Ecuador Taxes

respond to updated perceptions about the information and enforcement capacity of the
tax authority would be an interesting avenue for future research. 6 Conclusion
This paper investigates the impact and potential limitatio ns of tax enforcement based on
third-party information. When firms are notified by the tax authority about detected
revenue discrepancies, they amend their returns and increase reported revenues, closely
matching the amount indicated when it is provided. However, they offset much of this
higher declared revenue by an increase in declared costs, resulting in only small changes
in their reported profits, implied tax evasion, and corresponding corporate tax liabilities.
This is true even when adjustments are in the tens or hundreds of thousands of dollars.
This highlights the importance of taking possible offsetting adjustments into account when
examining the effectiveness of tax enforcement measures. We also document substantial
misreporting in the universe of firms in Ecuador, using third-party information on revenues
and costs. Notably, we find evidence that some firms under-report not only revenues but
also costs, even when they have positive tax liability. These empirical findings can be
reconciled in a simple model of third-party reporting in which the detection probability
depends on the firm’s reported profit rate.

3 Background and Empirical Predictions
3.1 Firm Taxation and Third-Party Information in Ecuador 3.1.1 Rates and Reporting Requirements
We now turn to our empirical setting: the corporate income tax in Ecuador. Ecuador’s
per capita GDP in 2011 was approximately 5,000 USD. 12Tax revenues are around 12%
of GDP, with indirect taxes comprising about half and corporate income tax making up
the majority of the remainder. Oil-related royalties are also an important component of
public revenues. All incorporated firms in Ecuador are required to file an annual
corporate tax return(Form F101). Pre-tax profits are defined as the difference betw
een total revenues and total costs. Firms must distribute 15% of pre-tax profits among the
ir employees and during the years of our study were taxed at a flat rate of 25% on the rema
inder. The 25% rate is independent of firm size and was constant for over 20 years up t
o and including the years that were affected by the intervention in this study.
13 There are no tax refunds for losses, but losses can be carried forward, with some limitations, for 5 years with a maximum carry-over deduction amount of 25% of profits in any given yea
r. The Ecuadorian fiscalyear corresponds to the calendar year and firms file the annual
corporate tax return the following April.
All firms are also required to file a monthly value added tax (VAT
) return (FormF104). In order to deduct input costs, this return must inclu
de a purchase annex listing the amount purchased from each supplier along with the suppl
ier’s tax ID. A similar annex for sales to client firms must be submitted by firms with annual
sales above 200,000 USD as well as by Large Taxpaying Units, public sector firms, financ
ial institutions, credit card companies, and firms requesting refunds of taxes withheld. READ PAPER