Contributed by Diego Zambrano, Tax Consulting and Practice Manager, Audit Corporate / Tax Corporate
A new tax regime for micro-enterprises was established in 2020 in Ecuador, which applies to those taxpayers (societies or natural persons), including entrepreneurs who fulfill the status of micro-enterprises, i.e. having 1-9 workers and an annual income of less than US$300,000. This regime applies to the following taxes: Income Tax (IR), Value Added Tax (VAT), and Excise Tax (ICE).
Taxpayers not included
Taxpayers engaged in activities related to the banana sector, construction contracts, or those whose economic activity involves the provision of professional services, liberal occupation, the relationship of dependency, as well as those who receive exclusively capital income may not be able to access this scheme.
Duration of the regime
Micro-enterprises will remain under this scheme as long as their status and characteristics in income and number of employees remain, in no case will the companies’ permanence be greater than 5 years. Then, they will subsequently be subject to the general regime.
The formal duties of taxpayers under this scheme include:
- Keeping accounts under SME standards (Small and Medium-sized Enterprises), in addition, they must submit declarations and annexes where appropriate.
- Keeping proof of sale that supports their operations for a period of not fewer than 7 years.
- Providing tax information to authorized officials for inspections or verifications and attending to the tax administration offices when required.
- Carrying out ICE, IR and VAT returns on a 16-monthly basis. If the taxpayer has unrecognized income under this scheme, he or she must also carry out the annual IR return.
PAYMENT AND TAX RETURN FEATURES
Income Tax (IR)
- Tax Base: The gross taxed income from business fewer commercial rebates or discounts and deferred tax adjustments will be considered.
- Income not considered: Financial income, asset revaluation, lottery prizes, raffles, royalties, double taxable income, inheritances, dividends, retirement pensions, or those obtained by the occasional disposal of movable and immovable property, or income detailed as not included under the scheme.
- IR Rate: The rate will be 2%, without the right to rebate or decrease.
- Withholdings at source: Taxpayers under this scheme will be subjected to a 1.75% withholding tax. If they have income under the general scheme (e.g. professional services) the retention they are required to make is based on the type of good or service that you sell outside the regime (8% or 10%).
- Six-monthly declaration: Taxpayers will pay the tax exclusively for income subject to this scheme in July and January.
- Annual Declaration: Only in the following cases should the IR’s annual return be additionally filed:
- Companies and permanent establishments of non-resident companies
- Natural persons with incomes other than Business Activity
- Natural persons who require requesting overpaid payment or filing the claim for improper payment.
Value Added Tax (VAT)
- Six-monthly return: Taxpayers will pay the tax in July (first semester) and January (second semester).
- VAT withholdings: Taxpayers under this scheme will not be withholding agents. In special cases in which they must retain, these values will be declared on a monthly basis (the SRI may include micro-enterprises as retention agents).
Excise Tax (ICE)
- Six-monthly return: Taxpayers will pay the tax in July (first semester) and January (second semester). In the event that they make a monthly declaration within the fiscal year, it must be maintained for the rest of the year.
- Taxpayers subject to this scheme who choose to submit the Simplified Transactional Annex (ATS) on a six-monthly basis. They must do so in accordance with the ninth digit of the Single Taxpayer Register (RUC), in the month following the end of the reported semester. For the semester from January to July, the ATS will be presented in August; for the semester from July to December, the ATS will be presented in February.
- The period for the submission of Annex ICE for the taxpayer that is subject to the micro-enterprise tax regime was established on a six-monthly basis. This addendum shall be submitted to taxpayers in accordance with the ninth digit of the RUC within the month following the end of the reported semester.
Benefits for Microenterprises
New micro-enterprises that start their economic activity from the validity of the “Organic Law for the Reactivation of the Economy, Strengthening the Dollarization and Modernization of Financial Management (year 2018)”, will be exempted from income tax for 3 years from the first fiscal year in which operational revenue is generated, provided that they generate net employment and incorporate national added value into their production processes.