What changes were decreed by the President and how will they be applied?

 This year will bring reductions for some taxes in Ecuador. On the night of January 10, 2023, President Guillermo Lasso announced that the Value Added Tax (VAT) will be reduced on three holidays, that the Special Consumption Tax (ICE) for various products will be lowered and that the progressive reduction of the Capital Outflow Tax (ISD) will continue. According to the government, the tax reduction will generate $140 million in tax savings for Ecuadorians.

The Constitution says that taxes can only be created, modified or suppressed through a bill presented by the President of the Republic to the National Assembly. However, there are laws that empower the President to change VAT, ICE and ISD under certain conditions, without having to go through the Assembly.

One of these is the Organic Law for economic development and fiscal sustainability post covid-19 pandemic, approved in 2020. This law establishes that the President of the Republic, with a decree, can reduce VAT from 12 to 8% for tourist activities for 12 days a year on holidays or weekends. In addition, it allows the president to reduce the ICE rates of any product or service that is levied with this tax.

And the Organic Law for Productive Development, approved in 2018, delegated the power to the President of the Republic to “gradually reduce the rate of the Foreign Currency Outflow Tax, prior favorable opinion of the governing body of public finances.” In other words, the President can progressively modify the rate of this tax as he has done since 2022 with certain services taxed with ISD.

VAT changes

In the decree issued by President Lasso, it says that VAT will be reduced from 12 to 8% “for the provision of all services defined as tourist activities” on the following dates in 2023:

1. From Saturday, February 18th, to Tuesday, February 21st: the Carnival holiday.
2. From Friday, April 7th, to Sunday, April 9th: Easter holiday.
3. From Thursday, November 2nd to Sunday, November 5th: holiday for the Day of the Dead and the Independence of Cuenca.

The decree instructs the Internal Revenue Service (SRI) to take “the necessary actions to facilitate the provisions.” In his announcement, President Lasso said that “this way you will not only get more out of your vacation, but we will all be promoting one of the industries with the greatest growth and potential in our country.”

Changes to ICE

President Lasso also decreed some changes in the products taxed by ICE, a tax that is applied to certain goods —national and imported— and services. These are the modifications:

1. Plastic bags: ICE will be $0.8 cents per plastic bag. Before it was $0.10 cents each.
2. Non-alcoholic and soft drinks: will be reduced from $0.19 to $0.18 cents per 100 grams of added sugar.
3. Alcohol (not used for alcoholic beverages) and alcoholic beverages goes from $10.36 to $10 per liter of pure alcohol.
4. Industrial beer: it will be $13.08 per liter of pure alcohol. Before it was $13.56 per liter.
5. Craft beer: it will drop from $1.55 per liter of pure alcohol to $1.50 per liter of the drink.
6. Cigarettes: Down from $0.17 to $0.16 cents.
7. Firearms, sporting weapons and legal ammunition: it goes from 300% of its price to 30%.

According to the SRI, the high taxes on weapons “has made it impossible to renew the equipment of security companies and the productive sector.” Lasso said that the reduction of ICE for weapons that are used by public and private security institutions is done to “facilitate the legal provision of equipment so necessary for the fight against crime.” A large part of those crimes that are expected to be combated are committed with high-level weapons that enter the country illegally, are not regulated, and do not pay taxes.

In November 2021, the ICE of certain products was already modified with the tax reform that was approved by the Ministry of Law. Then, the ICE tax on mobile phones and plans, video games, streaming services, heaters and water heaters, and electric and hybrid vehicles was eliminated.

ISD Changes

The ISD, taxes the outflow of foreign currency from the country. That is, it is charged on all transactions in cash, debit or credit card, checks, and even means of payment over the Internet. Currently this tax is 4%.

The decree issued on January 10, 2023, establishes a progressive reduction of the ISD from February to December 2023 as follows:

1. From February 1, 2023, it will be reduced to 3.75% (one quarter of a percentage point).
2. From July 1, 2023, it will drop to 3.50% (one quarter of a percentage point).
3. From December 31, 2023, it will be reduced by 1.5 percentage points to reach 2%.

President Lasso said that this decrease is done to make imports of machinery and “household consumer products” cheaper. In addition, Lasso said this will also “stimulate the arrival of new investments that will boost our entire economic and job offer.”

This decision consolidates the government’s plan to reduce this tax progressively. It was also one of the commitments of the Ecuadorian State with the International Monetary Fund (IMF), established in the credit program of September 2020 and which ended in 2022. For this reason, the ISD has already been reduced for certain services since 2021.

In September of that year, the ISD for foreign airlines was eliminated. In January 2022, the government announced that the ISD for the import of fuels derived from hydrocarbons, biofuels and natural gas was eliminated. In 2022 this tax was reduced by one percentage point: it went from 5 to 4%.

José Rivera, country manager of the investment broker Libertex, says that the reduction of these taxes is “an important step” that “will allow the economy to roll more easily.” Rivera says that reducing the ISD does not mean that more money will leave the country; it could actually mean more money coming in.

According to Rivera, this would allow multinationals and large economic groups to see Ecuador as an attractive country to invest. “If I invest in Ecuador and it is cheap for me to withdraw my profit, I do. But I’ve left the country with more jobs, better relationships with suppliers, payment of taxes, social security, and more movement in the economy. Keeping all that in Ecuador is more valuable than worrying about how much profit the investor makes,” says Rivera.

On the other hand, if it is expensive to withdraw the profits, it is not convenient for those potential investors, and the country would not have all those benefits associated with the inflow of capital.

Tax cuts will cost $590 million over 2-year period

Due to the tax reductions announced by Lasso, the State Budget will collect $590 million less during 2023 and 2024.

The Minister of Finance, Pablo Arosemena, explained that the collection reduction will be $140 million in 2023. Meanwhile, the revenue reduction in the Budget will be $450 million in 2024.

Francisco Briones, director of the Internal Revenue Service (SRI), explained that the ISD and ICE reductions will begin in February 2023.

According to Briones, the Budget will stop receiving $100 million with the reduction of the ISD in 2023.

The reduction of ICE, on the other hand, will mean a sacrifice of $25 million in 2023. Briones said that this measure seeks to counteract the effects of inflation.

And with the lower VAT rate on holidays, the Budget would stop receiving about $15 million.

These are reductions that were promises of Guillermo Lasso’s campaign.

The Minister of Finance specified that the Government “does not have money to spare.” But he explained there is room to make this fiscal sacrifice, because in 2022 the fiscal deficit was reduced by almost 1.7% of the Gross Domestic Product (GDP).

He added that the VAT reduction seeks to encourage consumption on holidays to boost consumption and in turn, collect more taxes.