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Government’s new tax bill proposes moderate changes

Published on November 01, 2021

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The Assembly has 30 days to decide whether to approve or reject it.

On Thursday night, October 28, 2021, Fabián Pozo, legal secretary of the Presidency, presented its new urgent economic bill (that includes reforms to the country’s tax system) to the Assembly. One of those changes are the values ​​that would be charged for income tax and the items to be deducted.

The bill presented is the first of three that President Guillermo Lasso plans to send to the Assembly as part of the division he made of the Opportunities Creation Law, which was not qualified for processing on September 29th. In this version, some modifications were made to the text that was presented last month.

Like the previous one, the new project – which is called Organic Law for Economic Development and Fiscal Sustainability After the Covid-19 Pandemic and has 225 articles – was presented as urgent in economic matters. Therefore, the Assembly has a maximum period of 30 days to approve or reject it.

Changes in income tax

One of the most criticized points of the Opportunity Creation Law project was the increase in income tax for people who earn more than $2,000 per month. This tax must be compulsorily paid by all Ecuadorians over 18 years of age and companies – national or foreign with a representative in Ecuador – with an annual income greater than the base established by the Internal Revenue Service (SRI) each year.

In the case of the bill presented last Thursday, the decision stood, but changes were made to the income tax rate table to accommodate the payments.

Yael Fierro, an expert lawyer in tax law, says that one of the main changes is that with current legislation the maximum percentage that a person must pay income tax is 35%. With the proposal sent yesterday, that percentage increases to 37%.

The lawyer says that the changes will not only be noticed for people who earn $100,000 or more a year, who are the ones who will have to pay that 37% if the law is approved. He believes that\ the impact would reach the smaller fractions because the value that can be deducted would be reduced.

For example, a person who earns $2,500, which is equivalent to $30,000 a year, under current law must pay up to 15% income tax. Fierro clarifies that this value can change because it depends on many factors, such as whether it is under a dependency ratio, whether your employer pays the corresponding amount to social security, and the value of deductible expenses that are declared. For this reason, says Fierro, each case is different, and the calculation must be made considering those factors.

Once the final result is obtained, the table is reviewed —which includes the maximum and minimum values ​​on which the tax is charged and the percentage that will be charged for each band— and the amount to be paid is calculated. With current law, that value can be between 10% and 15% because deductible expenses are up to $14,000. In other words, a person who earns $2,500 a month —or $30,000 a year— can deduct those $14,000 and declare $16,000 instead of $30,000. In that case, they would have to pay only 10%.

But with the new law, the value of deductible expenses is much lower. It will be between $400 and $900, depending on monthly income. In that case, Fierro says that the person who earns $2,500 a month will no longer be able to deduct the $14,000 and would have to pay 15%. Even if one has deductible expenses for much more than $900 for health, education and other values.

Fierro says this hurts people who earn between $2,500 and $4,000 because they are still part of the middle class. Especially for people who do not work under a dependency relationship and for those who have other important expenses that can no longer be deducted. Therefore, he estimates that if the law is passed, the impact will be felt in this group of people.

The bill has not yet been approved, so the changes are not official yet. Fierro says that he hopes that the most controversial points of the law will be discussed in the Assembly and the best decisions will be reached for the citizens and the country’s income. From Friday, the term for the Legislature runs and it has 30 days to define what it does with this proposal from the President.

What else the bill says

The bill presented says that natural persons who have assets of more than one million dollars individually or in a conjugal partnership, must make a temporary one-time contribution of 1% of that estate.

Those who have an individual or conjugal estate of more than two million dollars, will pay a temporary one-time contribution 1.5%.

That contribution will be declared and paid by March 31, 2022.

The previous bill proposed a special contribution for those with a net worth of more than $500,000. Fierro says that in this way the companies that will pay it will be less because they exclude those who did not have such a large equity – from $500,000 thousand dollars before to $1,000,000 – and the collection will be only for the group who has more income.

The project orders that the value be calculated on the assets that people who are tax residents of Ecuador have inside and outside the country. That is, for those who — at any time during the fiscal period — have the majority of their assets in the country. Those who are not tax residents must pay only the value calculated on their assets in the country.

Another special contribution of the new version is for companies that have had an equity equal to or greater than $5 million thru December 31, 2020. That payment will be made in 2022 and 2023.

This contribution will be 0.8% of the equity for all companies that equal or exceed that value. It must be declared and paid until March 31 of each of those years.

In the previous bill, a single contribution was included for companies that had more than $1 million of equity and that in 2020 had a turnover of more than 2019. In the new version there are two contributions, and the conditions change.

Fierro says that with these modifications, many companies that previously had to pay, would no longer have to do so if this law is approved. With the new criteria, he says, “there are companies such as mining or banking services that do have the financial muscle” to pay the contributions.

The law also includes other proposals such as keeping VAT at 0% for electric and hybrid cars and solar panels. In addition, VAT will be removed from feminine hygiene products such as tampons and sanitary pads, as well as diapers, antibacterial gel and other essential products.

1 Comment

  1. What does it mean for American retiree expats?

    Reply

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