The current situation has had a significant impact on Ecuador’s economy, which is based mainly on the oil industry, aquaculture and shrimp fishing, the export of commodities, the production and commercialization of food and inputs for production chains, and tourism. The volatility of oil prices has caused imbalances in exports and therefore the General State Budget has been significantly affected. In this line, in the middle of the worst recession that Latin America has ever faced, the National Government and the productive sector are in urgent need of diversifying the economy through the strengthening of new industries and new sources of income. Strategic alliances of different type, a strong boost to the logistics and tourism sector, significant changes in business and in the value chain by promoting the use of technology in order to adapt to new times, among others, are initiatives that drive the national economic environment.
The Government of Ecuador is betting strongly on the potential of the mining industry, which can attract many foreign investments due to the exuberant amount of mineral reserves available in the national territory. It is foreseen that by 2024, 5 large mining projects will enter into production (currently in a pre-operational stage). In the last 4 years, the mining sector has accounted for about 45% of FDI – Foreign Direct Investment in the country and according to forecasts from various quarters, it will generate a large number of direct and indirect jobs, therefore, this industry will be essential for the recovery of the Ecuadorian economy.
According to official data from Ecuador’s Internal Revenue Service, at the end of June 2020, figures showed that total tax collection reached US$6.029.9 million, representing a 16.83% reduction compared to the same period in 2019, when US$7.250.3 million was collected. In this regard, to mitigate the imbalance of the public finances, among other measures, the National Government decided through an Executive Decree to begin the process of “Early Collection of Income Tax, to be charged to fiscal year 2020”. The main aspects included in the referred Decree are the following:
Which taxpayers will have to calculate and pay in advance the income tax?
Individuals and companies, including permanent establishments of non-resident foreign companies, that meet the following requirements will be obliged to pay in advance the income tax charged to the 2020 fiscal year:
- Who obtain income taxed, except for those coming from work in a labor dependency relationship. (This is in the case of individuals);
- That in fiscal year 2019 they have received gross income in an amount equal to or greater than USD 5 million; and
- That during the period from January to June 2020, they have obtained an accounting profit, excluding income and expenses from work in a relationship of dependence.
The value of the advance income tax to be paid for the financial year 2020 shall be calculated using the following formula:
IT 2020 Advance = (85% of the AP * 25%) – RFIR20
(Where IT = Income Tax; AP = Accounting profit arising from the financial statements for the period from January to June 2020; RFIR20 = Income tax withholdings at source related to transactions carried out between January and June 2020, in respect of which the taxpayer is entitled to use them as a tax credit when settling the tax.)
The advance payment determined by the taxpayer shall constitute a tax credit for the payment of its income tax, and its use shall be subject to the provisions of the tax regulations.
Settlement and Payment – Must be made in full until August 14, 2020; or may be deferred in three equal installments as follows (this advance shall not be subject to payment facilities in addition to those described):
(a) until 14 August 2020, the first instalment
(b) until 14 September 2020, the second instalment; and,
(c) until 14 October 2020, the third instalment.
Who is exempt from paying income tax in advance?
The following taxpayers are NOT required to pay the advance income tax
- Those who are micro, small or medium sized enterprises; or,
- Whose total income for the fiscal year 2020 is exempt from income tax under the tax regulations; or
- Taxpayers, who have their main tax domicile in the province of Galapagos, or their economic activity corresponds to the operation of airlines, the tourism sector, (exclusively with respect to accommodation and / or food), agricultural sector, aquaculture sector, are regular exporters of goods (at least 50% of their income corresponds to this export activity).
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Country Manager – Auxadi Ecuador
All information contained in this publication is up to date on 2020. This content has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this chart without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this content, and, to the extent permitted by law, AUXADI does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this chart or for any decision based on it.