Correa’s tax plan would restrict the amount of untaxed cash that can be taken out of the country and limit senior VAT refunds

No one was surprised by provisions in President Rafael Correa’s budget-balancing legislation to increase taxes on cigarettes, alcohol and soft drinks. Almost everyone was caught off guard, however, by some of the other changes he proposes.

President Rafael Correa

The legislation, called the Organic Law for the Balance of Public Finances, was delivered to the National Assembly Wednesday night and made public Thursday.

Among the proposals are one that would reduce the amount of cash travelers can take out of the country tax-free, from $11,170 to $1,098. Although opponents of the reduction say it is an infringement on individual liberty and access private money, Director of Ecuador’s Internal Revenue Service Leonardo Orlando says the measure is needed to combat money laundering. The rule would apply to tourists as well as citizens and residents.

Cash taken out of the country above the $1,098 limit would be taxed at five percent, the same rate as for out-going wire transfers and checks cashed out of the country.

A provision of the legislation that will affect some expats is a new annual limit on VAT refunds for people over 65. The new limit will be $732. Under current law, an individual can receive refunds up to $1,830.

As announced two weeks ago, the legislation raises taxes on cigarettes, alcohol and soft drinks. Cigarettes will cost two cents more per unit and the price of a bottle of beer (pequiña) will rise 13 cents.

Another provision would assess a 15% tax on phone companies, both fixed and mobile.

One of the intents of the legislation is to expand the government’s electronic money system. The tax on phone service providers would be waived if their customers pay through the electronic system. In addition, VAT and income tax refunds would be paid via electronic money.

The electronic money system, started by the government two years ago, has not been well received by the public. To date, only 60,000 have signed up. The government had hoped for 500,000 accounts by 2016.

In all, the legislation contains nine changes to current tax laws and rules that the government says will raise $300 million annually.

Debate begins Monday, April 4, and a final vote is expected within 30 days. With Correa’s País party holding a super majority in the Assembly, the legislation is expected to pass.