The Director General of the Central Bank of Ecuador (BCE), Guillermo Avellán, announced that the Financial Regulation Board is considering reforming the current policy of tax incentives for foreign loans to stimulate more funds to come into the country. Some on social networks immediately rebelled against what they consider uThere are no subsidies for the rich, or even directly for the bankers.

First, this policy already exists and they simply propose to adapt it to the new international context. Since 2004, interest payments for external income tax (IR) credits can be deducted from the tax base. Subsequently, the Correa administration instituted a foreign exchange outflow tax (ISD) that took effect in December 2007. In the spirit of keeping tax incentives for foreign loans in place, an exemption from ISD for principal and interest payments was granted during the same administration in 2008. This policy was maintained during the administration, governed by the decisions of the time The Monetary and Financial Committee, chaired at the time by Correa’s former Minister of Economy and Finance, Patricio Rivera.

That interest on external loans can continue to be deductible from income tax and exempt from ISD, conditions considered as incentives

Currently, it can be deducted from the tax base and exempt from ISD up to a maximum of 0.25 percentage points above the average corporate rate in the local market. But since the domestic market rate has an artificial ceiling that is now below international rates that have been rising since the middle of last year, external loans are now less attractive and it is then more profitable for local banks to focus on consumer loans.

The goal is to give Ecuadorians greater access to external financing.

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Second, this measure is not a subsidy to banks, but a tax cut for loan seekers. While it would be ideal to free up interest rates, at least the ECB authorities have proposed raising that ceiling so that companies or individuals who get credit abroad can continue to deduct all their interest costs. In this way, the field is somewhat leveled between local and foreign credit, further integrating the financial sector and Ecuadorian business people into the global financial system.

The goal is to give Ecuadorians greater access to external financing. Instead of benefiting the bankers, it encourages an increase in the supply of credit. In addition, measures like this expose local banks to greater competition from foreign banks and offer Ecuadorians greater opportunities.

However, it would be ideal to remove the failed control of interest rates. Colombia’s Banco de la República analyzed the effect of interest rate controls in Latin America between 1980 and 2008 and found that “the presence of a restrictive interest rate ceiling is associated with a lower level of financial depth in Latin America.” If that price control were removed, some rates would rise and some would fall, but the overall supply of credit would increase. (OR)