In partial veto, Noboa restores VAT hike rejected by the Assembly but allows other new taxes to stand

Feb 7, 2024 | 0 comments

Hours after Ecuador’s National Assembly rejected it, President Daniel Noboa restored his proposed Value Added Tax increase in legislation to fund the fight against narco traffickers and other budget expenses. In his partial veto, the president allowed four other tax increases included in the bill to stand.

President Daniel Noboa restored the VAT increase that was rejected Tuesday by the National Assembly.

With Noboa’s revisions, the VAT will increase permanently to 13% from the current 12% with the option of raising it temporarily to 15% based on budgetary needs. In addition, the taxes approved by the Assembly include: a tax on bank and financial cooperative profits; an increase in the Foreign Exchange Exit Tax (ISD) from 3.5% to 5% at the president’s discretion; a two-year special assessment on company profits; and a 5% VAT on construction materials.

The bank and company profits taxes are based on a “temporary emergency conditions” and will expire after a two-year term.

The Assembly has 30 days to consider Noboa’s restoration of the VAT hike but opponents admit they do not have the votes for an override.

In his veto comments, Noboa justified the VAT increase, saying it was necessary to “meet the objectives laid out in the original proposal for confronting a difficult national economic scenario.” The presidential press office said the option to increase the VAT from 13% up to 15% will be based on recommendations from the Finance Ministry.

During a sometimes-heated Assembly debate, opponents of the VAT increase claimed it was a regressive tax that would hit poor Ecuadorians the hardest. Supporters countered that essential products and services such as food, rent, medicine, medical care and education are exempt from the tax. Opponents of the tax included the Social Christian, Revolución Ciudadana and Pachakutik blocs.

In a second revision, Noboa reduced the 5% tax on construction materials to a variable rate to be determined. Of the 16 articles in the Assembly bill — officially, the Organic Law to Confront Internal Armed Conflict and the Social and Economic Crisis — Noboa allowed 14 to stand.

There were 83 Assembly votes against the VAT increase, short of the 92 needed for a veto override. “We tried hard to get more support for the rejection but were unable to go beyond 83,” said Assemblyman Blasco Luna. “It was our hope that the president would honor the wishes of the Assembly majority, but this did not happen.”

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