The foreign currency outflow tax (ISD) payable on money sent abroad in cash or via debit and credit cards, checks or online payment methods is being reduced to 3.50% as of July 1, 2023. This is the sixth time it has been reduced and there is another reduction ahead, the biggest one, which will be in December when it should remain at 2%.

ISD – which was created in 2007 and increased from 2% to 5% in 2011 – has been progressively decreasing in the last year and a half. President Guillermo Lasso defined the dates of the reduction in 2022, and this year 2023, through executive decrees, they fell by 0.25% each time. In December, it must suddenly fall by 1.50% so that the rate remains at 2% again, by then another government will have been elected in the August elections, anticipated by the death by the cross applied by the president.

President Guillermo Lasso announced the reduction of various tax rates

Will the next president succeed in overturning that cut? The reduction of the foreign exchange outflow tax is covered by the 2018 Law on the Promotion of Production, which authorizes the president to gradually reduce this tax, and there is also the ruling of the Constitutional Court declaring the 2011 Law on the Promotion of Environmental Protection unconstitutional – promoted in the administration of Rafael Correa in which increased the ISD to 5% – and gave a deadline of December 2023 to remain in force until the new tax reform is sent.

But this unconstitutionality was formal, recalls Pablo Guevara, a partner in the Andersen tax consulting company. “This means that the Court does not criticize the increase but the form. If a new president comes in and wants to change the schedule, he can do that, but it has to be equal to 2 percent in December, because there’s a penalty. But the new president could also present a bill to the new assembly and increase the ISD. You can do it, but you need the law.”

The Internal Revenue Service (SRI) collected $1,273.6 million in taxes on currency outflows in 2022, and so far in 2023 – from January to May – nearly $456 million. If the rate of 5% were kept at this moment, about 330 million dollars would enter the state coffers, Guevara makes this calculation, but explains that it is not so exact because lowering the rate makes the activity more dynamic and if that 5% was there, it would not have come out more money and less would be collected.

ISD has generated approximately $11,930 million in its 14 years of existence; its disassembly process looks complicated

But the effect on business was favorable. “A company that imports products for every hundred dollars had to deliver five dollars, now it can give a better price to the market. This encourages the setting up of a new institution. It is positive for the economy that taxes do not distort the market, that they make the country provocative for new investments”, he comments.

And that this reduction in ISD was a factor that motivated international brands to enter Ecuador in 2022 and 2023. The CEO of the Costa Rican company AR Holdings, Antonio Burgos, led the opening of Old Navy in the country last October and a month ago day – in June – he did the same with the first GAP store. “Something that helped a lot was the reduction of foreign exchange outflow taxes, because if it didn’t make the operation too expensive, if the import taxes are already quite high in Ecuador, and also when I pay my supplier abroad for supplies, I have to leave 5% there because the tax forces me to raise 5% to everyone. It’s a tax that goes directly to the price of what people buy. That the tax remains at 2% from December 31 “is a huge relief for business. They’ve certainly helped a lot to make you want to invest more “.

This is “good news for the business sector and for the population, because the business sector creates jobs,” says Guevara.