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Ecuador's new tax legislation brings changes
Impact International / May 1, 1998

By Larry Luxner

One year ago, Ecuador's Congress passed a law that applies an excise tax (known by its Spanish acronym ICE) to both imported and locally manufactured beer, alcoholic beverages, soft drinks, cigarettes, automobiles and other luxury goods.

However, the tax base on which the ICE is to be applied is higher for imports than for domestic products, thereby increasing the relative cost of those imports.

The ICE currently imposes taxes of 10% on soft drinks, 30% on beer and 26% on liquor and non-beer alcoholic beverages. If the new tax-regime legislation is passed and the tax base for imported and local products is equalized, then imported products should finally be able to increase market share as their price will become more competitive.

That's a far cry from a year ago, when former President Abdala Bucaram -- who's since fled the country after being ousted by Congress -- declared that he was "studying the possibility" of slapping a controversial 1,000% import duty on liquor and cigarettes to stop the nation's 11 million inhabitants from drinking and smoking.

"What we are trying to do is make the cost of a drink or a cigarette, which damages the health and pockets of Ecuadorans, very high to discourage their consumption," he said at the time, denying that the move was a thinly veiled attempt to raise revenue for the cash-strapped central government.

In the meantime, drinks executives in Quito and Guayaquil worry that by increasing the cost of legally imported liquor, the ICE will encourage the growth of contraband and consumption of adulterated booze. In fact, the U.S. Embassy in Quito estimates that for every bottle of whiskey legally brought into Ecuador, eight to 10 bottles of whiskey are coming in as contraband -- which of course doesn't pay the ICE, the value-added tax (known as IVA) nor import duties. And for each bottle of imported vodka, five others come in under the table. Contraband imports of wine and rum are also five times higher than legal imports, say industry observers.

Legal importers also complain that they face unfair competition from military commissaries that import drinks at very low prices. Although these PXs are restricted to soldiers and their immediate families, a large leak exists and whoever has a "friend" in the military is able to buy liquor at cut-rate prices.

Meanwhile, beer importers say Ecuadoreans prefer local beer -- mainly because the local breweries spend $500,000 a year to promote their brands, supporting six or eight soccer teams -- while beer importers spend only $10,000 a year on publicity.

Advises the U.S. Embassy: "U.S. exporters should exercise caution when exporting their liquor, wine and beer to Ecuador and should make sure that the Ecuadorean importer is legally established. Sales of Miller beer have practically disappeared from the local market after its illegal importer fled the country. At the present time, the only U.S. brand successfully competing in the local market is Budweiser."

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