Corporate Tax 2010 - BMR Advisors

Bustamante & Bustamante
Ecuador
Ecuador
76
contributions made in kind to companies; (ii) awards from
inheritance or liquidation of partnerships, including the liquidation
of community property; (iii) sale of businesses in which assets and
liabilities are transferred; (iv) mergers, spin-offs and conversions of
companies; (v) donations to entities of the public sector and to
legally-organised private charity, cultural, educational, research,
health or sports institutions and associations; and (vi) assignment of
shares, equity interests and other securities. Only if it is expressly
provided under the law, will the rendering of specific services,
imports or transfers of certain goods within domestic territory be
exempt from VAT.
Exempt goods are taxed at 0% and include the following among
others: (i) food products deriving from agriculture, aviculture,
livestock, apiculture, rabbit breeding, bio-aquatic, or forest source,
meats in their natural state, sausages, and fish kept in their natural
state; (ii) milk in its natural state, pasteurised or homogenised, or
locally produced powdered milk, cheese and yogurt, baby formula,
children protein foods; (iii) various basic foodstuffs, i.e. bread, sugar,
pasta, and animal oil, among others; (iv) various farming inputs; (v)
various farming vehicles and equipment; (vi) medicines and drugs for
human use; (vii) paper, magazines and books; (viii) export goods; (ix)
selected articles imported by certain officers or for specific purposes
established in the law; (x) goods sold to public entities or public
enterprises; (xi) energy; and (xii) fluorescent lamps.
Exempt services are taxed at 0% and include the following, among
others: (i) transportation of passengers and cargo, whether by river,
sea or land, as well as the international air transport of cargo and air
transport of cargo to and from the Province of Galapagos; including
of the shipment of crude oil through pipelines and natural gas through
gas pipes; (ii) health services, including pre-paid medical services
and medicine production services; (iii) rent or lease services for
immovable property used only as housing; (iv) public services of
electrical power, potable water, sewage system, and garbage
collection; (v) all educational services; (vi) day care services for
children and homecare services for the elderly; (vii) religious
services; (viii) book printing services; (ix) funeral services; (x)
administrative services provided by the State and entities of the
public sector; (xi) public entertainment services; (xii) financial and
stock exchange services; (xiii) assignment of securities; (xiv) export
services, including pre-paid tourism packages; and (xv) toll and like
services provided to public entities or enterprises.
2.4 Is it always fully recoverable by all businesses If not,
what are the relevant restrictions
VAT is levied at every stage of production with a tax credit
mechanism that prevents a cascade tax effect, hence the input tax
paid at the time of importation or purchase of a good or service may
be fully compensated with the output tax charged on the sale of
goods and/or the provision of services subject entirely to 12% VAT
rate. This treatment includes VAT paid on imported or purchased
goods that become part of the taxpayer’s fixed assets, including
intangible assets.
Therefore, as a rule of general mandatory application, taxpayers are
entitled to a tax credit for 100% of the VAT paid on their
acquisitions as long as such acquisitions are employed fully in the
production and marketing of taxable goods and services.
Subsequently, tax credit is not granted for VAT paid on acquisitions
employed in the production and marketing of exempted (zero-rated)
goods or services.
For taxpayers supplying both taxable and zero-rated goods or
services, VAT paid on acquisitions that cannot be directly
attributable to either must be apportioned between supplies. The
law provides for the standard method of apportionment fixed on a
monthly basis, this is, the ratio of taxable supplies to total supplies
expressed as a percentage. Alternatively, the Internal Revenue
Service (SRI) may allow these taxpayers to use the full credit if they
have bookkeeping systems enabling them to differentiate the VAT
paid and attributable to taxable supplies from the VAT paid and
attributable to zero-rated supplies.
VAT paid on inputs for exported goods is fully reimbursed.
However, as of January 2008, exports derived from petroleum
activities or activities related with non-renewable natural resources
are not entitled to such VAT refunds.
2.5 Are there any other transaction taxes
An excise tax called ICE is levied on the importation or distribution
of specific goods, among others: cigarettes; beer; carbonated
beverages; alcohol; alcoholic beverages; motorised vehicles for
ground transportation with a cargo capacity of up to 3.5 tonnes;
small aircraft not used for the commercial transport of passengers,
cargo or services; and jet-skis, ATV’s, yachts and recreational boats.
The ICE rate fluctuates between 5% and 300% depending on the
good subject to this tax.
2.6 Are there any other indirect taxes of which we should be
aware
No, there are no indirect taxes to mention.
3 Cross-border Payments
3.1 Is any withholding tax imposed on dividends paid by a
locally resident company to a non-resident
Only the income earned by companies established or domiciled in
Ecuador is subject to Ecuadorian income tax (25%). Dividends and
profits paid or credited by local companies to resident companies or
individuals and to non-resident individuals are tax-exempt.
Dividends paid or credited by foreign companies to Ecuadorian
residents are also tax-exempt, provided they are not remitted from
a tax haven country, in which case such payment shall become part
of the recipient’s taxable income. Dividends paid or credited by a
local company to non-resident companies are subject to the 25%
WHT; however, the 25% corporate tax paid by the local company
distributing dividends will be credited against such WHT and,
therefore, dividends sent abroad will not be exposed to taxes other
than those already paid by the company declaring them.
3.2 Would there be any WHT on royalties paid by a local
company to a non-resident
Royalties remitted or credited overseas are subject to a 25% WHT
at source, except when subject to lower rates under bilateral tax
treaties signed by Ecuador.
If the party obligated to make the withholding fails to do so, it will
be jointly liable for paying the tax. In this case, the royalties paid
or credited overseas will not be deductible as an expense.
3.3 Would there be any WHT on interest paid by a local
company to a non-resident
As of January 2008, interest of an Ecuadorian source paid or
credited abroad is subject to a 25% WHT under Ecuadorian income
tax law and may be deducted as long as the corresponding foreign
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