Economic Development Law reconfigures investment incentives

The urgent law of Economic Development and Fiscal Sustainability after the COVID-19 Pandemic, In addition to the tax reform, it brings an important chapter regarding investments. In her a series of incentives that existed for investments are set aside; it establishes new rules for oil contracts and even introduces certain telecommunications issues.

According to Napoleón Santamaría, a tax expert, the law corrects a problem that had arisen since Correismo and that continued during the government of former President Lenín Moreno and it was a kind of “tributary populism.”

This was applying exaggerated tax concessions. Indeed, there are important changes in at least two laws. In the Internal Tax Regime Law A series of exemptions were established (they did not pay IR) for dividends and profits for non-residents, dividends that were reinvested as profits, interest on deposits, non-monetary investments, insurance indemnities, among others. These exemptions are eliminated.

Additionally, the deduction of 100% of the amounts destined for the compensation of students in dual training for education scholarships is annulled.

Whereas in The Law for Productive Development eliminates the IR exemption for fifteen years for prioritized sectors and for basic industries. The exoneration of the foreign currency outflow tax (ISD) is also eliminated for those who signed investment contracts and for those who reinvested 50% of their profits.

All these concessions in force today are extremely generous, says Santamaría. “It’s like giving them everything for free, which is neither fair nor correct. Like when one invites to the house and has to pay everything. The most logical thing is to ask friends to bring something to eat at least ”, he exemplifies.

These incentives are changed in the proposed law for two more general and simplified incentives. Companies that make new investments may pay 3 points less in income tax (22%) for fifteen years (or until the investment is recovered, whichever occurs first). This reduction could be up to 5 points less in the case of investments that have an investment contract in between.

On the other hand, companies have the possibility of benefiting from a Tax reduction of 150% for expenses of organization and sponsorship of cultural artistic events and the production of cinematographic works, also for the promotion of the arts, cinema and cultural innovation. In addition, you can deduct the 100% additional for the calculation of the tax base for donations, investments and / or sponsorships for bio-enterprises.

Thus, the new incentive structure “is simpler for the investor, fairer for the fiscal coffers and more reasonable for horizontal equity,” says Santamaría. Additionally, it does not affect tax stability since it is established that the companies that have signed investment contracts keep the benefits in force until the end of the contract.

The proposal also includes reforms to the hydrocarbon issue. Thus, the possibility of migrating oil contracts from both current private companies and fields now managed by Petroecuador is introduced.

For Fernando Santos Alvite, former Minister of Energy, The country needs a lot of investment in the oil sector and the law envisages a series of reforms that could be positive. However, consider that these reforms are late and that their fruits will no longer be reaped in 2022, but could remain until 2023. This is because interested oil companies would have already designed their budgets in October. If the law is approved, companies will be able to benefit from the new incentives and contractual conditions from 2023.

Santos considers that for the investment to arrive, more than a law of this type is required, a restructuring of the bureaucratic apparatus. He explains that although the government is seeking to attract more investment in a fair way and President Lasso is moving efficiently, the bureaucracy continues to lag behind. He said that in 2019, contests for clean electricity generation (Villonaco wind and photovoltaic in El Aromo) were already called, and despite the fact that these have already been granted to recognized Spanish companies, the processes do not advance due to bureaucratic delays. He also recalls that in the time of Minister Carlos Pérez the oil rounds were carried out and awarded to companies, however, the investments do not finish arriving because the corresponding environmental licenses are not issued in the Ministry of the Environment.

“If a profound reform is not made to the administrative machinery of the oil and mining area, which maintains Correísmo personnel, there will be no progress,” he assures.

Consider that Tax incentives are not a great magnet for companies. For example, the reduction or even elimination of taxes are not so attractive, because if they do not pay taxes in Ecuador they must do so at their headquarters. Instead, an agile bureaucracy would be vital for a company. He regrets that there are no corrections in the law for these types of bureaucratic problems.

As soon as to the Organic Law of Telecommunications, It is proposed that in order to reduce the digital divide, guarantee universal service and modernization of the State through technological growth, telecommunications service providers They will be able to pay up to 50% of the values ​​corresponding to the rates for the use of radioelectric spectrum and the contribution of 1% of the income invoiced with the implementation of national priority projects, preferably aimed at improving connectivity in rural areas.

Several projects with private participation, in portfolio

For the year 2022, the Government has a series of monetization projects in the pipeline that would involve investments from the private sector.

The Government works in the concession for the administration of the Esmeraldas Refinery. The project has already put the bidding rules up for sale on the international market, after which the bidding process is expected to resume in the coming months, together with the participation of the Hydrocarbon Bidding Committee. Regarding the Termogás Machala project, it is analyzing an unsolicited proposal to make the necessary investment to complete the combined cycle, operation and maintenance of the plant.

As soon as to the Blower project, In 2020, the State hired an investment bank that allowed it to obtain the necessary inputs to evaluate the convenience of its development. The objective of the project would be to carry out a tender for the operation and maintenance of the hydroelectric plant. The last project analyzed for a possible monetization is the Monteverde Maritime Terminal. It’s analized the receipt of an unsolicited proposal with the objective of improving, operating and maintaining the LPG storage, transportation and distribution system for the southern part of the country.

Additionally, this Tuesday, the Ecuadorian company Siglocorp, specialized in project structuring, and García Management and Consulting Group, a company dedicated to the management and development of investment projects in Latin America, will present to Frontera Capital Group, a boutique investment company based in the United Arab Emirates, that seeks development in the hydroelectric, oil, mining, industry, infrastructure, housing and maritime areas.