Ecuador loses $7.6 billion a year due to the informal economy, smuggling and tax evasion

Facing one of its deepest economic crises in years, a Latin American economic commission claims Ecuador misses out on $7.6 billion annually in tax revenue. The Latin America and the Caribbean Economic Commission (ECLAC) says the loses are due to the large informal economy, smuggling, the off-shoring of assets and tax cheating. “Although it is not possible to collect all of this revenue, tougher, more sophisticated enforcement could capture a large portion of it,” ECLAC said in a report.

A report by the The Latin America and the Caribbean Economic Commission says that billions of tax dollars are lost annually in Ecuador due to the large informal economy.

The report says 59 percent of the loses are in the informal economy; 26 percent are due to smuggling and 12 percent are due to the illegal transfer of money to off-shore tax havens.

“Although informality is endemic throughout Latin America and the Caribbean, its growth in Ecuador stands out,” ECLAC says. “Although much of this economy involves poor workers who would not be subject to taxation, a significant part of it is operated through high-income operations and individuals who should be paying taxes.” In total, 75 percent of Ecuadorian workers are informal and “working off the books.”

ECLAC says the lost revenue is particularly notable because taxation rates are low in Ecuador. The income tax rate ranks fourth lowest in all the Americas and the country’s value added tax is the third lowest in Latin America. “The country’s VAT is 12 percent while the average in the region is 16 to 17 percent,” ECLAC notes, adding that repeated recommendations from the International Monetary Fund to increase the VAT have been rejected by the three most recent governments.

According to the Transnational Alliance to Combat Illicit Trade, an ECLAC research partner, smuggling in Ecuador soared during the pandemic. “While there was an increase in the illegal movement of goods in all Latin American countries, the increase was particularly high in Ecuador,” the Transnational Alliance said. “Food, fuel, alcoholic beverages and clothing were among the most smuggled products.”

The Alliance also noted that billions of dollars in illegal drugs flow through the country, primarily in coastal ports. “Although this is not taxable, it supports the informal economy in the coastal cities. Ecuador is not a large consumer of drugs but has become a major transit point between Colombia and Peru and destinations in the U.S., Europe and Asia.”

ECLAC said that smuggling has had a “devastating” impact during the pandemic on Ecuadorian farmers, manufacturers and small businesses.

Although ECLAC supports the efforts of President Guillermo Lasso to increase trade, it says the government should “focus strongly” on capturing lost tax revenue. “To do this, it must address the problem of the informal economy, bringing more workers into formal taxation status. It should also consider raising taxes in the formal economy, particularly the VAT.”