Financial Crime World

Ecuador Grapples with Tax Evasion as New President Takes Office

QUITO, Ecuador - The new administration of President Guillermo Lasso has announced plans to tackle the country’s long-standing issue of tax evasion, which has plagued Ecuador for decades.

Background on Tax Evasion in Ecuador

According to experts, Ecuador’s tax authority, the Internal Revenue Service (IRS), has been struggling to effectively collect taxes due to a lack of resources and inadequate enforcement. As a result, the government has lost significant revenue, impacting its ability to fund public services and infrastructure projects.

President Lasso’s Plans to Combat Tax Evasion

To combat this issue, President Lasso has announced plans to:

  • Increase oil production by nearly 100,000 barrels over the next four years, generating an additional USD860 million in income for the state.
  • Eliminate or reduce Value Added Tax (VAT) during four holidays every year to promote tourism.

Proposed Tax Reform

The new president has also proposed a tax reform aimed at promoting local and foreign investment. The reform includes:

  • Eliminating the 2% income tax on total sales levied on small businesses.
  • Gradually reducing the currency remittance tax.
  • Increasing control to combat tax evasion.

Additionally, the government has introduced several other initiatives aimed at improving tax collection and enforcement, including:

Tax Withholdings

  • Income earned in Ecuador and remitted abroad is subject to income tax withholdings at rates ranging from 10% to 25%.
  • Payments made by economic agents within Ecuadorian territory are also subject to income tax withholdings.

VAT on Digital Services

  • The government has recently enacted a law that charges VAT on digital services provided to Ecuadorian residents.
  • Credit card issuers, intermediaries, and certain residents are responsible for withholding taxes whenever the service provider is not registered with the Ecuadorian tax authority.

International Tax Agreements

Ecuador has entered into double taxation treaties with several countries, including:

  • Argentina
  • Belgium
  • Brazil
  • Canada
  • Chile
  • China
  • Colombia
  • France
  • Germany
  • Italy
  • Japan
  • Mexico
  • Peru
  • Qatar
  • Romania
  • Russia
  • Singapore
  • South Korea
  • Spain
  • Switzerland
  • Uruguay

The country has also signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Information and ratified the Convention on Mutual Administrative Assistance in Tax Matters.

Transfer Pricing System

Ecuador’s transfer pricing system is based on OECD principles and technical guidelines. Taxpayers must file transfer pricing reports under certain conditions to assess the fulfillment of the arm’s length principle in related party transactions.

COVID-19 Response

In response to the COVID-19 pandemic, the government enacted a law that provided tax incentives for financial institutions and other economic activities such as tourism. However, most of these provisions expired once the state of emergency ended.

  • Mining has become an important industry in Ecuador, with significant potential to generate revenue for the government.
  • The country’s mining sector could become a major source of income in the near future.