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### Viewing cable 08QUITO55, ECUADOR'S NEW TAX REFORM LAW

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08QUITO55 | 2008-01-17 13:25 | 2011-05-02 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Quito

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    VZCZCXYZ0001
    OO RUEHWEB

    DE RUEHQT #0055/01 0171325
    ZNR UUUUU ZZH
    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

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