Ecuador Tax Reform Package Approved By Lawmakers

by Mike Godfrey, Tax-News.com, Washington

02 January 2008

The interim Ecuadorian assembly has approved a bill proposed by President Rafael Correa designed to alleviate the tax burden on lower and middle income groups, but which business groups fear may undermine investment and economic growth in the Andean country.

The temporary 130-seat assembly, which is doing the job of Congress while it draws up a new constitution for the country, approved the bill last week in a comfortable 90-23 vote for President Correa. It raises taxes on luxury goods, cigarettes, alcohol, perfume and weapons.

The bill also imposes a 0.5% tax on currency outflows, although profits or loan repayments sent abroad from Ecuadorian units of foreign companies will be exempt from the tax.

Another controversial measure is a 70% windfall tax on mining companies' future revenues above a pre-determined price threshold, with a similar levy to be charged on oil firms' futures contracts.

The bill also makes rent and mortgage payments, health costs, and spending on education tax-deductible, and removes a tax on telephone calls.

The tax package has met with strong opposition from pro-business lawmakers, who have backed street demonstrations against the proposals, fearing that the measures will erode investment in key sectors of the economy and lead to lower overall economic growth, forecast at 2.65% for 2007.

In defense of the reforms, Correa has argued that they will raise much needed revenues, reduce tax evasion and lead to more equitable distribution of wealth.

The government predicts that the tax package would generate an extra $300-350 million per year in revenues, increasing the overall tax take to $5 billion this year and $5.5 billion next year.

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