Ecuador’s government has enacted a new tax reform that introduces tax hikes on businesses and high-net-worth individuals while cutting some taxes on select consumer products. Clients should analyze the tax reform’s measures in detail. With increasing taxation for higher-income consumers, B2C firms should reconsider price increases on high-cost premium goods amid likely increases in price sensitivity for this segment. As tax burdens rise temporarily in 2022 and 2023 for large businesses, B2B clients should segment pricing accordingly and emphasize cost-saving products to contend with increased price sensitivity. Clients should also consider new tax incentives for investment when planning for 2022 and 2023.
On November 29, Ecuador’s executive branch enacted a tax reform following a failure to act by the National Assembly. Adoption of a tax reform fulfills a condition of Ecuador’s accord with the IMF, enabling the continued disbursement of IMF funds and supporting fiscal balance in Ecuador. The reform raises taxes on high-income individuals and introduces a two-year tax for high-net-worth individuals and companies. In addition, the reform eliminates the value-added tax and/or special consumption tax on select products/services, including diapers, electric/hybrid vehicles, heating systems, and hotel stays for tourists.
Ecuador’s new tax reform represents a substantial compromise from pro-business President Guillermo Lasso, who had promised not to increase taxes in his campaign platform. Nonetheless, given Lasso’s small footprint in the legislature, the compromises in this reform act produced substantive revenue increases that should not greatly dampen the recovery of consumption and investment. However, maintaining social stability and enacting further pro-growth reforms will be essential to fostering confidence in Ecuador’s economy.
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