National Customs Corporation. Municipalities administer and control municipal taxes such as, inter alia, real property tax, tax on transfers of real property, tax on capital gains derived from the sale of real property, tax on business capital assets and business year authorisation tax. The SRI has offices and agencies in all cities in Ecuador.
The SRI and other tax authorities have the power to regulate the application of taxes and answer matters raised by taxpayers, which become binding. The SRI has the power to audit national taxes and to decide on administrative claims filed by taxpayers concerning the results of tax decisions. Taxpayers may claim against original tax decisions or final administrative decisions before the courts. However, to suspend the enforcement of the decision of the taxing authorities, in the event a judicial claim is filed, a bond equivalent to 10 per cent of the tax debt should be rendered, otherwise the action brought will not be admitted.
Holding companies – that is, companies whose only corporate purpose is to own shares, quotas or rights in other companies with the purpose of having direct control over such other companies – may consolidate the financial results of all of the controlled companies, but for the purposes of taxation, each company forming the economic group is an independent taxpayer.
For the purposes of control by the SRI and other tax authorities, economic groups are those where one or more persons have at least a 40 per cent participation in other companies. The importance of economic groups relates to the rules on transfer pricing either internally or externally.ii Other relevant taxes
VAT is applicable to the transfer of ownership or to the importation of movable goods of a corporeal nature in all phases of trading, as well as to the transfer of copyright and connected rights, and industrial property rights, and to services rendered as provided in the law. The ordinary rate is 12 per cent of the price or value of the good or service, except for some transactions that are subject to a zero per cent rate (which means that, in practice, there is tax).
Transfers for the purposes of the application of VAT are any act or contract intended to transfer ownership of the above-mentioned goods or rights, either by sale or gift, and the use or consumption of corporeal movable goods produced by the user or consumer.
Certain transactions are not subject to VAT, including:
- contributions to the capital of companies;
- sales of total assets and liabilities of all kinds of businesses;
- adjudications in the case of partitions of estates or liquidated companies, or dissolved marital property;
- company divisions;
- donations to public entities or to non-profit organisations; and
- transfers of shares, quotas or participations in companies.
VAT paid in the acquisition of goods or services are tax credits with respect to VAT generated in the transfer of goods or rendering of services by a taxpayer subject to VAT.
Tax on special consumption is applicable to the importation or transfer of specific movable goods of a corporeal nature or to specific services determined by law, such as cigarettes, alcoholic beverages, sodas, perfumes, video games, firearms, incandescent bulbs, vehicles, aeroplanes, ships, paid television services, casino services and social club affiliation services. The rates vary from 10 to 300 per cent of the price of the goods or services.
Other important taxes are:
- the 5 per cent tax on any transfer of money abroad, except importations and the payment of registered foreign loans;
- the annual contributions to the Superintendence of Companies by companies controlled by such entity, mainly stock corporations and limited liability companies, and to the Superintendence of Banks and Insurance by the companies controlled by such entity;
- the annual municipal taxes on total assets of commercial business (at a rate of 0.15 per cent); and
- customs duties.
All transfers of assets or rights to juridical persons or individuals domiciled in tax heaven jurisdictions are deemed as donations and subject to the applicable tax.
The municipalities also collect taxes on real property and on the transfer of real property, including taxes on capital gains derived from the sale of real property. There is also a tax on funds maintained abroad by financial companies and banks, and by companies managing funds and trusts.
Under the Environmental Development and State Resources Optimisation Act of 2012 (Act of 2012), banana production is subject to income tax calculated on the basis of a rate of 2 per cent on gross revenues. This way of determining income tax might be applicable, if requested by the producers' associations, to agriculture, fisheries and aquaculture activities. The Law on tax incentives for certain sectors, in force since 12 October 2016, imposes on other subsectors of agriculture activities, as well as on other subsectors of the fishery industry and of the aquaculture industries, a tax of 1 to 2 per cent on gross revenues.
Under the Act of 2012 and its amendments, rates for a special consumption tax on beer and cigarettes were increased through different models of calculations of taxation on units and ad valorem, or a mixture of both. Special consumption tax rates on other goods were also changed, especially in connection with vehicles, to encourage the production and importation of hybrid or electrical vehicles.
A special tax on environmental contamination is applicable to persons or companies that are owners of motor vehicles. The rates are established on the basis of the impact to the environment (based on the size and the age of the vehicle).