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At the state level, all responsibility for the administration of the tax system rests with the President of the country, who oversees its activities, through the Internal Revenue Service, the State Office of Appraisal and Land Taxes, and the Ecuadorian Customs Corporation. Any institution that has the right to establish taxes at the state level, which are determined by the Law as necessary, is also under the auspices of the executive branch.

At the local and municipal levels, all responsibility for the establishment of taxes is borne by: The local Prefect, Mayor, and Chairmen of Local and Municipal Councils. Their power extends to the local tax system through the establishment of lower administrative corps dealing with the payment and collection of taxes.

Tax inspectorates are government agencies that handle claims and appeals filed by taxpayers in relation to amounts of money improperly collected by government auditors during financial audits.

The main types of taxes:

Income tax, income tax, and assets tax

• Income tax

• Tax on the amount of the asset (in the balance sheet)

• Tax levied by the Regulatory Offices

• City property tax

• Special tax on the net profit of companies

Transaction taxes

• Value Added Tax

• Tax on special consumer goods

• Capital tax

• Tax on the transfer of securities to immovable property

• Customs taxes

Currently, the State of Ecuador, together with the Internal Revenue Service, is analyzing reforms aimed at reducing or eliminating various taxes that are counterproductive. At the same time, the possibility of increasing the rate and the estimated base amount of other taxes, which are of great importance for the state budget, is being considered.

Accounting and audit

Requirements for statutes:

Ecuadorian law requires that all companies without exception, including the actual communities of individuals, keep records of their activities. The National Accounting Federation of Ecuador issued the Ecuadorian Accounting Regulations (NEC) on October 5, 1999, which cover the following topics:

• Preparation and submission of a financial statement.

• Clarifications of the financial condition of banks and other financial institutions.

• Status of cash flows.

• Entry of money and events after the close of the balance.

• Net income/loss for the period.

• Related party revelations.

• Variations in the type of exchange.

• Financial information by segment.

• Income.

• Cost of financing.

• Inventory.

• Property, building, equipment.

• Accounting for depreciation.

• Research and development costs

• Construction contracts, etc.

Moreover, the Superintendence of banks. The Superintendence of Companies and the Internal Revenue Service define and regulate audit and accounting procedures in their respective sectors, respectively. These organizations formally adopted 15 NECs as well on October 5, 1999.

The National Accounting Federation has issued clause 16 of the NEC in order to bring financial positions in line after the inflation on March 31, 2000. After this date, NEC 17 must be applied to convert financial fortunes to US dollars. NEC 16 may apply in the same way if inflation is high in Ecuador.

To ensure that the financial positions of businesses are compiled in accordance with the new dollarization scheme, NEC 17 was issued, which explains how businesses should translate their financial conditions into US dollars and maintain all registers and accounting records in US dollars from March 31, 2000. … This procedure is a simpler alternative than FASB 52 and takes inflation into account since 1991. NEC 17 was developed based on International Accounting Standards 21 and 29.

Accounting books and registers

When maintaining accounting records, enterprises must follow the following standards:

• Financial statements are maintained in Spanish and in US dollars (financial fortunes in sucre are converted to dollars from March 31, 2000, according to NEC 17, and after that date, all transactions are recorded in US dollars).

• A double-entry bookkeeping system should be used.

• Bookkeeping is maintained at the main legal address or at the premises of the parent company unless the Superintendence of the company grants special permission to do the bookkeeping at another office.

• Registers, on the basis of which accounting records are kept, and transaction documentation is kept for 6 years after the close of the reporting year to which they correspond.

Auditors and audit requirements

The decision of the Superintendence of Companies that the company should invite auditors is made based on the total number of assets of the company at the time of the close of the reporting year, immediately before the audit. For statutory audits in the case of anonymous communities and limited liability companies, their total assets must exceed 50,000 minimum wages (the US $ 200,000). For branches of foreign companies, this amount must exceed 5,000 minimum wages ($ 20,000).

Securities market law requires audits to be performed at institutions such as securities houses, stock exchanges, and risk assessors. Asset-based external audit requirements are published periodically.

The Banking Superintendence publishes its own external audit requirements for businesses under its control. When an audit is conducted at a banking or financial institution, an additional report is submitted called “supplementary information”, which includes information about the institution’s securities, its risks, and foreign currency position.

In order to obtain permission to conduct an audit in any company, prospective auditors should follow the following procedures:

• Submit a request to the appropriate regulatory agency.

• Submit copies of diplomas and professional licenses.

• Provide the track record of the experts who conduct the audit as evidence of their experience and educational level.