The law temporarily increases taxes to aid in the reconstruction after the earthquake. Taxpayers should ensure that they comply with the new tax measures.

Ecuador enacted and published, in the Official Gazette, on May 20, 2016, The Citizen Solidarity and Stewardship Organic Law for the Reconstruction and Recovery of the Areas Affected by the Earthquake (the Law), which funds a multi-billion dollar reconstruction after the devastating 7.8 magnitude earthquake on April 16. The tax provisions are effective according to the rules established in Article 11 of the Tax Code.¹

Salary contribution

Under the Law, workers under labor agreements that receive a monthly salary equal to or greater than USD 1,000 will pay a contribution equal to a day's payment for the next eight months beginning from May 20, 2016, according to the following table:

VAT

The Law increases the value added tax (VAT) from 12 % to 14% for one year. The increased VAT does not apply to taxpayers who are located in the affected provinces (Manabí and Esmeraldas).

Individuals who are final consumers and make their purchases of goods and services in the provinces of Manabí and Esmeraldas will receive from the government a discount equivalent to the 2% VAT increase paid on their consumption.

Additional 3% tax on corporate profits

The Law imposes an additional 3% tax on 2015 taxable profits of entities that carry out economic activities and are subject to the corporate income tax.

Individuals will pay the additional 3% tax on the 2015 taxable base when it is higher than USD 12,000. Income obtained from work under a labor relationship and profit sharing are not considered in the calculation of the additional 3% tax.

Additional tax on assets

The Law imposes an additional 0.9% tax on individuals with assets of more than USD 1 million.

Taxpayers with assets or economic activity that was affected by the earthquake and are residents of the provinces of Manabí and Esmeraldas are exempt from this payment.

Additional tax on real estate

The Law imposes a tax equal to 1.8% of the valuation of real estate listed in the Land Registry and the equity value of the capital representative rights (i.e., property rights in an entity, including stocks, shares and dividends) in entities resident in Ecuador that are held by residents in tax havens.

The tax is 0.9% for other foreign entities not domiciled in tax haven jurisdictions.

To calculate the tax, the tax base is calculated on the equity-method value (i.e., a financial method used to value the investment in capital representative rights).

Other provisions

Taxpayers in the affected provinces of Manabi and Esmeraldas are exempt from the Law. If a taxpayer paid taxes for which it is exempt, the Tax Authority will refund the taxes paid.

———————————————

———————————————
ENDNOTES

¹ The rules related to monthly taxes, however, will apply from June 1, 2016.