Bloomberg News

Ecuador Ruling Party ‘Certain’ Tax Law Will Pass, Lawmaker Says

October 26, 2011

Oct. 26 (Bloomberg) -- Ecuador’s government has enough support in congress to raise taxes for the ninth time since 2007, almost doubling beer prices and raising fees on cigarettes and capital exports, the head of congress’ tax commission said.

The proposed law, which would increase the tax on money taken out of the country to 5 percent from 2 percent, seeks to shore up liquidity in South America’s seventh-biggest economy, Francisco Velasco, president of congress’ Economic and Tax Commission, said in an interview in Quito.

“I’m certain” the law will pass, Velasco, a former radio talk-show host, said yesterday by telephone. “It’s not fair that the money and capital stays abroad in a country that needs it urgently.”

Ecuador uses the U.S. dollar as its official currency, meaning that any capital taken out of the country reduces the amount of money in circulation, acting as monetary tightening. The law has raised concerns from groups including the Quito Chamber of Commerce that it will spur inflation by pushing up the cost of imported goods, hobble foreign investment and place an extra burden on the middle class.

Companies that would be affected include a unit of Brazil’s Cia. de Bebidas das Americas, the biggest beer maker in South America, and Cerveceria Nacional SA, a unit of SABMiller Plc, the world’s second-largest brewer by volume. Officials from Cia. Cervecera AmBev Ecuador, controlled by Belgium-based Anheuser- Busch InBev NV, will speak with lawmakers today about the tax, Ecuador’s congress said yesterday in an e-mailed statement.

‘Gigantic Budget’

The tax increase, which would raise the cost of alcohol by 75 percent, “will continue funding a gigantic budget that has devoured not only the hopes of the nation’s industrial sector, but also its middle class,” Blasco Penaherrera, president of the Quito Chamber of Commerce, said in an Oct. 24 e-mailed statement.

President Rafael Correa said in August that the tax increase was necessary because capital flight from Ecuador is one of the “grave dangers” of dollarization. Money is already flowing out of the country because of a trade deficit that totaled $488 million in the first eight months of the year.

Previous tax increases have helped fund increased government spending. Investment in public works projects, including roads, hospitals and schools, helped spur annual economic growth of 8.9 percent in the second quarter.

“This law seeks to do what every tax in the world seeks, to redistribute wealth,” Velasco said. “Those that have more, spend more and waste more, should pay more.”

--Editors: Philip Sanders, Richard Jarvie

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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