Tax Reforms in the Organic Law to Boost Tourism Activities and Promote Employment

The Organic Law to Boost Tourism Activities and Promote Employment was published on February 25. It was passed by the Assembly as an urgent law from an economic standpoint. This law introduces changes to several regulatory bodies. Below, this newsletter highlights the most relevant tax reforms in the Organic Law to Boost Tourism Activities and Promote Employment:

CHANGES TO THE INTERNAL TAX REGIME LAW

• International payments for services of organization, production and presentation of artistic and cultural shows held in Ecuador by taxpayers registered with the National Tourism Authority as providers of tourism services in Ecuador will be subject to an income tax withholding of 15%. In the event that the recipient is resident in a tax haven, preferential tax regime or lower tax jurisdiction, the withholding at source will be applied at the general corporate rate.

• The President may, subject to a favorable opinion from the Ministry of Economy and Finance, reduce the VAT rate to 8% for the provision of services defined as tourism activities during national and local holidays, and on Saturdays and Sundays, without exceeding a total of 12 days in each year.

• VAT that is paid and not offset against the local purchase or import of goods or services for the development and/or commercialization of construction materials subject to the 5% VAT rate, may be considered as a deductible expense in the income tax return corresponding to the fiscal year in which the VAT payments were generated.

• Individuals whose line of business is commercial transportation services on auto rickshaws will be entitled to a tax credit for VAT paid on the local purchase of such vehicles.

• The commercialization of mineral substances that require the obtaining of commercialization licenses, as well as the production and commercialization of substances that come from a mining concession are subject to an income tax withholding at source of up to 10% of the gross amount of each transaction. These transactions will be carried out, declared and paid by the seller and will constitute an income tax credit for the seller. This withholding will not be applicable to companies that are considered Large Taxpayers.

CHANGE TO THE REFORM LAW FOR TAX EQUITY IN ECUADOR

• International payments by domestic and foreign airlines operating within, from and to Ecuador that have their respective operating permit will be exempt from payment of the International Transfer Tax (“ISD” in the Spanish acronym). The Ecuadorian Tax Authority will establish the procedures for its application.

CHANGE TO THE ORGANIC CODE FOR TERRITORIAL ORGANIZATION, AUTONOMY AND DECENTRALIZATION (COOTAD)

• The Decentralized Autonomous Governments will have the option to qualify for investment or reinvestment projects in tourism to access the total exemption from taxes, fees and municipal contributions for seven years.

TRANSITION PROVISIONS

• Taxpayers who are registered in the National Tourism Register and who have not been able to meet their tax obligations with the Tax Authority and employment obligations with the Ecuadorian Social Security Institute (IESS) up to fiscal year 2023 may access payment arrangements for up to 24 months, without the need to pay an initial installment.

• The contribution made to the National Treasury Single Account on the value of each gallon of aviation fuel and lubricants sold for use by all commercial service aircraft will be reduced from 5% to 0%, starting in 2024.

• Individuals and micro- and small enterprises registered in the Tourism Register may amortize and deduct losses declared after the tax reconciliation for fiscal years 2022 and 2023 in a single fiscal year or up to five fiscal years after the losses were generated.

• An additional 50% can be deducted for income tax purposes for expenses incurred by taxpayers registered in the Tourism Register for the purchase of alarm systems, security personnel services and surveillance cameras during fiscal year 2024.

• While the armed conflict is in force, the President is granted the power to authorize the full or partial remission of items that are ancillary to the tax obligations generated during the internal armed conflict (interest, fines, surcharges).

INTERPRETATIVE PROVISIONS

• With regard to the tax base of income from an employment relationship, when referring to the deductible amount for social security contributions for members of the Armed Forces, it should be understood that this deduction corresponds to the total amount established in the law that regulates the social security of said members of the Armed Forces.