VAT is a tax paid by the end consumer of certain goods and services. It is called “value added tax” as it only taxes the value added in each phase of the manufacturing, distribution and marketing process of goods and services.
In Ecuador, this tax is set at a general rate of 12% which is applied on the value of the transfer of ownership, import of goods or provision of services. In exceptional circumstances, a 0% rate is applied to certain products or services stated in law, mainly essential goods, medicines, electricity, among others.
Manufacturers, marketers and distributors are responsible for liquidating and paying to the Tax Administration the difference between VAT paid by end consumers of the products and services, and VAT paid by them upon the purchase of supplies and raw materials used in production.
In each phase of the production chain, the taxpayer pays its predecessor (person from whom the goods or services are purchased) the invoiced tax, and in turn receives the corresponding tax from its successor (to whom the goods or services are transferred); therefore it is the end consumer who bears the economic burden of the tax. The difference between VAT received on sales and VAT paid on purchases is called a tax credit. If VAT paid on purchases is greater than the VAT received on sales, the taxpayer must register an account receivable from the Treasury. If, on the other hand, the VAT received on sales is greater than the VAT paid on purchases, the difference must be paid to the Tax Administration.
VAT is a tax applicable to all Ecuadorians and foreigners who undertake transactions subject to tax within the national territory. However, there have been cases when the State has returned VAT paid, for the purpose of reducing the costs of products or services and thus making them more competitive. This is the case, for example, for exporters who have VAT returned to them for the purpose of preventing their products becoming more expensive in the international market. Likewise, included in this category of beneficiaries are foreign tourists who, recently and under certain conditions, have VAT paid locally returned to them by the Internal Revenue Service.
In future articles we will provide deeper analysis of this important tax that produces the greatest amount of revenue in Ecuador.
Warning: This newsletter by Perez Bustamante & Ponce is not and cannot be used as legal advice or opinion since it is merely of an informative nature.