Portugal widens austerity measures by targeting high profit companies

The new levy forms part of the government’s plans to reduce the country’s growing budget deficit.

The country’s prime minister, Pedro Passos Coelho, indicated the tax will be levied at an additional 5% in 2012, with a 2.5% tax already in place for companies with an annual profit exceeding €2 million also being amended.

“Portuguese companies with a taxable income exceeding €1.5 million will have to pay an additional tax, called Derrama Estadual, levied at a rate of 3% on the part of the taxable income between €1.5 million and €10 million, and at a rate of 5% on taxable income exceeding €10 million,” said Marta Pontes, of Uria Menendez.

These amendments are expected to substantially boost government’s tax revenue.

“The increase of the Derrama Estadual is expected to bring in for the government approximately €100 million in revenue,” said Filipe Romão, partner, and colleague of Pontes’s at Uria Menendez. “The main contributors will be the listed Portuguese companies (approximately 50 companies that are expected to contribute between €70 million and €80 million).”

The Portuguese Budget 2012 is expected to be announced this week, with other tax reforms including a rise in the rate of VAT on many items up to the top 23% rate, as well as the repeal of many tax breaks.

“The policy measures are essentially designed to limit the extensive use of reduced VAT rates, reduce VAT exemptions and extend the scope of application of the VAT standard rate,” said Tiago Cassiano Neves, Garrigues – Taxand.

The nation is dependent on bailouts from the EU and IMF and is therefore keen to show a concerted effort is being made to meet bailout goals and deficit reductions.

“I’m not doing this with a light heart,” the president told parliament. “These steps have to be taken so that all Portuguese can get out of this nightmare.”

Portugal signed a memorandum of understanding (MOU) with the IMF, EU and ECB to ensure bailout goals were stipulated.

“It agrees to adopt several legislative structural measures aimed at creating an economic environment that allows for economic growth and stability and control of public expenditure over the next three years,” said Neves.

Deficit reduction targets stand at cutting from 9.8% of GDP in 2010, down to 5.9% of GDP in 2011 and 4.5% next year.

“The proposal seems to create the right environment to rapidly attain, at least, a net zero primary balance,” said Jaime Carvalho Esteves, leader of PwC’s tax division.

Jurisdictions around Europe have been implementing different austerity measures as they each seek to reduce their deficits in a variety of ways. France is using permanent tax reform to cut its deficit, while neighbouring Spain has opted for temporary tax changes, outlining the different European approaches to budgetary control.

For full coverage of the Portuguese budget, follow www.internationaltaxreview.com.

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