VAT, GST and Sales Tax in Ecuador

Summary

Name of the tax Value-added tax (VAT)
Local name Impuesto al valor agregado (IVA)
Date introduced 31-Dec-81
Trading bloc membership None
Administered by Ecuadorian Internal Revenue Service (IRS) (http://www.sri.gob.ec)
VAT rates
Standard 14% until May 2017, then 12%
Other 0% and exempt
VAT number format The nine-digit Tax ID is applicable to all taxes.
VAT return periods Monthly
Thresholds
Registration None
Recovery of VAT by non-established businesses No

Scope of the tax

VAT is levied on the following transactions:

  • The supply of goods or rendering of services performed in Ecuador
  • The importation of goods and services from outside Ecuador
  • The supply of copyrights, industrial property and related rights (effective from 2011, all transactions involving intellectual property rights are considered services)

Who is liable

A VAT taxable person is an individual or business entity that, in the course of doing business in Ecuador, engages in the following actions:

  • Transfers and/or imports of physical movable goods
  • Performance and/or importation of services

No registration threshold applies.

The definition of a VAT taxable person also applies to a perma­nent establishment (PE) of a foreign business, located in Ecuador.

Group registration. VAT grouping is not allowed under Ecuadorian VAT law. Legal entities that are closely connected must register for VAT individually.

Non-established businesses. If non-established businesses per­form transactions on which VAT is levied, a sales and purchase receipt must be issued by the local company and the VAT payable is levied from the local company (reverse charge).

Tax representatives. Foreign companies may select a resident person or legal entity to represent the taxpayer to the tax authori­ties. This is not limited to VAT issues but must include all tax matters between the taxpayer and tax authorities in Ecuador.

Reverse charge. A self-invoice is issued in case of self-consump­tion or donation, and for imported services. In case of self-con­sumption or donation, the price has to be the market price or higher, and VAT is levied. The legal requirements applicable are the same as for a normal sales invoice.

For imported services, the local entities must issue a sales and purchase receipt in order to charge the VAT over the services billed from abroad. The VAT on import of goods is settled by the local customs authority.

Registration procedures. Private entities must file before the tax authority the following documents:

  • Forms RUC-01-A and RUC-01-B signed by the legal represen­tative
  • Public deed of the constitution of the company duly registered in the Commercial Registry
  • Legal representative’s appointment duly registered in the Commercial Registry
  • General data sheet provided by the Superintendance of Companies
  • Legal representative’s ID or passport

Tax ID registration must be performed directly in the tax author­ity’s offices. All documents must be originals and notarized cop­ies. The legal representative must perform the registration directly or file a letter of authorization to the person in charge of this process. The estimated time for this procedure is three hours.

Late-registration penalties. In order to proceed with commercial activities in Ecuadorian territory, legal entities must first obtain a Tax ID. There are no penalties for late registration.

Digital economy. There are no specific requirements for digital economy transactions other than general VAT regulations.

Deregistration. If a person or legal entity ceases its commercial activities in Ecuadorian territory, then a request to cancel the Tax ID must be submitted to the tax authority in order to prevent penalties and new tax obligations.

VAT rates

The general rate of VAT in Ecuador is 12%, however since June 2016 until May 2017 the rate will be temporarily increased to 14%. A zero rate (0%) can apply, preserving the right to deduct input VAT.

Examples of goods and services taxed at 0%

  • Unprocessed food
  • Agricultural goods (such as certified seeds, plants and roots) and equipment
  • Drugs and veterinary products
  • Paper, newspapers, magazines, books and publishing services
  • Exported goods
  • Transport of persons and materials and air cargo transport
  • Education
  • Health services
  • Public supply of electricity, drinking water and sewerage ser­vices
  • Rent for housing purposes
  • Financial securities exchanges
  • Electric kitchens with induction systems for domestic use

Some supplies are exempt from VAT, which generally means there is no right to deduct input VAT.

Examples of goods and services exempt from VAT

  • Sale of a business
  • Mergers, spinoffs and conversions of companies
  • Donations to charities
  • Transfers of stock, shares and other negotiable instruments
  • Real estate

Option to tax for exempt supplies. Not applicable.

Time of supply

The time when VAT becomes due is called the “time of supply” or “tax point.” The basic time of supply is when the goods are transferred or when the services are performed. The invoice for the transaction must be issued at the time of supply.

The total amount of VAT must be paid even in credit operations.

Imported goods. The time of supply for imported goods is either the date of importation or the date on which the goods leave a duty suspension regime.

Recovery of VAT by Ecuadorian taxable persons

VAT input tax may be recovered with respect to the following:

  • Exportation of goods
  • Importation and local acquisition of goods and raw materials used in the production of exported goods
  • The provision of goods or services to governmental entities (some restrictions apply)

The recovery may be achieved through the offsetting of VAT receivable against VAT payable or through a claim to the tax authorities.

If a taxpayer registers a VAT amount for which a credit exists as an expense, the expense is not deductible for income tax purposes.

Partial exemption (input tax credit system). Taxpayers that pro­duce goods or supply services that are subject to 12% (14% until May 2017) VAT may recover the full input tax paid, netting it with local acquisitions. The same treatment applies to VAT tax­able persons that export goods and services. VAT input tax can be recovered with respect to imports of fixed assets and goods, raw materials and services necessary to produce and trade taxable goods and services.

Taxable persons that exclusively produce or sell goods, or supply services that are subject to VAT at the zero rate (other than exports of goods or services), are not entitled to any input tax recovery.

VAT taxable persons that supply goods or render services that are subject to VAT at both rates (12%, 14% until May 2017 and 0%) may recover a proportion of input tax.

The recovery percentage is calculated using a pro rata method, using the ratio of the total value of supplies made at the standard rate plus exports to the total value of all supplies made. The following is the ratio:

(Supplies subject to a rate of 12% or 14% + exports) / (Total sales + exports)

Refunds. If the amount of input VAT (credit VAT) recoverable in a month exceeds the amount of output VAT (debit VAT) payable, the excess credit may be carried forward to offset output tax in the following tax period.

Recovery of VAT by non-established businesses

Ecuador does not refund VAT incurred by foreign businesses unless they have a PE in Ecuador.

Invoicing

VAT invoices. In general, a VAT taxpayer must issue an invoice for all taxable transactions performed, including exports. Such invoices are necessary to support a tax credit.

Exports. Ecuadorian VAT is not chargeable on supplies of export­ed goods or services. However, to qualify as VAT-free goods, exports must be supported by customs documents evidencing that the goods have left Ecuador.

Foreign-currency invoices. Invoices related to supplies made in Ecuador must be issued in US dollars (USD).

VAT returns and payment

VAT returns. VAT returns are generally submitted monthly. VAT returns and payment in full are due between the 10th and the 28th day of the month following the end of the return period. To deter­mine the filing deadline for a VAT taxable person, the tax admin­istration uses the ninth number of its tax identification number (RUC).

In certain circumstances, VAT-taxable persons that supply goods and services exclusively at the 0% rate may submit VAT returns every six months.

VAT shown in tax returns must be paid in US dollars.

Special schemes. Taxpayers who perform only 0% VAT rated sales and purchases must file a VAT return every 6 months, due between the 10th and the 28th day of July (for transactions per­formed between January and June) and January (transactions performed between July and December).

Electronic filing and archiving. All VAT returns must be electroni­cally filed according to the schedule specified above and using the software provided by the tax authority, which can be down­loaded from the website www.sri.gob.ec.

Annual returns. Not applicable.

Penalties

A range of penalties is assessed for errors and omissions with respect to VAT accounting, including the late filing of a VAT return or late payment of the tax. The interest rate for late pay­ment is set every quarter.

Penalties for noncompliance with VAT obligations include fines of up to five times the amount lost by the tax authorities, closure of the business and imprisonment.