The first report for the plenary debate on the Law on Coping with Internal Armed Conflicts and the Social and Economic Crisis brings a number of additions made by various groups to the original bill, which was presented by the President of the Republic, Daniel Noboa. The President proposed raising the VAT from 12% to 15%; But lawmakers opposed to the issue changed the proposals by imposing certain contributions on companies and banks, and even changed the proposed VAT rate to 13%, which will be temporarily increased by two percentage points (2%). the remainder of fiscal year 2024 and fiscal years 2025 and 2026. These changes, for constitutionalist Rafael Oyarte, would be unconstitutional. The analysis goes through both the relevance of the tax initiative, which is the sole authority of the president, and the inconvenience of applying confiscation taxes to banks.

What does the Constitution say about presidential initiative in laws on tax issues?

As for taxes, more than 25 years ago, since ’98, it was established that bills introducing, changing or abolishing taxes are the exclusive initiative of the President of the Republic. They can only be presented by the head of state; and, by virtue of this limitation, Parliament cannot incorporate new taxes, even in the name of being said to be a contribution. The court has already ruled on the unconstitutionality of such parliamentary action.

Having this clarity, it is astonishing that, if the president presents a bill proposing an increase from 12% to 15%, the Parliament intends to abandon that initiative and, as a full or partial replacement, create contributions to the profits of extraordinary companies in general and banks.

But on other occasions, members of the assembly made changes to other projects… Was that wrong?

Namely, the Court issued three rulings in which it determines what is permitted and what is not. One of them is that if the president brings up the tax issue, there are essential elements within the tax, such as the tax rate itself, and that cannot be changed as intended. Exceptions cannot be added except those provided by Resolution 001-19 DOP-CC, confirmed in decision 2-21-OP/21. Taxes must result from a presidential initiative to create, modify or eliminate them, as indicated in decision 1-23-OP/23, and the name cannot be created or changed or called a “contribution” according to decision 43-16-IN/ 22 .

Were the reforms proposed on other occasions outside of what was allowed?

Clean. For example, in 2016, a solidarity contribution was created without the president proposing it: the Court has already said that it is unconstitutional. However, apart from the lack of legality due to the issue of initiative, there are other reasons. They want to create contributions that would have a retroactive effect, because they relate to the extraordinary profits from the previous years of companies (2022) and banks (2022 and 2023) on the net profit. Tax has already been paid on that profit.

Although the Court declared it unconstitutional, in the end it was charged, and there was no refund, almost like a dead letter on paper…

This is what the Court is criticizing because it tells them: “It’s unconstitutional, but just stop charging.” And, therefore, you have some legislators echoing this position.

There is a kind of commitment to banking…

These types of measures create additional problems, such as disincentives for investment. There are plans for the arrival of foreign banks in the country, but this does not attract such investments. The first thing an investor looks at is the labor and tax regime. If you are told that in Ecuador you pay 25% income tax, plus 15% of the profit that goes to the workers, you already know. But if surprises come later, such as an additional 15% tax on profits for which tax has already been paid, the investor no longer comes. There are voices in the country trying to point out that it is harmful for banks to make a profit, and it is harmful that they do not make money. If the bank is not capitalized, it will not do well. We don’t seem to learn from our own problems, like the one in 1999 when the bank collapsed because it had losses.

Those voices that point to banking with special interest say that it is the most profitable activity. Is that right?

Banking is not the most profitable activity. The first are: the service sector with 35% profitability; mining, 25%, and banking, 12%. Is the intention to decapitalize the banks? The damage is done to the state in the end. It is noticeable that the treatment for companies is not the same as for banks; For companies, the treatment is not as strict as that for banks. If the company had an extraordinary profit of $50 million in 2022, it pays 5%, or $2.5 million. You say to the bank, “You made $50 million in 2022 and $50 million in 2023,” and you have to pay 20%, or $10 million a year. For the banks, the issue is already one of seizure.

Is it a special desk for banking? If they had a higher profit, do they pay more?

In the case of banks, there is a table: if the annual profit is from 10 to 50 million dollars, the payout is 15%; from 50 to 100 million dollars they pay 20%, and over 100 dollars they pay 25%.