More about taxes: Separating fact from fiction

By Garry Vatcher

When I was just a little boy, a long, long time ago, my mother was really worried about a loan payment that was due. My father worked away from home and he called to say he had to work overtime and it would be a few days before he would be back with his paycheck. In those days, in my hometown anyway, the loan officers would often go door-to-door to pick up the payments and this was the day.

My mother had a few dollars so she went to the store to pick up something to cook for dinner and she gave me specific instructions, “If anyone comes looking for me, just tell them I am not home and to come back in a few days.” No one came and my mother got back from the store and put away the groceries.

Looking out the window, I saw two men in suits heading toward the house.

“Mom, they are coming!” I shouted.

She quickly climbed into the attic and said, “Tell them I am not home!”. I opened the door and confronted the two men. I had never told a lie, even to this day. But I was faced with a difficult decision.

“Son, is your mother home?”

“She said she is not home.”

“She said she is not home?” I could feel hell’s flames on my toes because I was taught to never lie.

“Well, she went to the store and told me that if anyone comes to tell them she is not home and to come back in a few days.”

“Ok son, when she gets back tell her we were here and will be back in a few days to pick up the payment.”

My mother was happy, the men were happy, and I never told a lie.

This technique is often used by professionals where they are not telling a lie, but then they are not telling you all the details either, especially about what is in the attic. The recent kafuffle about taxes in Ecuador is a perfect example of this.

Regarding taxes, these are issues causing confusion among expats and even some professionals:

1) On February 7, the president issued Executive Decree #157: “The General Regulations for the application of the Law of Economic Efficiency and Employment Generation.”
2) Ecuadorian financial institutions are now required to report income to the government for all of their customers.
3) All residents of Ecuador must file an income tax return, reporting income and paying taxes, if any is owed. This includes foreigners with visas residing in Ecuador.

All these things are true; however, they are completely unrelated.

Decree #157 has to do with job creation and foreign investments. It deals with Private/Partnerships, Free Trade Zones, and Foreign Investments. Nothing in the decree deals with expat taxes. To read the decree, click here.

Since the requirement under the Lasso government that businesses issue electronic invoices, some suspect the banks are reporting deposits made to accounts. There is no proof of that or directive that we can find. But the SRI knows what you spend and most likely what money is deposited to bank accounts. During the recent corruption arrests in Guayaquil, it was reported that some of the suspects had high spending habits and assets but never reported the income to support it. The SRI official gave us an example of someone who reports $20,000 in income but spends $500,000 on a condo in Panama, there is an issue. It is all about catching money launders, criminal activity and bribery payments. NOT, about expat taxes!

It is true that everyone living in Ecuador has to file a tax return, which is normal in most countries. You file where you live. That has always been the case, however it has never been enforced in Ecuador. There is no new decree or regulation. It is the same as always. There is no new notification that they are now going to enforce it.

My staff and I have spent countless hours investigating this to find out the truth. This has been a great cost to us in time and labor. We struggled with putting out what we learned but we have people standing at our doors who want answers. The misinformation has the potential to impact our donors at Hogar de Esperanza — and people deciding whether to live in Ecuador or not. Already, this past week, we have seen a drop in donations, which is having an impact on our ability to provide for those coming to us for emergency services.

We have met with an accountant, a lawyer and several officials at SRI. They all tell us the same thing regarding the confusion over taxes. What the hell is going on, they ask? They are completely baffled by the fear among expats. Most expats do not need to pay taxes in Ecuador. As an accountant, I am always concerned about people paying taxes they do not need to pay, so I am sharing the information we received with line numbers from the tax return, with explanations. You can share this with your accountant or, if you decide to file a tax return, we can do it for you at our Expat Services Center.

Line 6003 Income not subject to Income Tax (informative)
Here you include the total balance of income defined as “not subject to Income Tax” or exempt in accordance with current tax regulations. It is only informative, and you do not pay tax on this amount in Ecuador. The SRI official we met with defined this income as income for which you paid taxes in another state or country. Here you include money you are bringing into Ecuador which is being taxed elsewhere.

Article 10 of the income tax act states that “Any natural person or company resident in Ecuador that obtains income abroad, which has been subject to tax in another State, must register this exempt income in their Income Tax return.”

Regardless of whether a tax treaty exists or not between Ecuador and other countries, Ecuador does not double-tax.

But, what if you were not taxed on this income, such as social security or pension payments?

Line 683 Retirement pensions and/or alimony deduction
Record in box 683 the values received for retirement pensions from any public or private institution, as well as the value of alimony received by the taxpayer. This line has created the most controversy. The original language seemed to indicate that this applied to only Ecuadorian pensions. That does not consider the fact that most expats living here receive foreign pensions. On page 47 of the income tax guide the language was clarified to say ANY public or private institution, so this includes foreign pensions.

Line 848 deductions from income tax payable
Just to confuse things even more (who says tax forms are not complicated?), Ecuador included this line that says: Withholdings for income from abroad with the right to tax credit: record the values of taxes paid abroad up to the legally permitted limits; in those cases in which the internal tax regulations establish the income obtained as income subject to Income Tax.

As you can see, Ecuador is not requiring that expats pay taxes on income received from outside the country. They want you to report it, to make sure you are not laundering money or supporting criminal activity and for your own protection.

Whether you decide to file income tax returns here is totally a personal decision you need to make. But before you believe everything you are told, check the attic! There could be something hiding there that you have not been made aware of.

The Expat Services Center is a service of Foundation Hogar de Esperanza. We provide a variety of supports, bill payments and other services to the expat community. To contact us, email Fernando at: services@hogaresperanza.org Tel/WhatsApp: 099-094-7611. We are located at Juan Montalvo 8-28 and Mariscal Sucre in the historic district.

To find out more about the work of Hogar de Esperanza or to support our work, click here.
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Garry Vatcher is president and founder of Foundation Hogar de Esperanza. He has been coming to Ecuador since 1987 and permanently moved to Cuenca 10 years ago. The foundation provides emergency assistance to thousands of people each year. With his guidance, the foundation has forged alliances with some of Ecuador’s major institutions including hospitals, the National Police, Amazon communities, universities, and governments. The foundation has received numerous awards and recognition for its’ work from local and international bodies.