IMF doubles down on suggestion that Ecuador increase taxes and eliminate exemptions

Oct 15, 2020 | 27 comments

An International Monetary Fund official has repeated the “strong suggestion” that Ecuador take immediate steps to increase tax revenues. The comments by Julien Reynaud, IMF representative in Ecuador, followed interviews by new Finance Minister Mauricio Poza in which he said there were no immediate plans to raise the country’s IVA tax (VAT) from 12 percent.

“The tax base in Ecuador is very small and, in fact, is one of the smallest in Latin America,” Reynaud said. “The country’s richest people pay very little in taxes due to the many exemptions that are allowed. This is an area where improvements should be made immediately.” He repeated the IMF recommendation that Ecuador should raise its IVA tax by three points, to 15 percent.

When it agreed to loan Ecuador $6.5 billion last month, the IMF said that its proposals for increasing Ecuador’s tax base were recommendations, not demands, but Reynaud said Wednesday that the IMF guidance constituted “strong suggestions” and should be seriously considered.

An analysis of Ecuador’s tax laws indicates that there are too many exemptions and loopholes and poor enforcement in collecting taxes owed, Reynaud said. “The country’s road back to solvency must begin with making the changes that other countries in the region made long ago. It must lower the income threshold on which income taxes are applied, currently the highest in Latin America. It must eliminate exemptions that favor the upper- and middle-classes, and it must bring its VAT into alignment with VATs in the region’s other countries.”

He said that simple changes to tax laws could generate $2 billion to $3 billion in additional revenue.

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Reynaud repeated the IMF recommendation that more financial support be offered to the poor. “An adjustment of the tax code will also allow more support for the country’s poorest citizens and allow more of them to join the tax rolls. Ecuador has one of the highest percentages of informal workers in South America and efforts must be made to formalize the sector.”

He added that another “largely untapped” source of tax revenue involves real estate sales. “Once again, we note that Ecuador’s taxes on property sales are among the lowest in the region. This should be adjusted.”

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