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DE RUEHQT #0055/01 0171325
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O 171325Z JAN 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8298
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 7248
RUEHCV/AMEMBASSY CARACAS PRIORITY 2823
RUEHLP/AMEMBASSY LA PAZ JAN 0856
RUEHPE/AMEMBASSY LIMA PRIORITY 2285
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 3201
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 000055 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR MEWENS 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV EINV EC
SUBJECT: ECUADOR'S NEW TAX REFORM LAW 
 
REF  A: 2007 Quito 2659; B: 2007 Guayaquil 512 
 
¶1.  (SBU) Summary:  Ecuador's Constituent Assembly passed its first 
law, the Administration's tax reform package, December 28.  The 
Assembly walked back some of the Administration's controversial 
proposals, eliminating a proposed tax on luxury private schools, and 
reducing the proposed inheritance tax from 70% to 35%.  It 
maintained proposed taxes on capital outflows, unproductive lands 
and extraordinary income, and higher excise taxes on a number of 
products.  It also upheld the Administration proposal for increased 
powers for the IRS.  End Summary. 
 
¶2.  (SBU) Ecuador's Constituent Assembly approved the 
Administration's proposed tax law with some modifications on 
December 28, following a short 11-day review period over the 
Christmas break.  This was the first law to be passed by the 
Assembly, preceding any discussion of text for the new constitution 
which is supposed to be the Assembly's primary focus.  Implementing 
regulations for the law have yet to be drafted, but the law will be 
implemented in early 2008, giving tax payers and collectors little 
time to adjust to the new requirements. 
 
¶3.  (SBU) Several of the controversial items in the Administration's 
proposal (Ref a) were changed due to public outcry.  These include a 
proposed tax on expensive private school tuition, which was 
completely eliminated.  A progressive inheritance tax (rather than 
the previous flat 5% rate) was kept, but the maximum rate was 
reduced from the Administration's initial proposal of 70% to 35% 
(plus a fixed fee).  The tax will be applied to the amount each 
inheritor receives rather than to the total inheritance, and only to 
amounts over $50,000. 
 
¶4.  (SBU) However, many of the key elements of the Administration's 
proposal remain.  The proposed tax on capital outflows generated 
little reaction from the general public and remained in the law at 
0.5% per transaction.  Banking and other business interests remain 
concerned about the tax, and bankers complain they would be 
responsible for retaining the tax even if a transaction were 
processed through a courier office, making tracking and collection 
extremely difficult.  The tighter corporate income tax provisions 
(more onerous advance payment provisions, fewer allowable 
deductibles) remain in place.  The proposed elimination of the 15% 
excise tax on telecommunications remained in the law, along with 
increased excise taxes on alcoholic beverages, firearms lightbulbs, 
luxury vehicles, club memberships, casino services, etc (although 
some of the increases are lower than originally proposed due to 
business sector opposition). 
 
¶5.  (SBU) A tax on "unproductive land" remains in the law.  The tax 
approved by the Assembly of $7.85 per hectare is actually higher 
than the initial Administration proposal of $5 per hectare. 
However, the numerous exceptions established in the draft remain. 
The interpretation of "unproductive" will be defined in the 
implementing legislation. 
 
¶6.  (SBU) The tax on "extraordinary income" remains in the law at 
70%, applicable to contracts that are signed after the law enters 
into force between companies and the State for the development of 
non-renewable resources.  (Comment:  this might be beneficial for 
petroleum companies that are currently in the process of 
renegotiating contracts with the GOE and are subject to a decree 
requiring them to pay 99% of extraordinary income to the State.) 
 
¶7.  (SBU) One of the most controversial aspects of the new law is 
the vastly increased powers of Ecuador's Internal Revenue Service 
(SRI).  The SRI now has more discretion in interpreting laws, 
investigating possible tax violations, and assessing fines. 
(Comment:  If used correctly, the enhanced powers could reduce tax 
evasion in a country where rates of tax evasion are very high. 
However, many people assert that the enhanced powers could easily be 
abused by the GOE.) 
 
¶8.  (SBU) Another aspect of the law that generated opposition is the 
elimination of donations to municipalities.  Previously, taxpayers 
could direct 25% of federal income tax that they paid to their 
municipality, rather than paying it to the central government.  This 
provision has been removed, although President Correa promised 
mayors in a December 26 meeting that the municipalities would be 
compensated for the loss during 2008.  Mayors initially strongly 
opposed the elimination of the donation, notably Guayaquil mayor 
Jaime Nebot, who was blocked by police when he tried to organize a 
protest against the tax bill in Montecristi where the Assembly meets 
(Ref B).  However, many mayors now seem at least publicly satisfied 
by the promised compensation.  (Comment:  In changing the provision, 
the power to direct income will transfer from the taxpayers to the 
federal government, increasing federal power over the 
municipalities.) 
 
¶9.   (SBU) Comment:  It is noteworthy that the Constituent Assembly 
responded to some of the public outcry by changing a few provisions 
that principally affect individuals, thereby countering critics who 
saw the Assembly as a rubber stamp for measures submitted by the 
President.  However, complaints by the business community about the 
capital outflow tax, increased SRI enforcement provisions, or 
changes to the way corporate income tax is calculated were ignored. 
The business sector has questioned the constitutionality of the law, 
arguing that the Constituent Assembly's enabling statute stipulates 
that measures approved by the Assembly must be approved by 
referendum (President Correa and his Proud and Sovereign Fatherland 
movement, or PAIS, do not share this interpretation).  Now that the 
new law has been published and the Constitutional Tribunal has 
refused to consider the business sector complaint, the business 
community appears to be focusing its efforts on working with the 
government in forming implementing legislation. 
 
¶10.  (SBU) Comment, continued:  We continue to believe the tax 
reform package is a mix of decent and undesirable ideas.  Regardless 
of how one sees the balance of those two strands, one thing is 
clear.  By moving the package quickly and with no private sector 
input, the new tax law exacerbates the tense relationship between 
the Correa administration and business, and further compounds the 
uncertainty that has discouraged private investment.  End Comment. 
 
JEWELL