Quito GMT -5
EY
EY Addvalue Asesores Cía. Ltda. Inglaterra y Av. Amazonas (esquina) Edificio Stratta – 11th Floor P.O. Box 170507
Quito Ecuador
Indirect tax contacts
Javier Salazar
+593 (2) 255 55 53 javier.salazar@ec.ey.com
Alex Suárez +593 (9) 6315 5777 alex.suarez@ec.ey.com
Fernanda Checa +593 (2) 255 55 53 fernanda.checa@ec.ey.com
Santiago Andrade +593 (2) 255 55 53 santiago.andrade@ec.ey.com
Guayaquil GMT -5
EY
EY Addvalue Asesores Cía. Ltda. Ave. Francisco de Orellana y A. Borges Edificio CENTRUM – 14th Floor Guayaquil Ecuador
Indirect tax contacts
Carlos Cazar +593 (4) 263-4500 carlos.cazar@ec.ey.com
Cynthia Yoong +593 (4) 263-4500 cynthia.yoong@ec.ey.com
A. At a glance
Name of the tax
Value-added tax (VAT)
Local name Impuesto al valor agregado (IVA)
Date introduced 31 December 1989
Trading bloc membership Andean Community of Nations
Administered by Ecuadorian Internal Revenue Service (IRS) (http://www.sri.gob.ec)
VAT rates
Standard 12%
Other Zero-rated (0%) and exempt
VAT number format Nine-digit Tax ID
VAT return periods
Monthly
Thresholds Registration None
Recovery of VAT by non-established businesses No
B. 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 (this includes intellectual property)
• The importation of digital services (please refer to the subsection below on the Digital econo my)
C. Who is liable
A 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 VAT registration threshold applies in Ecuador.
The definition of a taxable person also applies to a permanent establishment of a foreign business located in Ecuador.
Exemption from registration. The VAT law in Ecuador does not contain any provision for exemp tion from registration.
Voluntary registration and small businesses. The Ecuadorian VAT law contains the option of voluntary registration for nonresident digital service providers in Ecuador only when the service is imported by tax residents or permanent establishments of nonresidents in Ecuador.
Group registration. Group VAT registration is not allowed in Ecuador.
Non-established businesses. If non-established businesses perform transactions on which VAT is levied, the resident customer (taxable person) must account for VAT via the reverse-charge mechanism (business-to-business (B2B) supply). A sales and purchase receipt must be issued by the local company and the VAT payable is levied from the local company.
A non-established business is not required to be registered for tax purposes in Ecuador unless its activities trigger a permanent establishment.
Non-established businesses have the choice to register for VAT in Ecuador if they provide digital services. The VAT registration procedure for digital services providers requires they also provide the following documentation:
• Registration form signed by the legal representative
• Agreement of responsibility and use of electronic media signed by the legal representative
• Certificate of tax residence of the company
• Certificate of existence of the company providing the digital service
• Appointment of the legal representative of the company providing the digital service
• ID of the legal representative
Tax representatives. Foreign companies may select a resident person or legal entity to represent the taxable person to the tax authorities. This is not limited to VAT issues but must include all tax matters between the taxable person and tax authorities in Ecuador.
Reverse charge. A self-invoice is issued in case of self-consumption or donation, and for import ed services. In case of self-consumption or donation, the price must 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. For imported digital services, where payment is made by credit or debit card, the local credit or debit card entities shall act as withholding agents for 100% of the VAT due on such supplies.
Domestic reverse charge. There are no domestic reverse charges in Ecuador.
Digital economy. There are no specific requirements for digital economy transactions other than general VAT regulations. Non-established businesses have the choice to register for VAT in Ecuador if they provide digital services.
For B2B transactions, the services provided by a nonresident business are generally subject to 12% VAT with respect to imported services. The customer is expected to self-assess and pay VAT, which may be used as a tax credit. For business-to-consumer (B2C) transactions, which are also subject to 12% VAT, the payment is subject to a 5% outflow tax (OT), which is the responsibil ity of the customer. The 5% OT also applies in general to any payments that are made by the customer to the supplier (for B2B and B2C transactions). The outflow tax will be charged to the local customer bank/credit card account used to perform the payment. This charge does not affect the amount received by the non-established business.
Please note that a non-established business is not required to be registered for tax purposes in Ecuador unless their activities trigger a permanent establishment. For further details, please see the Non-established businesses. subsection above. The Simplification and Progressive Taxation Act was published 31 December 2019 and effective since 1 January 2020. Nonetheless, regarding digital VAT tax reforms the effective day was 16 September 2020. This means that digital ser vices are treated as taxable transactions for VAT purposes and subject to the standard rate of VAT.
“Digital services” are defined as those provided and/or contracted through the internet or any adaptation or application of protocols, platforms or technology used by the internet or other network, through which similar services are provided that, by their nature, are automated and require minimal human intervention, regardless of the device used for downloading, viewing or use. For digital services consisting in delivery and shipping of tangible movable goods, the tax will be calculated on the commission paid in addition to the value of the good.
The payment of the VAT generated on digital services supply would be assumed by the “import er of the service” (i.e., the Ecuadorian resident).
Regarding digital services, it is important to note that the provision of webpage domains servers, hosting (i.e., providers of information storage) and cloud computing are subject to 0% VAT rate. Tax residents in Ecuador and permanent establishments of nonresidents, in the acquisition of imported digital services, for purposes of supporting costs and expenses for the calculation of income tax, as well as the VAT tax credit, must issue a liquidation of purchase of goods and provision of services. The settlement of goods and services must indicate the value of the imported digital service and the corresponding VAT.
When the digital service provider is not registered with the IRS and there is no intermediary in the payment process, the digital service importer has the quality of taxable person, and in addition to issuing the liquidation of purchases of goods and provision of services, will retain 100% of the VAT generated.
When the digital service provider is not registered with the IRS and the payment is made through an intermediary, the account statement generated by the company issuing the credit or debit card will constitute the withholding receipt.
Online marketplaces and platforms. See the detail above for rules on online marketplaces and platforms (considered a “digital service” by the VAT law definition).
Registration procedures. Private entities must file before the tax authority the following docu ments:
• Form RUC-01-A 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 Superintendence of Companies
• Legal representative’s ID or passport
To register for VAT, the business must register for a tax ID and this 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.
There are additional documents required for a non-established business providing electronically supplied services to customers in Ecuador. See the Non-established businesses subsection above for further detail.
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.
This process can be done online with the correspondent username and password to use elec tronic media of the company before the IRS.
Changes to VAT registration details. A taxable person must update its tax ID through Form RUC01-A if there are any changes to its VAT registration details, such as address, business name, among others.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero rate.
The VAT rates are:
• Standard rate: 12%
• Zero rate: 0%
The standard rate of VAT applies to all supplies of goods or services unless a specific measure provides for the zero rate or an exemption.
Examples of goods and services taxable 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
• Solar panels and plants for wastewater treatment
• LED lamps
• Electric vehicle chargers
• Provision of webpage domains, servers (hosting) and cloud computing
The term “exempt supplies” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.
Examples of exempt supplies of goods and services
• Sale of a business
• Mergers, spin-offs and conversions of companies
• Donations to charities
• Transfers of stock, shares and other negotiable instruments
• Real estate rental payments and related maintenance costs
Option to tax for exempt supplies. The option to tax exempt supplies is not available in Ecuador.
E. 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.
Deposits and prepayments. There are no special time of supply rules in Ecuador for deposits and prepayments. As such, the normal time of supply rules apply.
Continuous supplies of services. There are no special time of supply rules in Ecuador for con tinuous supplies of services. As such, the normal time of supply rules apply, and as such the tax is due when the goods are transferred or the services provided. The time to issue the correspond ing invoice and to levy the VAT is agreed between the parties if the services or the goods are delivered periodically. Nevertheless, the expense solely can be considered as deductible once the service is rendered or the goods are delivered.
Goods sent on approval for sale or return. For the supplies of goods sent on approval for sale or return, and the sale takes place, then the normal tax point is when the goods are sold. However, where the goods are sent for approval and no sale takes place, then no VAT needs to be accounted for. If the goods, having been sent to the customer on approval, and no sale takes place but the goods are returned to the supplier, then no VAT is to be refunded (as none was accounted for when sending the goods for approval) and no credit note is required to be issued. A credit note is only required to be issued when a sale takes place and then the goods are returned to the supplier, and refund is required.
Reverse-charge services. If an Ecuadorian taxable person imports services, it has to self-assess and determine the applicable VAT when the expense is recognized and recorded in the accounting books. The tax has to be paid the next month from the date in which the self-assessment was issued. When paying for the services, the purchaser must withhold the VAT.
Leased assets. The time of supply of leased assets is every month against the invoice or every duly established period of time as agreed in the lease agreement.
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.
F. Recovery of VAT by taxable persons
Input tax may be recovered with respect to the following:
• Exportation of goods and services (some restrictions apply)
• Importation and local acquisition of goods and raw materials used in the production of export ed goods
• The provision of goods or services to governmental entities (some restrictions apply)
• The activities of audiovisual, television and cinematographic productions (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 taxable person registers a VAT amount for which a credit exists as an expense, the expense is not deductible for income tax purposes.
The time limit for a taxable person to reclaim input tax in Ecuador is five years. The use of the VAT credit paid on local purchases and imports of goods and services can be used for up to five years (if not this, VAT should be recorded as a nondeductible expense). The specific request for the reimbursement of VAT credit is not allowed.
If it is presumed that the resulting tax credit cannot be offset with the VAT incurred within the following six months, the taxable person may request a refund when it is originated by withhold ings.
Nondeductible input tax. In general, input tax is nondeductible when the expenses are not related to sales levied with standard-rated VAT (12%). In general, input tax incurred on personal expens es that are not directly related to the taxable economic activity cannot be recovered.
• Food • Clothing
• Housing
• Travel expenses
Examples of items for which input tax is nondeductible
Examples of items for which input tax is deductible (if related to a taxable business use)
• Expenses related to the acquisition, use or ownership of vehicles, computers or other goods used in the exercise of the economic activity levied with 12% VAT
Partial exemption. Taxable persons that produce goods or supply services that are subject to 12% 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. 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% 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% + exports
Total sales + exports
Approval from the tax authorities is not required to use the partial exemption standard method in Ecuador. However, use of the method could be reviewed during an assessment by the tax author ities. Special methods are not allowed in Ecuador.
Capital goods. There are no special input tax recovery rules for capital goods. For capital goods, the general input tax recovery rules apply, i.e., only the tax related to the taxable sales can be deducted. If they are used for both taxable and exempt transactions, then the pro rata method should be applied.
Refunds. If the amount of input tax (credit VAT) recoverable in a month exceeds the amount of output tax (debit VAT) payable, the excess credit may be carried forward to offset output tax in the following tax period.
Pre-registration costs. For input tax incurred on pre-registration costs, the sales receipt must be issued in the name of the company, with its respective tax ID. However, usually these types of costs are not able to be recovered since there are no invoices or receipts issued in the name of the taxable person at the stage of pre-registration.
Bad debts. Output tax accounted for on supplies that do not get paid by the recipient (i.e., a bad debt) cannot be recovered in Ecuador.
Noneconomic activities. Input tax incurred upon purchases that are used for noneconomic activi ties is not recoverable in Ecuador.
G. Recovery of VAT by non-established businesses
Input tax incurred by non-established businesses in Ecuador is not recoverable.
H. Invoicing
VAT invoices. In general, a VAT taxable person must issue an invoice for all taxable transactions performed, including exports. Such invoices are necessary to support a tax credit.
Credit notes. Credit notes are documents that are issued to cancel operations, accept returns and grant discounts or bonuses. The credit notes must record the denomination, series and number of the sales receipts to which they refer. The acquirer, or who in its name receives the credit note, must enter in its original and copy the name of the acquirer, its tax ID or passport ID, and date of receipt. Additionally, the credit notes must comply with the general requirements established for VAT invoices.
Electronic invoicing. Electronic invoicing is mandatory in Ecuador for all taxable persons. This includes special taxable persons, exporters, internet-based sellers, issuers and administrators of credit cards, financial institutions and entities that develop television and communication activities. Nevertheless, any taxable person can apply to the tax authority in order to issue electronic invoices.
Special taxable persons are companies or individuals subject to a special tax regime that includes regulations that are not applicable to all taxable persons. A taxable person will be considered as a “special taxable person” if the Ecuadorian IRS decides it through an official resolution. The taxable person must be considered as “special” regarding the volume of its transactions and strategic interest for the IRS.
Electronic invoices are subject to the same general rules applicable to regular invoices. Taxable persons that issue electronic invoices must include information such as: the amount of the transaction, the applicable VAT rate, date and place of issuance, identification of the taxable persons involved in the transaction, among others.
Taxable persons must issue electronic invoices for the supply of the goods and services. The electronic invoices must be forwarded to the Ecuadorian IRS and the purchaser, when issued. The
no compliance of the latter may cause the imposition of sanctions to the provider such as the closing of facilities.
Simplified VAT invoices. Simplified VAT invoicing is not allowed in Ecuador. As such, full VAT invoices are required.
Self-billing. Self-billing is not allowed in Ecuador. However, a type of self-billing applies for selfconsumption or donation transactions and for imported services (see the reverse-charge services section above). For self-consumption or donation, 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.
Proof of 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 evi dencing that the goods have left Ecuador.
Foreign currency invoices. Invoices related to supplies made in Ecuador must be issued in the domestic currency, which is the United States dollar (USD).
Supplies to nontaxable persons. There are no special invoicing rules for supplies to nontaxable persons in Ecuador. As such, full VAT invoices are required.
Records. Sales receipts, supporting documents and withholding receipts must be kept in archive by taxable persons. Such records must be kept locally in Ecuador.
Record retention period. Taxable persons must store tax records for at least seven years.
Electronic archiving. Electronic sales receipts must be archived digitally. However, all other records must be kept physically on paper.
I. Returns and payment
Periodic returns. VAT returns are generally submitted monthly. VAT returns 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 case of VAT withholding tax (WHT) agents, the tax return has to be filed up to the ninth day of each month.
Taxable persons who perform only zero-rated (0%) VAT-rated sales and purchases must file a VAT return every six 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).
Periodic payments. VAT payment in full is due between the 10th and the 28th day of the month following the end of the return period. VAT shown in tax returns must be paid in US dollars. The payment must be paid online via the website of the IRS. This is an online platform for all taxable persons that have a tax ID in Ecuador. Through this platform, any taxable person is able to file its tax returns and pay any VAT due online. The online payment can be made automatically, by syncing the taxable person´s bank account to the system, after signing a debit agreement. It is also possible to pay through the IRS website with both credit and debit cards.
Electronic filing. Electronic filing is mandatory in Ecuador for all taxable persons. 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 tax authority website. (www. sri.gob.ec).
Payments on account. Payments on account are not required in Ecuador.
Special schemes. No special schemes are available in Ecuador.
Annual returns. Annual returns are not required in Ecuador.
Supplementary filings. Supporting transactional information. Taxable persons must submit supplementary information on transactions made regarding purchases or acquisitions, sales or revenues, exports, voided receipts and withholdings. This information is denominated “Anexo Transaccional”and is filed electronically through the tax authority’s digital applications.
Correcting errors in previous returns. A substitute VAT return can only be filed where more tax is due than originally paid, or changes to fiscal obligations or changes to control processes. The filing will vary depending on the obligation.
Digital tax administration. There are no transactional reporting requirements in Ecuador.
J. Penalties
Penalties for late registration. There are no penalties for late VAT registration in Ecuador.
Penalties for late payment and filings. 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 impris onment.
Penalties for errors. In case of errors that imply an additional VAT payment, interest applies. Other regulatory infractions may be subject to penalties up to USD1,500.
Penalties for fraud. Tax fraud is typified in the Organic Criminal Code and is punishable by depri vation of liberty from one to seven years.
Personal liability for company officers. The legal representative and company accountant are the only persons responsible for the information submitted to the IRS. However, please note that the IRS is entitled to review the information proportionated by the taxable person.
Statute of limitations. Ecuadorian VAT law allows all taxable persons to rectify any errors made on their VAT returns during the following year after the original submission.
Additionally, the tax authorities have a time limit of three to six years from the date of the tax return submission to carry out any assessments (depending on the case).