Germán Moya
Tax Manager, Kreston Ecuador
German Moya is a Tax Manager at Kreston Ecuador, serving since April 2020, and concurrently holds the position of Jefe de Impuestos & BPO at CMA CONSULTING since November 2018. With a solid foundation in accounting and taxation, German has enhanced his expertise through a Master’s in Financial Management from Universidad Internacional de La Rioja (UNIR) and a certification in Tax Management from Universidad Espíritu Santo. He is also a licensed professional accountant, accredited by the Colegio De Contadores Bachilleres y Publicos Del Guayas since May 2016.
Ecuador hit with VAT increase in 2024
April 11, 2024
Ecuador will see VAT rates increase in 2024 to tackle a $5 billion deficit, driven in part by a reduction in oil production and increased spending on tackling the country’s ongoing unrest. The rise also satisfies a new financing agreement with the International Monetary Fund.
What is the new VAT rate in Ecuador for 2024?
The Value Added Tax (VAT) rate in Ecuador will rise immediately from 12% to 13%, although there will be an additional temporary rise to 15% from 1 April until 31 December 2024, in accordance with the decision of President Daniel Noboa in March. This was made after legal changes to counter the effects of the Internal Armed Conflict.
Noboa based his decision on Ecuador’s Organic Law and was as mentioned to confront the Internal Armed Conflict, but also due to the Social and Economic Crisis. These empower the president to modify the VAT rate if there is a favourable opinion from the Ministry of Economy and Finance. On March 12, the ministry issued that opinion in favour of the increase.
Which products will increase in price with the increase in the VAT rate?
All goods, services and products subject to VAT will increase in price. A summary below:
As for food, there are 115 that make up the basic basket, but only 21 will increase the price, for example: biscuits, cereals, coffee, mayonnaise, tomato sauce, gelatin, etc. It also applies to personal hygiene products such as: soaps, shampoo, skin creams, razors, talcum powder, deodorants, perfumes, toothpaste and toothbrushes.
However, there are 94 foods in this basket that have 0% VAT, so consumers will not have to pay more with the new law. These are the foods most consumed by Ecuadorians, among which are: rice, flour, oatmeal, bread, meat, chicken, eggs, milk, sausages, tuna, cheese, oil, fruits, vegetables, legumes, grains, tubers.
Clothing, cars, motorcycles, bicycles, batteries, tyres, oils, and technological equipment will also increase in price. As well as streaming services, cell phone and internet service plans. Food prepared in restaurants, as well as airfare, will also increase with the increase in VAT.
How the business could be affected?
For businesses, the VAT increase may have negative effects, considering its impact on consumption. The prices of goods and services will increase and consumption may be reduced. If consumers spend less to avoid a decrease in their resources, companies will experience a decrease in their sales, which would generate a reduction in the production of their goods and services.
Likewise, as the value of goods and services increases due to VAT, inflation tends to increase and causes a reduction in consumers’ purchasing power. In a contracting economy, it is vital to avoid measures that increase inflation, as this may further aggravate the economic recession.
So considering all mentioned above, VAT increases can discourage investment and business activity by discouraging consumption, possibly increasing inflation and slowing investment turnover.
If you would like specific advice on increasing the VAT rate in Ecuador, please get in touch with one of our VAT specialists at Kreston Ecuador.
