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New government will inherit tax changes focused on ISD reduction and income tax deductions

Published on October 24, 2023

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New controls put in place in 2023 continue to find tax cheaters. The income recovered will help balance the reduction in ISD.

As the current year draws to a close, the Internal Revenue Service (SRI) is on track to collect nearly $1.0 billion from ‘tax cheaters,’ building on the $900 million collected in 2022. These figures mark historic highs in what is colloquially referred to as ‘forced collection’—when taxpayers, under the scrutiny of authorities, fulfill their obligations.

Despite tax reductions implemented this year, this forced collection has been instrumental in bolstering income, resulting in a total revenue of $13.502 billion thru September and a growth of 2.5%, noted SRI Director Francisco Briones.

One significant reduction mentioned by Briones is the Foreign Exchange Outflow Tax (ISD), which has seen a gradual decrease during this administration—from 5% to 3.50%.

By December 31, 2023, it will stand at 2%, as mandated by Executive Decree 643, signed by Guillermo Lasso in January. This rate will hold unless the incoming government opts to repeal the decree.

Separate from any presidential decision, a Constitutional Court ruling has declared the Environmental Promotion Law of 2011, championed during Rafael Correa’s tenure, unconstitutional. This law had raised the ISD from its original 2% to 5%. The Court, however, has granted the government until December 2023 for it to remain in effect until a new tax reform is proposed. Additionally, President-elect Daniel Noboa Azín, in the debate on October 1st, expressed his intention to abolish this tax.

Noboa will have to deal with tax issues before year end

Should Noboa seek to implement a new tax reform—such as modifying the recently revised income tax deduction scheme—he would need to pursue it through legislation. Any changes made would not take effect until 2024, as tax adjustments operate on a fiscal year basis, becoming effective on January 1st of each year.

“The power to determine tax policies lies with each government, and it must be exercised through legal channels. If any changes were to be made, they would pertain to the fiscal year 2025,” Briones asserts.

Furthermore, there are resolutions that must be finalized at year-end to influence the subsequent fiscal year. These crucial elements are detailed in the transition report meticulously prepared by the SRI. The report encapsulates three key components: findings and their corresponding resolutions, ongoing plans that warrant continuation, and a series of alerts for imperative decisions slated for December, January, and February.

“When a new administration takes the reins, they must be apprised of what they need to sign or decide promptly, as stipulated by law, the calendar, and other pertinent factors. Certain provisions must be enacted in December, such as the update of the personal income tax base and the ICE inflation adjustment,” Briones elaborates.

In the interim, the SRI persists in its pursuit of digitalizing services. Over the next few weeks, it aims to expedite the value-added tax (VAT) reimbursement process for companies. Briones emphasizes the significance of this improvement, stating, “This is incredibly important as it provides monthly liquidity for companies. The process, which currently spans 120 days, will be streamlined to a maximum of 30 or 35 days.”


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