The Government of Guillermo Lasso has been steadily reducing the Tax on the Exit of Foreign Currency since 2022, with the ultimate goal of eliminating the tax entirely by 2025.
Starting from July 1, 2023, the Foreign Currency Exit Tax (ISD) rate will drop to 3.50%, a decrease from the current rate of 3.75%.
Individuals are required to pay the ISD when they engage in certain activities, such as traveling abroad and using cash or credit and debit cards for purchases outside Ecuador.
Additionally, using credit and debit cards to pay for goods and services from foreign companies, like making purchases on platforms such as Amazon, also attracts the tax.
Sending money to relatives or friends abroad through remittance couriers or bank transfers is another scenario where the ISD applies.
The reason for lowering the tax is to fulfill the government’s plan of reducing the rate in three stages throughout 2023. The first reduction occurred in February, lowering the rate from 4% to 3.75%. The final reduction for the year is scheduled for December 31st when the rate will further decrease to 2%.
Initially, Guillermo Lasso’s government aimed to eliminate the ISD entirely by the end of his term. However, his term will now conclude earlier due to call for ‘cross death’ (dissolution of the government and new elections to occur this August 20th), potentially altering the plan.
Collection of ISD dropped more than planned
Unfortunately, the collection of the ISD has experienced a decline. The Internal Revenue Service (SRI) reported a 15.5% drop in ISD collections, amounting to $456 million from January to May 2023 compared to the same period in 2022. This collection also falls short of the SRI’s target of $505.3 million for the first five months of 2023. Consequently, the SRI is implementing stricter controls to improve tax collection.
Recently, on June 15, 2023, the SRI identified that approximately 86,000 taxpayers had been charged less ISD than they should have paid for their purchases in 2020 and 2021, totaling $12 million in unpaid taxes. The SRI attributed this discrepancy to cases where taxpayers used multiple credit or debit cards.
If a taxpayer exceeds the annual exempt amount for ISD payment with one card, the issuer of that card withholds the tax. However, other card issuers are unaware of the taxpayer’s total expenditure, allowing the taxpayer to exceed the exempt limit without further tax deduction.