Tax reform: “The self-exclusion of large taxpayers would leave 188 million dollars per month to the state treasury”

John Arias, tax expert at Census Consultores, conducts an analysis of the main aspects of the new tax and employment law. He assures that the self-deduction for large taxpayers could generate an inflow of 2.2 billion dollars, and since it is a kind of advance, in case they are entitled to a refund, it must be done by the next Government in 2025. He points out tax forgiveness, employment incentives and points to some inconsistencies.

What are the main points of the reform that the Government is proposing to the Parliament?

There are certain interesting points, the main one is knowing where the flow to cover the fiscal deficit will come from. There is a problem that seems minor, but is not: the withholding tax that large taxpayers must pay on a mandatory monthly basis. As we know, today there is a register of large taxpayers that includes 500 companies, which have to pay 3% of their income from month to month.

What changes does the new tax reform proposed by Daniel Noboa bring?

These large taxpayers generally have an income of $75,000 million per year, which represents a monthly contribution to the treasury of $188 million per month. That would bring in about $2.2 billion a year. However, it is a kind of advance payment of income tax (PPD). Since it is an advance payment, the Tax Administration (SRI) must liquidate it and return it in case there is an excess. It is like a temporary patch that forces companies to provide cash to cover treasury needs.

The return for 2024 must be made in April 2025, and the process lasts five months, which means that the next government should take care of it in 2025. Large taxpayers had 1% per deduction. Now it will be 3%.

How can you guarantee that self-taxation will be done?

It is very easy to find out that they are doing this, since everything is electronic now. Since there is an electronic invoice, at the end of the month it is possible to check how much they have invoiced, and large taxpayers, who have important internal control, must do this.

The tool used seems to be a tax amnesty or forgiveness for short-term flow. Do you see it as sustainable?

In the case of a tax amnesty, there is an income from the fiscal treasury of the immediate refund of the flow. In reality, there have been five amnesties in the last fifteen years and they have been important for tax collection. It must be taken into account that due to interest problems, sometimes they exceed the principal and the debts become uncollectible, which makes them unstoppable. Currently there is a mediation and transaction tool, but this measure was impractical. The problem was that SRI needed a year or more to reduce the interest and additional fees. As a consultant I have had several cases where it was clear that it was very bureaucratic. The recommendation is automatic. Another tax measure is the remission of the obligation to pay the value of income tax for 2022 to the taxpayers of Rimpe – popular entrepreneurs.

Daniel Noboa’s tax bill, with tax amnesty, would leave $832 million net to state coffers

Do you think that after other remissions, this one will have an effect?

It depends on the management carried out by SRI at the appropriate time. They need to start making collection efforts, pressuring taxpayers to fix processes to catch up. It is not just about waiting for the goodwill of taxpayers.

Noboa group has a debt of 89 million dollars, do you think this measure could benefit them?

We should see if they are interested in paying for it, there were already other recommendations, but there was no such interest. The debt of Noboa Group dates back to, if I’m not mistaken, 2013 or 2014. In any case, maybe now that they are in the premises of the Government, they see that it is relevant to write off the debt, to take advantage of this political moment. But the referral itself is an egalitarian issue, in which there is no problem of conflict of interest.

SRI refers to debt attributed to a company associated with newly elected President Daniel Nobo

Will this reform affect the issue of employment?

Another important thing is that two tax breaks have been created for the employment of young people between the ages of 18 and 29. When contracting, they can obtain an income tax deduction ranging from 20% to 90%, depending on the number of contracts. For example, if an employer pays $5,000 in one year to an employee, that and an additional 20% can be deducted from the IR payment. Another incentive relates to the employment of persons who have been sentenced to prison or their spouses or common-law partners. This measure seeks an incentive for the reintegration of the workforce.

Is the issue of free zones similar to what former president Guillermo Lasso already proposed?

There is a lot of similar content but different themes such as the proposal for a 0% rate for the first five years and then a 15% rate for the duration of the free zone certification. They also create an IR exemption for ten years for non-conventional non-renewable energy, related to small-scale hydroelectricity, geothermal solar, marine, wind, among others. The idea is to promote new investments in the production of renewable energy.

What was the issue of VAT for construction or real estate?

There is another interesting topic, which is the return of VAT for real estate. Currently, when a citizen buys a home, he already has as part of the cost the VAT paid by the real estate sector. Its reduction also results in cost reduction. This should be translated into the price of homes.

How much will the price of apartments in Ecuador fall due to incentives in the tax reform?

How do changes of tax residence work?

Temporary tax residency was created for foreigners who make a productive investment of at least $150,000 and have a monthly income of $2,500. Thus, non-taxable residents will pay indirect taxes (VAT, ICE, etc.), but income from sources other than Ecuador is excluded from income tax. This implies that the initial investment of $150,000 must be maintained for the duration of the benefit, which is five years. In this way, the right foreign investments are facilitated. Not only is investment necessary, it must also be maintained. Ideally, foreign income should not be taken into account as income.