Ecuador’s Banking Sector Protests Proposed ‘Discriminatory’ Taxation Amid Anti-Crime Funding Efforts

Ecuador’s Association of Private Banks (Asobanca) has publicly denounced what it perceives as discriminatory treatment in the proposed tax reform aimed at funding the government’s fight against organized crime, sparking a nationwide debate on fiscal equity and economic sustainability.

Banking Sector’s Strong Opposition

In a significant outcry against proposed fiscal measures, Ecuador’s Association of Private Banks (Asobanca) has voiced its strong opposition to what it terms a “discriminatory” approach in the ongoing discussions to finance the government’s crackdown on organized crime. Amidst a broader call for national unity against security threats and terrorism, the banking sector finds itself at the center of a contentious debate over tax reforms currently under consideration in the National Assembly.

The crux of the controversy lies in the draft tax reform bill, which suggests a general contribution from the productive sector to bolster the state’s anti-crime efforts. However, Asobanca argues that the banking industry is singled out for distinct and unfair treatment. “We cannot accept being burdened with what should be a contribution made under principles of rational proportionality and equity among different business sectors, not under political criteria of hatred and discrimination,” the association stated in a release on the social media platform X.

Asobanca has expressed frustration over being twice denied the opportunity to present its case before the specialized commission of the Assembly, a move it says infringes on its right to articulate its concerns, particularly regarding the adverse impact the proposed measures would have on credit access for thousands of Ecuadorian businesses and families. The association warns that reduced credit availability would inevitably lead to fewer jobs, diminished opportunities for all, slower economic growth, and, paradoxically, lower tax revenue.

Plea for Rationality in Legislative Initiatives

“Enough with grounding legislative initiatives in ideological biases and false information that compromise the financial stability of banks!” Asobanca emphasized, highlighting the highly regulated nature of the financial system and its significant contribution to state revenues relative to its size.

The banking sector’s alarm resonates against a backdrop of desired new investments in the country, juxtaposed with growing legal uncertainty and arbitrariness, initially targeting private banks but potentially threatening other productive sectors in the future. The proposed “confiscatory tax” could raise the fiscal burden to 76%, impacting the banks’ solvency and significantly reducing their lending capacity by an estimated $4 billion.

The legislative proposal spearheaded by the Revolución Ciudadana (RC) parliamentary group, associated with former President Rafael Correa, includes taxing the banks’ extraordinary profits and increasing the foreign currency exit tax from 3.5% to 5%. This initiative emerges in response to President Daniel Noboa’s legislative proposal aimed at financing the so-called “war against terrorism,” which encompasses measures like raising the Value-Added Tax (IVA) from 12% to 15%, a move criticized by progressive and left-wing factions for disproportionately affecting the poor and middle class.

Debunking Profitability Claims

RC’s stance on the “exorbitant profits” of the banking sector in recent years has fueled its argument for higher contributions from those more financially able. Nonetheless, Asobanca counters this narrative, insisting that the banking sector was only the tenth most profitable in terms of financial returns in 2022 and highlighting that the banks’ tax contributions are set to triple under a new self-retention regime, increasing from approximately $123 million to $360 million annually.

The debate reflects broader societal concerns, with RC arguing that its proposals aim to alleviate the financial strain on most Ecuadorians, who have faced a series of tax measures since the COVID-19 pandemic in 2020. “Ecuador, where inequality levels have risen, cannot ask the middle class and the poorest to bear the burden of a crisis that also costs lives,” RC stated in January, referencing the surge in insecurity and violence due to organized crime activities.

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As Ecuador grapples with these complex fiscal and social challenges, the standoff between Asobanca and tax reform proponents highlights the intricate balance between funding critical state functions and ensuring economic growth and stability. The ongoing debate underscores the need for equitable solutions that address urgent security concerns without undermining the financial health of critical sectors or placing undue burdens on the country’s most vulnerable populations.

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