Scope and Rates
The Ecuadorian value-added tax (VAT), is tax-based on the value-added method.
VAT is due on:
- the sale by VAT taxpayers of movable property located in Ecuador.
- work performed independently, leasing and services specified in the law, provided they are performed in Ecuador
- the final importation of movable property and
- the use or exploitation in Ecuador of services supplied by non-residents (i.e. import of services).
For VAT purposes, the concept of taxable “sale” includes:
- sales and other transfers for consideration of movable property located in Ecuador (payment in kind,
- the incorporation of movable goods produced by the taxpayer in the case of leasing and supplies of services exempt or excluded from taxation
- transfers of movable goods which are attached to the soil at the time of the transfer, provided they have exclusive enjoyment and represent goods in trade for the taxpayer
- the removal of movable property by the owner for his personal use or consumption
- transactions carried out by commission agents, consignees and others who sell or buy personal property in their own name but on behalf of third parties
Under the VAT system, tax is levied at each stage of the manufacturing and distribution process on a non-cumulative basis. The accumulation of tax is avoided through the deduction of VAT invoiced to the entity. The entity pays VAT on the total amount invoiced in each monthly tax period, but it is entitled to recover the input VAT that was invoiced to the entity during the same period. If, in any tax period, the credit for input VAT is higher than the amount of VAT due on output, the entity is not entitled to a refund (unless the refund is related to exports); rather, the excess is credited against future VAT liabilities.
The standard rate of VAT is 12 percent.
- national Transportation services of passenger (including: sea and air), as well as international transportation of cargo; and national transportation of air cargo from, and to the Galapagos province. Also includes the transportation of crude oil and natural gas through pipelines
- health care services, including prepaid medicine and manufacturing services of medicine
- leasing services of property destined for housing
- public services such as: power supply, water, sewage and rubbish collection
- education services
- child care services and nursing home services
- religious services
- book printing services
- funeral services
- administrative services rendered the State and public entities in which a tax or price has to be paid, for example Registro Civil (public entity in charge of the issuance of citizenship I.D., records, permits, among others)
- public spectacles
- financial and stock services rendered by authorized entities
- exported services
- receptive tourist packages, billed inside or outside the country, to natural persons or corporations that are non-resident in Ecuador
- toll collection services in roads and bridges
- lottery systems of Junta de Beneficencia de Guayaquil and Fe y Alegría
- aerial fumigation services
- services personally rendered by qualified craftsman by the Junta Nacional de Defensa del Artesano. In addition, goods produced in workshops and commercialized by craftsman are zero-rated
- services of refrigeration, cooling and frozen to preserve foods and in general all perishable products, which are exported as well as processed products : cut products, grinded products, and the extraction by mechanical or chemical ways to elaborate oils for human use
- individual insurance and reinsurance health services , in group, medical assistance and personal accidents, as well as mandatory services for transit accidents and,
- services rendered by social clubs, professional guilds, production chambers, syndicates and similar groups, that collect from their members, royalties, quotes, tariffs that do not exceed US$1,500 in the year. The services rendered in exchange of royalties, quotes or similar greater than US$1,500 in the year will be subject to the standard rate
- foodstuff from agricultural origin, chicken farming, livestock, bee keeping, forestry, meats in natural state and pork products; and from fishing that are kept in natural state
- milk (local production): natural, pasteurized, homogenized or in powder, cheese and yogurt. Milk replacers and feed supplements for kids
- bread, sugar, panela, salt, lard, butter, oat, cornstarch, noodles, flours for human use, national products such as: canned tuna, canned sardine and trout, oil, except olive oil
- certified seeds, bulbs, plant, cuttings and live roots. Fish flour and food for animals, food with the addition of molasses or sugar, fertilizers, pesticides, insecticides, fungicides, herbicides, oil used against the plague called sigatoka negra, anti-parasites and veterinary products as well as raw materials and supplies, imported or acquired in the local market, to produce this products
- tractors of up to 200 hp, including the kangaroo types and the ones used in the rice farming; plows, shreds, ridgers and troughs; seed drills, harvesters, grass cutters, portable fumigation pumps, sprinklers for irrigation systems and rest of elements of farming use, parts and supplies
- medicines and drugs for human use, as well as raw materials and imported supplies or acquired in the internal market in order to produce medicines locally. The packages / labels imported or acquired in local market that are not use exclusively in the manufacturing of medicine for human use or veterinary use
- bond paper, books and complementary materials that are commercialized together with books
- exported goods
- goods introduced into the country:
- by foreign diplomatic personnel and officers from international bodies
- by passengers entering into the country, up to the royalty value recognized by the Law
- via donation from abroad, performed in favor of entities and public entities and public bodies
- goods that are temporary introduced into the country or are in transit if they are not object of nationalization
- the administrators and operators of Specific Zones of Economic Development (ZEDE), as long as the imported goods are exclusively destined to the authorized zone, or incorporated in some transformation / production process thereon developed.
- electric energy, fluorescent lamps
- airplanes, small planes and helicopters for commercial transportation of passengers, cargo and services
- hybrid vehicles, or electric vehicles, whose taxable base is up to US$35,000.
Special Consumption Tax (ICE): ICE is applied to consumption of certain goods and services considered as sumptuous.
Capital Outflow Tax (ISD): ISD applies to remittances abroad in cash or by check, transfers or withdrawals of any kind made with or without the intermediation of financial entities.
Businesses making taxable supplies in Ecuador through a local permanent establishment will be required to register and account for local VAT.
There are penalties for failure to file tax returns based on the general terms fixed by the tax administration.
No. Under Ecuadorian VAT legislation it is not possible for a non-resident entity to voluntarily register in Ecuador and act as an established entity.
VAT registration is not possible without a permanent establishment in Ecuador. If the company (permanent establishment) performs activities in the country, VAT registration is mandatory.
Taxpayers are required to submit VAT returns on a monthly basis.
Yes, excise tax returns that apply to certain goods and services.
The exchange rate in effect when the goods/services are “ nationalized”.
There are certain items that businesses cannot recover VAT on. For example:
- exempt supplies: where VAT relates to both taxable and exempt supplies, an apportionment is needed (pro rata rule).
- the VAT paid on acquisition of goods and services cannot be recovered when sales are exempt.
International Supplies of Goods and Services
Exports of goods and services are included in the scope of VAT, but they are zero rated. This means VAT is not levied on the output, but VAT paid on inputs may be recovered through tax refunds, which the taxpayer may request after shipping the goods This treatment does not apply for the exportation of services. Goods supplied and services performed abroad are not subject to tax.
When goods are imported into Ecuador, import VAT and customs duties must be paid before the goods are released from customs’ control.
Services rendered from abroad for which utilization is made in Ecuador (import of services) by Ecuadorian VAT payers in the country are taxable.
In such cases, the local taxpayer must self-assess the VAT payment in the month immediately after the taxable event is completed, and will compute the VAT credit in the following month.
Layout of invoices is strictly regulated.
A taxpayer is required to issue an invoice for each taxable transaction performed. If this requirement is not complied with, the purchaser is not entitled to the VAT credit otherwise arising from the purchase.
Invoices and similar documents corresponding to transactions made by a registered taxpayer with another registered taxpayer must show separately the relevant VAT. Transactions made by a registered taxpayer with a final consumer or a small taxpayer must not show separately the corresponding VAT.
Tax invoice should contain the following data:
- date of issue
- a sequential invoice number
- taxpayer identification number (CUIT) and customer taxpayer identification number
- supplier’s name and address
- customer’s name
- the quantity and nature of the goods/services supplied
- unit price (exclusive of any VAT)
- rate of any discounts (if not included in the unit price and if applicable)
- the VAT rate applicable
- the total amount price (including VAT).
- issued authorization code or electronic authorization code
Yes, in certain cases.
Transfers of Business
Sale of businesses in which the asset and the liability is transferred, mergers, spin-off, transformations of corporations, cession of shares, corporate participations and remaining securities, are not VAT taxed.
Options to Tax
Head Office and Branch transactions
There are no special rules for VAT. Both are considered as different taxpayers for VAT purposes.
No. However, for income tax purposes, the taxpayer is allowed to deduct, a provision to cover bad debts, that is equivalent to 1 percent of the accounts receivable of the fiscal year and whose collection is pending at the close of the fiscal year.
In the absence or an invoice or similar document or when the price is below the market value, this market price is used as the taxable base by the tax authorities.
There are certain penalties for failing to fulfill formal obligations.
Compensatory interest is approximately 1.1 percent monthly (the rate fluctuates every three months).
If withholding is not made or is partially made, the withholding agent will be subject to penalties equivalent to the total amount not withheld, plus the amount that would correspond to past due interest. This penalty does not release the company from its joint obligation as withholding agent as defined in the tax code.
VAT Received and Withheld
The delay in filing the withholding return will be subject to a penalty of 3 percent per month over the amount pending of payment.
How often do tax audits take place?
It depends on the level of compliance level tax obligations. In general large taxpayers are subject to more controls.
Are there audits done electronically in your country (e-audit)? If so, what system is in use?
Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?
Are rulings and decisions issued by the tax authorities publicly available in your country?
Yes for the decisions.
Certain taxpayers authorized by the authorities are entitled to withhold the VAT paid on their acquisition of goods and services to other taxpayers.