Financial Crime World

Ecuador Joins OECD, Adopts Transfer Pricing Rules

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Ecuador has officially become a member of the Organisation for Economic Cooperation and Development (OECD), adopting its pillars on arm’s length principle to determine transfer pricing adjustments.

Tax Requirements

  • The country’s tax authority requires taxpayers to maintain documentation supporting transactions subject to transfer pricing rules.
  • Transactions between related parties exceeding $3 million must submit an annual Transfer Pricing Annex, while those above $10 million require a report justifying prices aligned with the arm’s length principle.

Withholding on Income Tax

  • Ecuador imposes a 25% withholding tax on income earned abroad by residents for services, interests, rents, royalties, management, and administration expenses.
  • However, this rate may be reduced under double taxation agreements with countries that have such pacts in place.

Multilateral Instrument

  • The country has adopted the OECD’s Multilateral Instrument (MLI) to prevent base erosion and profit shifting (BEPS).
  • The MLI aims to ensure that multinational enterprises are taxed where they generate profits, regardless of where their headquarters are located.

Indirect Taxes

  • Ecuador imposes a value-added tax (VAT) on all goods and services at 15% and construction materials at 5%.
  • Exports are exempt from VAT.
  • The country also has a Tax Special Consumptions (TSC) on distributors, manufacturers, importers, and certain products determined by law.

Deductible Expenses

  • For the 2024 tax year, Ecuador has introduced revisions to deductible expenses.
  • A reduction of 18% is applied to the lower amount between projected personal expenses and the basic family basket for the month of January, based on the number of family dependents.

Income Tax Rate

  • Ecuador’s income tax rate is progressive, ranging from 0% to 37%.
  • Net income exceeding $11,902 is taxed at a rate that increases with income level.
  • Taxpayers can apply deductions and credits against their income tax liability.

Tax Credits

  • Taxpayers are entitled to a VAT credit for taxes paid on goods and services used in the production and marketing of other VAT-taxed goods and services.
  • The country also allows a deduction for discounts, bonuses, returned goods, interest, and insurance premiums in installment sales.

Conclusion

Ecuador’s membership in the OECD demonstrates its commitment to transparency, fairness, and cooperation in taxation matters. The country aims to promote economic growth by creating a stable and predictable tax environment for businesses and individuals.