ECUADOR Law and Practice Contributed by: Diego Almeida-Guzmán, Andrés Álvarez-Toapanta, Guillermo García-Mendoza and Ignacio Jijón-Chiriboga, Almeida Guzmán & Asociados
8. Audit Cycles 8.1 Regular Routine Audit Cycle
• The ultimate beneficiary holds an effective owner - ship stake equal to or exceeding 25%. Such own - ership may be defined in terms of capital, voting rights, entitlement to dividends, profits, benefits or returns, or similar factors. • The entity is subject to an effective income tax rate of lower than 60% of the applicable rate in Ecua - dor, or a rate that is unknown. To calculate the taxable base, the net profit earned by the entity at the end of the fiscal year applicable in its jurisdiction will be considered. 6.6 The Substance of Non-Local Affiliates There are no rules related to the substance of non- local affiliates. Nevertheless, to record an expense as deductible, the latter must be related to taxable income, and the transaction must reflect economic substance. Therefore, under Ecuadorian law, transac - tion simulation is regarded as a felony and is punishable by law. Likewise, practices regarded as tax avoidance are penalised under Ecuadorian criminal law. 6.7 The Sale of Shares in Non-Local Affiliates Gains obtained by local corporations on the sale of shares held in non-local affiliates are taxed in Ecuador. No specific rule exists on the matter in local law. As such, these gains will be subject to a 25% income tax rate. If the income is taxed abroad, the local corpora - tion could use tax credit in Ecuador, as outlined in 6.1 Foreign Income Exemptions . Overall, the Ecuadorian tax regime considers any practice that involves simulating a transaction for the sole purpose of evading taxes as a felony, and it is punishable as such. It is important to note that assessments from the tax authorities in recent years tend to challenge tax-relevant transactions and opera - tions that do not reflect economic substance and/or essence. Additionally, the new CFC regime may be viewed as an anti-avoidance provision. For further details, refer to 6.5 Controlled Foreign Corporation-Type Rules . 7. Anti-Avoidance Provisions 7.1 Overarching Provisions
The Ecuadorian IRS does not have a regular, routine audit cycle. Nevertheless, audits of a fiscal year are usually conducted within four years of the date of fil - ing the corresponding tax return. Audits can be con - ducted within six years if the taxpayer fails to file the tax return on time. Tax audits are normally performed by reviewing all accounting records and their supporting documen - tation. The reports issued regarding tax audits can be challenged before the IRS. Any final administrative resolution issued by the IRS can be challenged before the Ecuadorian tax court. 9. BEPS 9.1 Adoption of BEPS Recommendations The Ecuadorian government has already taken certain actions that are partially aligned with Action 1 of the BEPS plan, and specifically the International VAT/GST Guidelines. Even though Ecuador has not adopted BEPS within its tax regime, the following standards have been imple - mented. CFC For further details, refer to 6.5 Controlled Foreign Corporation-Type Rules . Beneficial Owners Ecuadorian taxpayers must report their chain of own - ership and other key related parties up to their final beneficiaries. Taxpayers who fail to report such infor - mation will be taxed at a 28% rate. VAT The legal system expressly states that digital services are subject to VAT if the consumer is a resident in Ecuador and the payment is made by such resident. The Ecuadorian tax system provides for a registry of digital service suppliers that are not domiciled in Ecua - dor, which is administered by the Ecuadorian IRS.
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