Explore the requirements and rules that apply to Indirect Taxes in Ecuador.
Explore the requirements and rules that apply to Indirect Taxes in Ecuador.
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General
VAT/GST registration
VAT/GST compliance
International Supplies of Goods and Services
VAT/GST recovery
Tax points
Invoices
Record-Keeping Requirements
Audits
Special Indirect tax rules
Rulings
General
Types of indirect taxes (VAT/GST and other indirect taxes).
VAT or impuesto al valor agregado (IVA)
IVA is applied to imports and transfers of goods and services.
Are there other indirect taxes?
Special consumption tax (ICE)
Impuesto a los Consumos Especiales (ICE) is applied to consumption of certain goods and services considered as sumptuous.
Capital outflow tax or Impuesto a la Salida de Divisas (ISD)
ISD applies to remittances abroad in cash or by check, transfers or withdrawals of any kind made with or without the intermediation of financial entities and, in general, any other mechanism for extinguishing obligations (except for compensations) when these operations are carried outwards.
What supplies are subject to VAT?
The Ecuadorian value-added tax (VAT), is tax-based on the value-added method.
VAT is due on:
- the sale by VAT taxpayers of movable property located in Ecuador
- work performed independently, leasing and services specified in the law, provided they are performed in Ecuador
- the final importation of movable property and
- the use or exploitation in Ecuador of services supplied by non-residents (i.e. import of services).
For VAT purposes, the concept of taxable “sale” includes:
- sales and other transfers for consideration of movable property located in Ecuador (payment in kind)
- the incorporation of movable goods produced by the taxpayer in the case of leasing and supplies of services exempt or excluded from taxation
- transfers of movable goods are attached to the soil at the time of the transfer, provided they have exclusive enjoyment and represent goods in trade for the taxpayer
- the removal of movable property by the owner for personal use or consumption
- transactions carried out by commission agents, consignees and others who sell or buy personal property in their own name but on behalf of third parties.
Under the VAT system, tax is levied at each stage of the manufacturing and distribution process on a non‑cumulative basis. The accumulation of tax is avoided through the deduction of VAT invoiced to the entity. The entity pays VAT on the total amount invoiced in each monthly tax period, but it is entitled to recover the input VAT that was invoiced to the entity during the same period. If, in any tax period, the credit for input VAT is higher than the amount of VAT due on output, the entity is not entitled to a refund (unless the refund is related to exports); rather, the excess is credited against future VAT liabilities. VAT generated in acquisitions of goods and services may only be used as tax credit for a period of 5 years.
What are the standard or other rates (i.e. reduced rate) for VAT/GST and other indirect taxes?
IVA: 0 percent and 12 percent.
Supplies of goods subject to 0 percent: all transfers and imports of goods such as unprocessed food, medicines, raw material to produce medicine, books, electricity, airplanes and helicopters for commercial purposes, cargo and services and hybrid vehicles, among others.
Supplies of services subject to 0 percent: national land transport, transport of crude oil and natural gas pipelines, healthcare-related services, financial and stock market-related services and exported services, among others.
ICE: between 5 percent and 300 percent (article 82 Ley de Régimen Tributario Interno (LRTI).
ISD: 5 percent.
VAT/GST registration
Who is required to register for VAT/GST and other indirect taxes?
There is no special registry in Ecuador for VAT and other indirect taxes. However, there is an obligation for all individuals and entities undertaking business activities in Ecuador to register at the Ecuadorian Internal Revenue Services (EIRS) and to obtain their taxpayer identification numbers – Registro Único de Contribuyentes (RUC). The aforementioned registration involves VAT, income tax, special consumption tax, capital outflow tax and all taxes administered by the Ecuadorian Internal Revenue Services.
Is voluntary registration for VAT/GST and other indirect taxes possible for an overseas company (e.g. if the annual turnover is below the relevant VAT/GST and other indirect taxes registration threshold)?
No, there is no special registry in Ecuador for VAT or other indirect taxes. If the foreign entity does not have a permanent establishment in Ecuador, it would not be required to register for tax purposes in Ecuador.
Foreign entities that have established a permanent establishment have the obligation to register before the EIRS. Consequently, they are compelled to keep accounting records to file monthly VAT and withholding tax returns, to file income-tax returns and to comply with all Ecuadorian tax obligations.
Are there any simplifications that could avoid the need for an overseas company to register for VAT?
VAT registration is not possible without a permanent establishment in Ecuador. If the company (permanent establishment) performs activities in the country, VAT registration is mandatory.
Does an overseas company need to appoint a fiscal representative?
Not applicable.
Which forms and supporting documentation does an overseas company need to submit for VAT/GST and other indirect tax registrations?
Not applicable.
Is grouping* for VAT/GST and other indirect taxes possible?
No
VAT/GST compliance
How frequently are VAT/GST and other indirect tax returns submitted?
VAT and ICE: monthly.
ISD: on each transfer or sending of money abroad and, in general, any other mechanism for extinguishing obligations when these operations are carried outwards.
What are the exchange rate rules in your country?
If a business receives an invoice in foreign currency, the exchange rate to be used for VAT reporting purposes is the exchange rate in effect at the date of conversion.
International Supplies of Goods and Services
Exports – Goods
How are exports of goods treated?
Exports of goods and services are included in the scope of VAT but are zero rated. This means VAT is not levied on the output, but VAT paid on inputs may be recovered through tax refunds, which the taxpayer may request after shipping the goods This treatment applies for the exportation of services. Goods supplied and services performed abroad are not subject to tax.
Exports – Services
How are exports of services treated for VAT/GST purposes?
Exports of goods and services are included in the scope of VAT but are zero rated. This means VAT is not levied on the output, but VAT paid on inputs may be recovered through tax refunds, which the taxpayer may request after shipping the goods This treatment applies for the exportation of services. Goods supplied and services performed abroad are not subject to tax.
Imports – Goods
How are goods dealt with on importation?
When goods are imported into Ecuador, import VAT and customs duties must be paid before the goods are released from customs’ control.
Imports – Services
How are services brought in from abroad treated for VAT purposes?
Services rendered from abroad for which utilization is made in Ecuador (import of services) by Ecuadorian VAT payers in the country are taxable.
In such cases, the local taxpayer must self-assess the VAT payment in the month immediately after the taxable event is completed, and will compute the VAT credit in the following month.
VAT/GST recovery
Can an overseas company recover VAT/GST and other indirect taxes if not registered for VAT/GST locally?
No
Are there any exemptions with the right to recover or deduct input VAT?
According to Ecuadorian law, the VAT paid on purchases can be offset directly against the sales tax. This applies to those taxpayers whose sales are taxed at 12 and 0 percent rates. In this second case, the VAT paid on purchases can be offset proportionally with the sales tax or as a tax credit. For those taxpayers whose sales are taxed at 0 percent, the VAT rate paid on purchases is charged directly to expenses.
Additionally, tax authorities refund only the retention of VAT that cannot be used as a tax credit.
Special cases of refund of VAT
Exportation is taxed at 0 percent for VAT. Exporters paying VAT on local or imported purchases – such as raw materials, supplies, services and assets used for manufacturing and sales of export goods – are entitled to a VAT refund. Likewise, inbound tour operators who bill inbound tour packages within or outside the country to individuals or non-resident companies in Ecuador are entitled to a tax credit for VAT paid and held in local procurements, as well as VAT paid on imported products such as goods, fixed assets, raw materials, supplies or services that integrate inbound tourism.
If for any circ*mstance the resulting tax credit cannot be offset with VAT on sales, inbound tour operators may request a refund of the tax credit accrued by local purchases or imports of the above mentioned products.
Taxpayers using international freights for their business, and having paid VAT to acquire fuel, are entitled to a tax credit for said payment exclusively.
Operators and administrators of Special Economic Development Zones, Zona Especial de Desarrollo Económico (ZEDE), have the right to a tax credit for VAT paid in purchases of raw materials, supplies and services from national territory to be incorporated in the production process of the ZEDE operators and administrators.
Are there any restrictions to the deduction of input VAT?
There are certain items that you cannot recover VAT on, such as:
- when taxpayers additionally provide other services or sell goods that, in part, are taxed at a 12 percent rate and partly at a 0 percent rate. In this case, they should make use of the tax credit or the tax will be refunded by applying the proportionality factor. Also, for the import or local purchase of fixed assets for inbound tourism packages, it would be refunded by applying the proportionality factor
- the VAT paid in acquisition of goods and services cannot be recovered when sales are taxed at a 0 percent rate with no right to recover.
Tax points
When is VAT/GST due on a supply of goods or services?
As a general rule, the VAT on supply of goods is triggered on the delivery of the good or with the collection of all or part of the price, whichever occurs first. In the case of personal consumption, at the time when the good is consumed.
As a general rule for services, the tax point is triggered when the service provided is finalized or with the collection of all or part of the price. There is some exemptions as property rent or loans. In these cases the tax point is triggered with the deadline for the collection or with the collection of all or part of the price.
There is some exemptions as work in progress. In these cases the tax point is triggered with the delivery of the certificate of work progress.
Invoices
Is a business required to issue tax invoices?
Yes.
Is it possible/mandatory to issue invoices electronically?
Yes.
Is it possible for the vendor to issue an invoice (i.e. self-billing)?
Yes, it is possible and at the moment required for companies that are appointed as special taxpayers.
Record-Keeping Requirements
How long must records and invoices be retained?
The books, accounting registry, and invoices shall be stored as long as the tax is not prescribed. The statute of limitations is seven years.
Can the invoices be stored abroad?
No.
Audits
Do tax audits take place on a regular basis?
No, however, the tax authority has a period of 3 years to audit taxpayers.
The Ecuadorian tax authority usually audits areas such as the amount of input VAT or the computation of taxable turnover.
Are audits done electronically in your country (e-audit)? If so, what system is in use?
No.
What penalties can arise from non-compliance?
The late submission of tax returns can trigger penalties equivalent to 3 percent for each month or part of the month. This fine is calculated on the tax amount paid by the respective declaration. When taxes have not been paid on time, interest can be levied and the applied interest rate corresponds to a rate published quarterly by the Internal Revenue Service (Servicio de Rentas Internas). This fine applies to any tax administrated by the Internal Revenue Service.
Special Indirect tax rules
Are there any special rules for the sale of a company by one taxpayer to another where VAT is not due on the sale?
The Ecuadorian Tax Law establishes (Article 54) that the sales of businesses in which the assets and liabilities are transferred are exempt from VAT. In addition, the cession of shares, corporate participations and remaining securities, are not VAT taxed.
Are there unique specific indirect tax rules that you would not expect to find in ‘standard’ VAT jurisdictions?
No.
Does a reverse charge mechanism apply for goods or services?
Not applicable.
Are there indirect tax incentives available (e.g. reduced rates, tax holidays)?
ISD exemption on payments abroad for imports of goods and services related to the authorized activity for those operators and administrators of ZEDE.
Rulings
Are rulings and decisions issued by the tax authorities publicly available?
No, however, in the case of resolutions about taxes rates changes, they are publicly available.
For further information please contact
Gino Erazo
Senior Partner
KPMG in Ecuador
T: +593 4 2290 698
E: gerazo@kpmg.com
Karina Rubio
Tax & Legal Partner
KPMG in Ecuador
T: +593 2 2450 356
E: krubio@kpmg.com
Footnote
*By ‘grouping’ we mean: either a consolidation mechanism between taxpayers belonging to the same group (payment and refund are compensated but taxpayers remain distinct) or a fiscal unity for VAT/GST purposes (several taxpayers are regarded as a single taxpayer).
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