Study shows that most small Ecuadorian businesses are off the tax rolls and have no accounting systems

According to a study by the Network of Development Financial Institutions (RFD), 65 percent of small Ecuadorian businesses do not have taxpayer registration numbers (RUC) and pay no taxes other than VATs on some purchases.

Most small businesses in Ecuador are off the tax rolls and have no bank account.

The government says there are 4.2 million small businesses, or micro entrepreneurs, in the country, with 39% of them, or 1.5 million, located in rural areas. By definition, the government considers a business of one or two people, or an immediate family, a small business.

In addition to lacking taxpayer IDs, many small businesses do not have bank accounts.

According to Valeria Llerena, RFD director, the study indicates two major problems. “On one hand, the country is not collecting badly needed tax revenue and, on the other, there is a lack of access to banking services for small entrepreneurs,” she says. In total, 55 percent of all Ecuadorians do not have a bank account.

Among other problems, Llerena says, is that small business employees are not covered by labor laws and are not contributing to the national Social Security program. “There is a very large informal economy in Ecuador, as there is in other Latin American countries, and this needs to be formalized to upgrade our standard of living.”

Besides lack of badly needed support for the Social Security pension and health care systems, Llorena says informality also hurts the Ecuador’s education, public health system and a variety of social programs that assist poor families. “There is a trickle-down effect that affects many public services critical to improving the lives of Ecuadorians.”

One suggestion that would improve small, non-reporting businesses, says Llerena, is the establishment of a digital money system, or an “electronic wallet,” tied to the dollar. “This would modernize business and financial practices for millions of Ecuadorians by introducing them to more sophisticated ways of handling money,” she says. “It would not put businesses on the tax rolls directly but would provide an avenue for joining the system for those who want to.”