Portuguese Parliament Scrutinises Government's Budget Proposals

by Ulrika Lomas, Tax-News.com, Brussels

20 October 2008

The Portuguese legislature has begun the process of scrutinising the government's draft state budget bill, which balances the need to ease the tax burden on small companies against revenue-raising measures such as a crackdown on fiscal evasion.

The Prime Minister, José Sócrates, said that this is a budget created to respond to the current financial crisis and help with the creation of wealth in Portugal. He also encouraged entrepreneurs saying that SMEs are the ones who are in need of help in the current economic climate and that he is making changes to the corporate income tax regime. The process of assessment will run until November 28.

The draft budget brings a number of measures that, according to the prime minister, will restore confidence to the business sector. One of the main measures announced relates to corporate income tax. The government has proposed two levels of taxation: a 12.5% rate which applies to corporate incomes up to EUR12,500, and a 25% rate for higher amounts. The Finance Minister said that around 300,000 companies will benefit from the new additional lower band, or around 80% of the total number of companies operating in Portugal.

The second measure directed to companies takes the form of a credit instrument (linha de crédito PME-Invest) which will benefit more than a thousand companies, according to the Minister of the Economy, Manuel Pinho. The main points of the credit facility are: interest rates below Euribor; a guarantee of 50%; and a grace period of one-and-a-half years. Manuel Pinho has said that EUR800m of credit is intended to go to industry and services, while the remaining EUR200m will be directed to trade.

The simplified corporate tax regime is to be eliminated and the payments-on-account rates are to change depending on the amount to be paid. For small and medium enterprises with a turnover up to around EUR500,000 there is a decrease in the payments on account rate, from 75% to 70%. However, for companies with a higher turnover the rate increases from 85% to 90%.

The motor vehicles tax was also amended in the budget. From January 2010 onwards the motor vehicles tax will be based not only on the size of the engine but also on the levels of carbon dioxide emitted. This new measure amends article 10 of Law No. 22-A of June, 2007.

Under the budget proposals state workers will receive a 2.9% pay rise. According to the government this measure covers the expected inflation of 2.5%. In a year when European, legislative and municipal elections are held, Teixeira dos Santos refused to link the pay increase with the elections.

The fight against fraud and tax evasion was also highlighted in the budget, and is to be one of the primary objectives of the government’s tax policy. New measures in this area will be introduced in 2009. These will target the wealthy and create a tax-related court of justice (Juízos Fiscais de grande instancia). The proposals also seek to modify the law relating to tax offences.

Finally, in a press conference the Portuguese Finance Minister said that economic growth is expected to drop from 0.8% to 0.6% in 2009. He also stated that this year’s deficit target would remain at 2.0%.

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