What you should know about the income tax for natural persons in Ecuador

The income tax is nothing more than a tax that is applied to natural persons over 18 years of age, undivided successions and companies, whether national or foreign, whose tax year includes from January 1 to December 31 of each year, as indicated by the Internal Revenue Service (SRI) on its website.

Those who invoice already calculate their income tax impact with the new scheme: this segment has a small advantage

Not all individuals are required to declare income, there are some exceptions such as:

• Natural persons, whose gross income during the fiscal year does not exceed the basic fraction taxed.
• Those who are domiciled outside of Ecuador, do not have a representative in the country and their gross income is subject to withholding at source.

What were the changes?

Diego Zambrano, Manager of Tax Corporate Consulting and tax expertexplains that in 2021, 1.3 times of the basic tax-reduced fraction was used as the maximum to deduct personal expenses and there was a division such as food, health, among others, the latter being the one with which this deduction could be made the most.

Already in 2022 it changes with the new Tax Law. The first variation was in the surplus fraction tax that went from 35% to 37% to pay the tribute, which is analyzed according to the table. Another change was that personal expenses became a tributary credit.

What happens for 2023?

The Internal Revenue Service (SRI) issued a resolution on December 27, 2022, in which it updated the range of the table established to settle the income tax of natural persons for the fiscal period of 2023.

Here the variation is in the tax base that went from $11,310 to $11,772. These changes, according to the resolution, are based on the annual variation of the Urban Area Consumer Price Index, dictated by the National Institute of Statistics and Censuses (INEC). to November 2022.

“The ranges of the table provided in literal a) of article 36 of the Internal Tax Regime Law are updated for the liquidation of income tax for income received by natural persons and undivided successions, corresponding to the fiscal year 2023” , indicates article two of this resolution.

The table is the following:

Personal income tax and undivided inheritance tax – 2023 (in dollars).

Zambrano indicates the correct way to interpret the income tax table: “Add up your taxable income, which is salary multiplied by twelve, overtime, profits. Other income does not count. From that total I subtract the individual contribution to the IESS. And I place that value in the table”.

For example, if a person earns $1,800 per month, which per year becomes $21,600, and never received overtime or profits, then that total is subtracted with the contribution to the IESS. “I have $19,558 left and I look for that value in the table and it is in the fourth section. I see that I have to pay a basic tax of $534, but there is also a surplus of 12%”, explains Zambrano.

How do we determine the surplus fraction tax? The tax expert explains how it is obtained. First you have to subtract $19,558 for the basic fraction, which is $18,666 because in this case it was placed in the fourth section. That result, $892, took 12% of it, which is $107. Then, the basic fraction tax ($534) is added with the excess $107 giving an accrued tax of $641. “This value is not the one that necessarily has to be paid because it is necessary to analyze the tax credit”, explains Zambrano.

How do I know if the 10% or 20% tax credit applies?

It is important to know that there is a basic fraction of $24,967, which is basically 2.13 basic fractions deducted from income tax. This total is used to measure whether or not a person in a dependency relationship has access to a tax credit.

Continuing with the previous example, of a citizen with a salary of $1,800, which per year is $21,600. Here it will be necessary to add all his income such as thirteenth and fourth salaries, reserve funds and more. In this case it returned $23,825 as total income. “So, the regulations say that if I exceed the basic fraction ($24,967) I can use 10% of the tax credit ($532). But, if it is less, it is 20% ($1,065)”says Zambrano.

So, continuing with the example, that citizen, who had a tax accrued of $641 and which does not exceed $24,964, then accesses 20% of the reduction ($1,065) and would remain at $0.

How are the $532 and $1,065 determined?

These values ​​of the tax credit, which is 10% or 20%, are obtained from the equivalent of seven basic baskets determined by the National Institute of Statistics and Censuses (INEC). For example, that of November 2022 was at $761.14 and multiplied by seven, it results in $5,327.98.

Of that total, 10% is removed, which is $532, and 20% with %1,065. Zambrano clarifies that to know a tentative value of what he will pay in 2023, the calculation can be made with the basic basket of November, but the correct thing is that of December 2022.

“It has to be the December one, normally it doesn’t vary much, but the right thing to do is to use the December one,” he points out.

Zambrano also recalls that until January 31, 2023, the projection of personal expenses can be made. (YO)