Working Paper: How to Fight Excessive Tax Competition and Harmful Practices - The Case of Ecuador

02.05.2019: Ecuador is an instructive case of a developing country that is vulnerable to excessive tax competition and the use of lowtax jurisdictions. In a series of reforms, Ecuador has tried to tackle tax havens and the abuse of double taxation agreements; it has also been active in global tax reform advocacy. In this case study, we outline the context and outcome of these changes, and draw conclusions for policy-makers.

This case study introduces Ecuador as an example of a developing country that has made wide-ranging changes to its national and international tax affairs. We argue that the reforms in Ecuador were prompted by both underlying economic and political conditions and by specific watershed events. The results have been broadly positive, and lessons can be drawn for policy-makers in other countries. In what follows, we discuss the following:

Background on Tax Competition

Global tax competition is particularly important for developing countries because of the undue burden it places on their economies. The varying definitions of tax havens reflect a lack of consensus about the role of international organizations. The scale of the problem of tax havens has been revealed through the Panama and Paradise Paper leaks. Intended to reduce the tax burden, double taxation agreements are often used for double non-taxation and treaty shopping. Initiatives at the international level - including BEPS, the Financial Secrecy Index, and Model Tax Treaties - have been introduced to tackle tax abuses. Despite support from over 135 countries, there has been no success in creating an international regulatory body for taxation.

Ecuador as an Instructive Case

Ecuador has many economic and political features common to developing countries. As a country without monetary sovereignty, Ecuador is particularly vulnerable to tax havens and the consequences of double taxation agreements. Like other countries, political instability and international criticisms of the Ecuadorian government have created reputational problems.

Tax Havens

The Banking crisis and leak of the Panama Papers were hugely important in motivating changes relating to tax havens. Regulatory reforms in 2007 (with subsequent amendments) defined tax havens and imposed further restrictions and regulations. In 2017, Ecuador became the first country to hold a nationwide referendum on tax havens, and to adopt a law that forbids all politicians and public servants from holding funds in tax havens. The reforms were successful, and greater tax efficiency allowed Ecuador to increase tax revenues and pursue redistributive policies.

Double Taxation Agreements

Ecuador has 19 double taxation agreements (DTAs). Between 2005 and 2013, no new agreements were signed, likely because of a negative perception of political and economic instability by the international community. One of the DTAs, between Ecuador and Switzerland, was abused by China InternationalWater & Electric Corp (CWE), a subsidiary of the Chinese state-owned company Three Gorges Corporation, through illegal treaty shopping. Following media investigations and a public outcry, the DTA was amended in 2017 by adding an information provision addendum.

Global Tax Debate

Ecuador has pursued an active role in the global tax debate. Ecuador joined the BEPS Framework and is making changes to meet the required tax transparency standards. As president of the G77 plus China, Ecuador emerged as a strong voice in support of the creation of an international tax body. Ecuador remains active in tax advocacy and encourages other countries to replicate its achievements; it promotes the message that it is possible to change the public mindset and build a culture of paying taxes.

Lessons for Policy-Makers

The tax reforms in Ecuador have implications for policy-makers in other countries. Possible lessons include the motivational role played by crisis and scandal, the power of public will in driving change, the use of creative political tools, the importance of international support, and the benefits of improved access to information.