The new economic law will raise $ 1.9 billion in the first 2 years of validity and is very similar to the project of the Creating Opportunities Law that was presented by President Lasso in September of this year but was not qualified by the Council of the Legislative Administration (CAL) of the National Assembly because it proposed economic, tax and labor reforms.
The CAL said that the bill did not comply with the principle of unity of matter, which mandates that the content of the law must be on the same subject. Unlike that first project, the approved Organic Law for Economic Development and Fiscal Sustainability after the COVID-19 Pandemic proposes especially economic reforms. The government is expected to present two other bills to the National Assembly covering other issues raised in the Creating Opportunities bill.
The President sent the Organic Law of Economic Development and Fiscal Sustainability to the Official Registry on Monday, November 29, 2021, after entering into force by the Ministry of Law.
In a letter addressed to the director of the Official Registry, Lasso explained that the legislative plenary session “has not approved, modified or denied” the proposal presented to the Assembly on October 28, 2021, so he, as President of the Republic, promulgated the “Decree-Law” of tax reform.
Without a decision from the legislature, the law was approved “by the Ministry of Law” (that is, automatically) as it was presented by the President. With the sending of the decree law, the debate on whether the Assembly had, in effect, allowed the reform to enter into force was closed.
The tax reform was published in the Official Gazette Monday, at 5:00 p.m. and, with this, it came into effect.
But the political and legal consequences have not been resolved. Pachakutik said it would ask for the law to be repealed. However, this procedure must be done through the ordinary process of approval of the laws in Ecuador. This means that, in practice, a repealing law could take several months to discuss. And at that time, the President of the Republic could totally veto it, which would prevent the National Assembly from dealing with it in a year.
Breakdown of the new tax scheme
The new law has 225 articles and according to a statement from the Ministry of Economy and Finance, it was “prepared by collecting suggestions from various sectors and politicians in the country.”
It establishes that, those with income of more than $2,000 per month, must pay income tax. In addition, it establishes a one-time contribution of those who have an estate of $1 million or $2 million if they are in a conjugal partnership.
The law also reduces and eliminates taxes for certain goods and services such as feminine hygiene products and cell phone plans.
In addition, the tax reform establishes that companies with assets of more than $5 million will make a solidarity contribution of 0.8% for two years.
This tax reform also eliminates the current microenterprise regime, which will be replaced by a new regime for entrepreneurs and popular businesses.
The main changes of the tax reform are:
A. Who will pay more taxes
The new law establishes an increase in the Income Tax (IR) from a certain threshold of annual income. According to the Ministry of Finance, “those who have the most will pay more and those who have the least will not.”
The law contemplates a “minimum increase” of the IR, starting with those who have a monthly income of $2,000 per month.
These people will pay an average of $28 per month or $336 per year. Before, these taxpayers paid $13.05 per month or $156 per year in Income Tax. In other words, the amount to be paid is doubled.
Those with annual income of $25,000 (or income of $2,083 per month) are in the tax bracket of between $21,630 to $31,630, which means that they will pay a tax of 15% on their annual income.
But the increase in the payment of Income Tax will be more noticeable among those with annual incomes greater than $31,630, or $2,635 per month onwards.
The current tax law establishes that from the total annual income, personal expenses could be deducted in lines such as health and education. But the new law establishes the elimination of declared expenses of natural persons, in exchange there will be a tax credit.
B. The middle-class tax increase
Those who receive income between $31,630 and $41,630 per year, that is, between $2,635 and $3,469 per month, will pay 20% Income Tax from 2022.
In the current law -until 2021- this range of people paid 15% Income Tax. We are talking about 5% more from next year.
While natural persons who receive income between $41,630 and $51,630 per year will pay 25% IR, compared to the current 20%.
Those who receive between $51,630 to $61,630 will pay 30%: it is 10% more than what they paid until now (which was 20%).
For the range of annual income of $61,630 to $100,000, taxpayers will pay 35% Income Tax compared to the current 20%, that is, 15% more.
This new reform includes a tenth section or range of Income Tax. It will be applied to those who earn annual income over $100,000, who must pay a 37% Income Tax rate.
According to the calculations of the Ministry of Finance, the increase in IR would mean a collection of more than $460 million.
C. Wealth tax
The law establishes a special contribution, for one year, for people who have assets of more than $1 million and $2 million if the so-called conjugal partnerships are considered. The contribution will fall on about 6,000 people.
According to the accounts of the Ministry of Finance, the collection for this special contribution will reach between $320 million and $ 260 million respectively.
D. Company two-time contribution
The new law set a contribution from companies that generated profits during the coronavirus pandemic. The law establishes that companies with assets of more than $5 million will make a solidarity contribution of 0.8% for two years. Around 1,931 companies will pay the 0.8% rate.
For example, a company with an equity of $5 million will pay a contribution of $40,000.
The contribution of the companies will allow the collection to reach $468 million each year.
Of that total, about $419.4 million will come from the special contribution of companies with equity greater than $10 million.
In addition, the Ministry of Finance expects that 66% of the total annual contribution will come from companies in these sectors: financial and insurance, commerce, manufacturing and mining.
E. Assets outside the country
The tax reform regularized assets abroad, that is, people who have capital or investments outside the country must report them to the SRI and pay future income tax on that money or assets.
Basically, the reform will affect people with tax residence abroad, with businesses in the country, to report their global income and pay taxes. Even if the capital is in tax havens.
With the law, taxpayers will have until March, June and December of each year to declare their assets abroad to the SRI. The longer it takes a taxpayer to declare them, the higher the rate that will have to be paid.
According to Finance, the collection of taxes for the regulation of assets will reach $200 million.
F. New regime for entrepreneurs
The law creates a simplified regime for entrepreneurs and popular businesses (RIMPE), which will be in effect for three years. The payment of this tax applies to enterprises that do not have a gross income of more than $300,000 per year.
Popular businesses will also pay when their gross income has not exceeded $20,000 per year.
Gross income shall be understood to be those received by the subject, less discounts and returns.
G. VAT, ICE
To boost tourism, the new law establishes the reduction of the rate of the Value Added Tax (VAT) from 12% to 8% for the provision of services defined as tourist activities, for up to a maximum of 12 days a year during holidays or weekends.
And it exempts the payment of VAT to the following services: those provided by the Chambers of production, unions and the like, that charge their members royalties, aliquots or fees that do not exceed $1,500 per year. VAT is also exempted for services provided by accommodation establishments to foreign tourists, who stay in the country for less than 90 days. These establishments must be registered in the National Tourism Registry and have the Single Annual Operating License.
It also defines a 0% VAT rate for the purchase of electric and hybrid vehicles and solar panels, in order to promote energy change.
In addition, the law eliminated VAT on sanitary napkins, feminine hygiene products and popular diapers (national industry). This last change must be reflected in an Executive Decree, after a favorable report from the Ministry of Finance.
There were also changes in the Special Consumption Tax (ICE). From now on, the President of the Republic, through Executive Decree, may reduce the ICE rate at any time, prior to a favorable opinion from the Ministry of Finance.
H. Change in inheritance tax
The law also establishes the exemption from payment of Inheritance Tax to relatives within the first degree of consanguinity. Nor will this tax be charged if the beneficiary is one of the surviving spouses, if there are no children who can access the inheritance.
How the economic and tax law got thru the assembly
The approval of the Organic Law for Economic Development and Fiscal Sustainability after the COVID-19 Pandemic, has caused significant controversy in the country. Even though the Plenary of the National Assembly did not approve it by majority vote, the law did enter into force.
How was the law passed?
On November 26th, the plenary session of the National Assembly had its second debate on the “urgent” economic bill that was sent to the Legislature by President Guillermo Lasso on October 28th, which by law had to be reviewed by November 27th. In the debate, the plenary denied three motions on the bill:
- First, it denied the motion of the CREO assemblyman, Francisco Jiménez, on approving the majority report of the bill that was made by the Economic Development Commission of the Assembly.
- Then, it denied the motion of the Christian Social Assemblyman Esteban Torres to approve the minority report on the bill.
- And finally, it did not pass the motion to deny the bill and archive it.
The result of this latest motion is precisely what allowed the law to enter into force, although by majority, the Assembly had decided not to approve it.
Experts say that the economic law, which proposes various tax reforms for “the economic reactivation of the country,” entered into force by the Ministry of Law.
This happened because it was a process of approval of an economic law of an urgent nature and the law for this kind of bill says that there are three options; these are:
- Failure to approve the bill
- Archive (file) the bill
- Pass the bill without verdict
Constitutional lawyer and former secretary of the Assembly, Libia Rivas, explained that having failed to win the motion to file the bill, “in accordance with the Constitution” of Ecuador, the law had to come into effect automatically by the Ministry of law. As it is in compliance with the Constitution and is not in breach of any of its regulations, Rivas says that the bill will not be submitted to an analysis by the Constitutional Court.
Furthermore, the law has not only entered into force, but also entered fully as proposed by the President, without any modification.
Reactions to the approval of the law
In the opinion of experts, the new economic law came into effect for only one reason: that the bill was not archived. But why wasn’t it archived?
The motion to archive the bill did not receive the majority votes needed to do so. Of the 137 assembly members present, 53 voted to archive the bill, 3 voted not to do so, and 81 abstained from voting. The majority of abstentions came from the assembly members who make up the correista bench of the Union for Hope (UNES) —the largest in the Assembly— which caused negative reactions from political organizations such as the Social Christian Party (PSC) and the Democratic Left (ID). The organizations speak of an alleged “pact” between Correísmo and the government of Guillermo Lasso.
The PSC published a statement on its Twitter account in which it said that the approval – by the Ministry of Law – of the economic law was the “exclusive” responsibility of the government and UNES. The PSC – a party that supported the candidacy of Guillermo Lasso until the relationship broke down after what the president of the movement, Alfredo Serrano, called a “betrayal” – said in its publication that the government and the correista bench voted to “avoid the rejection” of the bill. According to the PSC, the law that is already in force is a “bundle of taxes that hurts all Ecuadorians.”
On the other hand, the assembly members of the Democratic Left, Alejandro Jaramillo Gómez, said in a tweet that on the night of November 26th there was an alleged “disgusting agreement, a criminal negotiation.” According to Jaramillo, “Correa and Lasso are paquetazo” and the new law will mean more taxes for the Ecuadorian middle class, “artisans destined to disappear,” and income tax for those with incomes of $2,000 dollars or more. Jaramillo’s post on Twitter was republished by the Democratic Left.
Yeseña Guamaní, vice president of the National Assembly and member of the Assembly for the ID, said on her Twitter account on Sunday, when the law had already entered into force, that it: impacts Ecuadorians “with taxes on micro-enterprises,” establishes “special contributions to land agricultural” and benefits the banks. According to the assemblywoman, the law will be a “severe blow to thousands of families.”
The former president of the Quito Chamber of Commerce, Patricio Alarcón, says that the approved law is “disastrous for the economic reactivation” of Ecuador. According to the businessman, there are several culprits who caused the law to be approved: the government, for sending such a “bad law” to the Assembly, the National Assembly for not improving it, and Correísmo for letting the law be approved.
Fausto Jarrín, an assembly member for UNES, published a statement on his Twitter account in which he talks about what happened on the night of November 26th during the plenary session. According to Jarrín, they worked “for weeks and we presented a minority report that other parties promised to support.”
However, that minority report was not approved. Jarrín says that they – the other benches that “breached their commitment” – and President Guadalupe Llori – who suspended the session – are the ones who have allowed “damage to the country.” The statement of Jarrin also says that if the votes of the Assembly of UNES had been those who were filing the project, “they would be putschists… and that would be used to radicalize the political persecution.”
Marcela Aguiñaga, a member of Correismo and an assembly member for UNES, denied the existence of any pact with the government, and said that the laws are approved or denied, and that the UNES bench denied it.
Paola Cabezas, coordinator of the party, did not comment specifically on the supposed pact. However, he responded to a tweet from the president of CONAIE, Leonidas Iza, in which he spoke of a Lasso-Correa pact. Cabezas said “we gave the country a proposal, you rejected it” – referring to the minority report – “the government’s allies are from your party.”
New economic law has environmental conservation tax incentives that
The new economic law proposes reforms to several legal bodies, among which is the Internal Tax Regime Law. Among these reforms, the law establishes the creation of a new section that raises green tax incentives.
The new section that will be included in article 39 of the Internal Tax Regime Law says that large or medium-sized private companies will be able to deduct “the additional 100% for the calculation of the taxable base of the income tax, donations, investments and or sponsorships” that seek to care for the environment. For example, the funds allocated in favor of programs, funds and projects of:
- environmental restoration and repairTop of FormBottom of Form
Inty Gronneberg, President of the Circular Foundation, who proposed the incorporation of this article in the new law, explained that these incentives will allow investors – large and medium-sized companies – to receive 100% of what they invest, in deduction of the payment of taxes. That is, the expert explains, if investors invest, for example, $100,000 in a project or undertaking that has environmental benefits, they will receive $100,000 in tax deductions.
The only condition for the incentives to be applied is that the deduction may not exceed “10% of the annual gross income” —the annual sales income— received in the previous fiscal year by the donor or sponsoring company. That is, for example, if a company invested $100,000 in a bioentrepreneurship but its total sales earnings last year were $500,000, it will not be able to deduct the entire $100,000, but only $50,000 (10% of total earnings).
To benefit from the tax deduction, projects that receive donations from companies must be qualified by the Ministry of the Environment, Water and Ecological Transition (MAATE) or by another authority designated by MAATE. The basis for the qualification of the programs will be a secondary regulation that has to be issued for the application of these benefits.
It is not yet known when this new regulation will be ready to go into effect.” However, the economic law says that the regulations, as well as the regulations that regulate these tax benefits, must be designed by the Ministry of the Environment. Both regulations must establish the technical and formal parameters that companies have to comply with in order to access the benefits of tax deductions.
Where did the idea come from?
Inty Gronnenberg, scientist and President of the Circular Foundation, says that the idea was promoted by the Foundation – which promotes the circular economy in the country – around February of this 2021. Gronnenberg says that several countries are thinking about what the post-covid-19 pandemic world will look like and that one of the things that began to be talked about was green reactivation.
Green reactivation is when governments use incentives for others to invest in sustainable measures to drive a future that not only focuses on economic development and job creation, but also provides environmental and social benefits.
Gronnenberg says that they noticed that in Ecuador, little or nothing was being said about the issue and that historically the country has lost many opportunities abroad because it does not have local projects that are attractive to the new wave of climate finance. So, seeing this international trend posed by green reactivation was what motivated the project to apply a similar strategy in the country.
The expert in entrepreneurship and innovation says that what was proposed was a mechanism that encourages reinvestment in environmental projects. In this case, this mechanism is that of tax incentives, which basically consists of the opportunity to deduct the basis on which large companies pay their taxes if they invest in programs that promote caring for the environment or in bio-enterprises. According to Gronnenberg, this is a mechanism that is widely used in countries like the UK.
He said that they sought the support of the private sector and proposed a mechanism of tax incentives for the environment. The mechanism that is now in the economic law was based on the tax incentives for sports that were proposed by the now Minister of Sports, Sebastián Palacios, when he was still an assemblyman. Only unlike these sports incentives, these will focus on projects that are approved by the Ministry of the Environment for environmental conservation, restoration and regeneration and bio-enterprises.
The idea with these incentives, says Gronneberg, is to make investment in the environmental area attractive in the country, since it is now very low.
Is it a good or bad idea?
Inty Gronnenberg says that the tax incentives for investment in environmental projects is a “win-win.” Companies earn from the tax incentives they receive, and environmental conservation and restoration projects and bio-enterprises earn because they receive investment funds to continue working.
In addition, says Gronnenberg, the State also wins because by incentivizing companies with these tax benefits, it encourages investment to stay in the country, and therefore, more economic profits are generated.
According to the expert, studies were also carried out to understand the scope of reinvestment in environmental projects and bio-enterprises motivated by tax benefits. And the results were positive. Gronnenberg explained that today more than 60% of the investment capital that these startups or small companies receive is used for workers’ wages; so if there is more investment, there will be more employment.
According to Gronnenberg, if the investment of $90 million is achieved in these environmental projects, it will be possible to generate between 40 and 50 thousand sources of employment in the environmental sector. In addition, the investment will allow the microenterprise or bioentrepreneurship to continue growing, and consequently, it can attract the attention of international investors, who will bring economic resources to the country.