The Challenges Faced by Companies Providing Complementary Maritime Services in Accessing the VAT Refund Regime for Service Exports

The Organic Law for Productive Development, Investment Attraction, Job Creation, Stability, and Fiscal Balance (LFP, according to the Tax Policy Committee) includes VAT refunds for service export activities. This reform is ultimately important, as it has resulted in many taxpayers being able to benefit from refunds on VAT paid by companies engaged in service exports.

The primary legislation establishes four requirements for an activity to be considered a service export:

a) The exporter must be domiciled or resident in the country;
b) the user or beneficiary of the service must not be domiciled or resident in the country;
c) the use, enjoyment, or exploitation by the user or beneficiary must take place entirely abroad, even if the service is provided in Ecuador; and,

d) that the payment made in consideration for such service is not charged as a cost or expense by companies or individuals that carry out activities or businesses in Ecuador.

According to the second paragraph of Article 72 of the LRTI (Law on the Revenue of International Trade), for the export of services to be applicable, it must comply with the terms established in the regulations and by the Tax Policy Committee.

Article 844 of the Commercial Code exemplifies complementary or support activities for maritime activities, such as towing, cranes, fixed or mobile platforms, or rafts, which may be considered exported services if the aforementioned considerations are met. In this case, providers of complementary services may be eligible for the VAT refund provided for in the tax regulations.

Despite this, they may face complications when requesting their VAT refund for the export of services.

In addition to the requirements mentioned in the primary regulation, the secondary regulation adds some that are worth reproducing: For example, to be considered a regular exporter of services, the amount of net exports must be equal to or greater than 25% of the total amount of annual sales, or the applicant must have made at least six exports in six different monthly periods; furthermore, it must be demonstrated that the net foreign currency income is transferred from an account abroad to an account at a local financial institution belonging to the applicant for the refund, related to service exports, supporting documentation such as receipts and withholdings, as well as contracts or similar documents that demonstrate the contractual relationship, its validity, and the purpose of the service provided, which must comply with the necessary formalities for its validity, presented on electronic storage media.

These requirements are very useful for the Internal Revenue Service to identify that a transaction has been carried out. However, they do not reflect the reality of maritime trade, particularly for companies that support these activities.

For example, a towing company would find it difficult to meet the requirement of demonstrating net foreign currency income, since it is well known that the law requires shipowners to have a representative in Ecuador who handles all the shipowner’s administrative and commercial matters. Therefore, it is possible that income is not paid directly, but rather through their shipping agents, without this constituting any illegality.

Another example is the requirement for contracts or documents reflecting the contractual relationship. In practice, an auxiliary company might not have such documentation because it would obligate shipowners or shipping agents to exclusively use their services. However, the reality is different, as shipowners and/or shipping agents have several auxiliary service providers, so the context overlaps with the content of the regulation.

In summary, upon receiving a refund request, the authorities should analyze each case individually and resolve it, taking into account the realities of different types of companies, in order to ensure that the right to a VAT refund is not violated, in this case, for an important sector of maritime trade.

1 Internal Tax Regime Law (LRTI), Article 56, paragraph 14, subparagraphs a), b), c), and d).

2 Tax Policy Committee, Resolution 3 of 2019, Article 4, Official Gazette No. 495, May 27, 2019.
3 Regulations to the LRTI (RALRTI), Article 8, following Article 7.
4 Internal Revenue Service, Resolution 51 of 2019, Article 5, second paragraph.
5 Ibid., Article 6, paragraphs 3 and 1.