Español Facing a severe downturn on account of declining oil prices, Ecuador’s central government has resorted to an urgent tax and production reform. The National Assembly, dominated by members of President Rafael Correa’s PAIS Alliance, passed the Law on Incentives for Production and Fiscal Fraud Prevention on Monday, December 22.
The bill, designed to raise US$200 million in extra revenue annually, overrules 10 previous laws. It attempts to incentivize greater domestic production while imposing new taxes on “harmful” products and making various modifications to Ecuador’s tax regime.
Taxing the Gas out of You
That is in addition to earlier changes to Ecuador’s energy sector, such as the recently launched Energy Efficiency Program for Induction Cooking. The stated goal is a decrease in the consumption of imported fuels such as liquefied petroleum gas (LPG), and greater use of hydroelectric power. Current LPG subsidies cost the government $700 million annually.
Within the proposals presented by Assembly Member Ximena Ponce, the value-added tax (VAT) of 12 percent is eliminated on purchases of induction cookers. However, a 100 percent increase for the relevant special consumption tax (ICE) serves to double the price of gas ovens.
“If someone decides not to help change the energy matrix and to keep using gas, both the gas and the kitchen will cost. It’s a strong disincentive against using gas,” she explained.
Recomendaciones de los liberales: aumentar el IVA. NO vamos a hacer eso! Si precio del petróleo sigue bajando, recortaremos en inversiones.
— Virgilio Hernández E (@virgiliohernand) December 21, 2014
PAIS Alliance legislator Virgilio Hernández mocks: “Liberal recommendations: increase VAT. We won’t do that! If oil prices continue to fall, we will cut investments.”
In his national Saturday broadcast on December 20, President Correa asserted that he is even open to duty-free importation of induction cookers. He is unimpressed that domestic producers “have not committed to [his] project,” preferring to manufacture gas ovens for consumers.
Investors Feel the Heat
Opposition Assembly Member Luis Fernando Torres has expressed concerns over what he dubs the “law of tax complications.”
The new law states that one-off transfers of stocks and shares will no longer be exempt from income tax, to prevent large companies from using this legal category to avoid paying tax.
Torres argues, however, that this change will adversely affect people holding small amounts of shares, while leaving larger businesses relatively unscathed. The opposition politician asserts that vaguely worded bills, like this one, could also be misinterpreted and end up discouraging small investors. He points to Colombian, Peruvian, and Chilean laws as superior alternatives.
— Luis Fernando Torres (@lftorrest) December 22, 2014
#LawOnIncentivesForProduction will destroy the stock market with a new tax and more controls.
Incentives, for Correa’s Select Few
Another controversial aspect of the bill is the offer of “tax stability” — tributary requirements fixed at the same levels for several years — offered for investments over US$100 million. During the debate on the day of the vote, legislators added the requirement for affected companies to issue regular reports, and for such arrangements to be signed off on a case-by-case basis by the president himself.
Pablo Arosemena, president of the Guayaquil Chamber of Commerce, contends that the incentives presented in the bill “fall short” for businessmen and that they should instead be grounded in the country’s current business landscape.
“There are very few investments of US$100 million in Ecuador,” Arosemena said in an interview with local broadcaster Ecuavisa. “In Colombia, for example, the threshold for investment is $2 million … Here it could well be $250,000, an amount better suited to the Ecuadorian reality.”
Moreover, he argues that Ecuador should “expand incentives to more sectors, not just those that would alter the production matrix. [Let’s] lower the threshold so we get smart investments that can actually happen, and provide stability not only for taxation but also to labor regulations.”
Legal Ambiguity Remains
Fabián Pozo, an Ecuadorian legal specialist completing graduate studies in California, shared with the PanAm Post that the bill represents another major tax reform with likely negative repercussions for Ecuador’s stock market.
“All transfers of stocks and shares are going to be taxed … This tax is not new internationally. However, it is usually imposed on capital gains,” he explains. “This is not very clear in the text of the reform, so it could be misunderstood and argued that all income is to be taxed.”
“The considerations for tax residency in Ecuador are also important. [These are] extended, but through ambiguous wording … such as exemptions for those who have their ‘closest relationships’ in Ecuador.”
He highlights the potential for confusion over the elimination of several tax exemptions for foreign and national holdings, unless they can prove that their “direct beneficiary” is an Ecuadorian resident.
Pozo acknowledges some secondary positive aspects, such as the streamlining of tax-payment bureaucracy. However, he says the reform brings “no greater incentives to investment or production,” which is the overarching objective.
Edited by Laurie Blair and Fergus Hodgson.