Ecuador is currently in a state of tax reform and many different areas of tax policy are being adjusted. This is undoubtedly creating some strain on a number of different companies and industries within the country. From an accounting perspective, this tax reform strives to make the overall corporate tax system much simpler and will further improve the financial structure of the government as they attempt to eliminate fuel subsidies.
At this point, companies are subject to a flat-rate income tax of 25% after workers’ and employees’ profit shares have been deducted (approximately 15%). Additionally, personal tax rates will remain the same at a variable rate of 5-35% based on a number of factors.
It is important for multinational companies to understand that a number of items are exempt from the VAT (value-added tax), such as:
- Capital contributions to companies
- Asset and liability sales in any business or industry
- Adjudications of liquidated companies
- Mergers
- The division of a company
- Charitable donations
- Share transfers
This tax reform has created a number of implications for the people of Ecuador. For one, any company with an annual revenue over $1 million will be taxed at a higher rate than stated in the plans for the tax reform, and any individuals with annual income over $100,000 will be unable to deduct personal expenses from their income tax.
A number of items of the Ecuadorian labor law have also been proposed as potential for changes and updates. This labor reform has also propositioned for the creation of new incentives for small and medium sized companies that export Ecuadorian goods to other countries. Additionally, the fixed term contract that was abolished in 2016 has been brought back into practice through the updates to the labor reform. These fixed term contracts can be created for up to 12 months, and if at the end of the contract the employer wishes to extend the contract it can be renewed for up to an additional 12 months. After this point, if the employer still wishes to renew the contract, this will be completed by providing the employee with an indefinite contract. Situations such as this may provide less overall stability to employees, therefore the government will have to create strong policies to ensure that the contracts are dispensed in a constitutional manner.
Finally, the Ecuadorian government is working to create a new plan for fuel subsidies. This is important to their economy as crude petroleum is the number one exported item from Ecuador. Ecuadorian citizens have not reacted kindly to the changes proposed in these reforms. Mass riots, looting and violent protests have affected the country gravely in the past few weeks as the President announced a fuel price increase in order to aid with the country deficit caused primarily by fuel subsidies. Over the next few months we will see the tax and labor reforms in Ecuador take place and begin to understand how much this will actually affect the country as a whole.
