Ecuador: Banks face taxing times
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Ecuador: Banks face taxing times

Ecuador's bankers are scratching their heads wondering how to design products to accommodate a radical new 1% tax on capital transactions, which from January will replace traditional income tax. The tax will be withheld from bank customers whenever a deposit is made into an account or for a fixed-term investment, or when a cheque is cashed. Customers will not be charged, however, when money is withdrawn from an ATM. It is feared that the tax will lead to further distortions - the financial system already has a huge quantity of transactions that don't always provide added value but which are operationally necessary - and to tax avoidance by conducting transactions outside the system, says analysts.

Ecuador has one of the lowest income-tax collections in Latin America, undermined by widespread evasion and corruption. In addition the government needs to cut a fiscal deficit of over 5% of GDP this year. Faced with political opposition to other tax-reform options, such as removing exemptions from value-added tax, and despite technical doubts both from within his own economic team and from multilateral lenders such as the IMF, president Jamil Mahuad's government adopted the current approach.

Following the experience of similar tax schemes elsewhere, the capital transactions tax is expected by some industry observers to yield higher revenues only in the short term.

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