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Austerity EU

By Editorial
July 15, 2014

The recent revelation that Banco Espírito Santo, one of Portugal’s largest banks, has hit trouble, sent shockwaves through the financial markets and reminded us all that the eurozone crisis, as a result of which taxpayers across Europe have paid a heavy price for governments’ profligacy and bankers’ folly, is far from over. So in this Tax-News topical feature, we summarise recent tax developments in the bailed-out European economies.


Optimism has been in short supply since Greece accepted its first rescue package from the European Union, the European Central Bank and the International Monetary Fund (the so-called ‘troika’) in May 2010, triggering wave after wave of tax increases and public spending cuts and sending the economy into a prolonged recession from which it has yet to recover.

However, in May 2014 Prime Minister Antonis Samaras promised to slash taxes "everywhere", explaining that the Government's goal is to reduce corporation tax to 15 percent, the top rate of income tax to 33 percent, and to cut the reduced rate of VAT to no higher than 12 percent.

Samaras made the announcement while unveiling the Government's Development Plan, which he said represented a "New Greece" of competition rather than statism. The plan would be rolled out over the next seven years. He said that most people had experienced reduced property taxes already, and that plans had been approved for further reductions over the next two years. However, he cautioned that the measures will be implemented gradually, in order to protect budget surpluses.

Samaras’s announcement probably couldn’t have come soon enough after the Parliamentary Budget Office warned earlier in 2014 that tax-raising capacity in the country is "exhausted," and that further increases will not bring in extra revenue.

The authors of the report noted that taxes on salaries, pensions, and property have increased seven-fold since 2010, while liability for the self-employed will become nine times higher than in 2010 during 2014. The report also observed that the top VAT and income tax rates are higher in Greece than the European Union average, where taxes are already generally very high.

Confirmation of a tax cut for companies engaging in oil and gas exploration was given by Greek Energy Minister Yiannis Maniatis on July 1, 2014. The move is intended to provide an incentive for companies to search for untapped hydrocarbon resources, which the Government hopes could reduce its reliance on imported fuel.

And on July 9, 2014, Finance Minister, Gikas Hardouvelis, promised that the country's extraordinary taxes will be abolished as the country's economy normalizes, and that tax burdens will be reduced to levels comparable to those in other Eurozone states.

Speaking at a conference in Vouliagmeni organized by The Economist, Hardouvelis linked the moves to the modernization of Greece's tax administration, and he added that the Ministry is assessing the efficiency and social impact of the current tax situation. In June, it was revealed that a special tax on heating oil had led to a dramatic decline in consumption and created a budget hole of EUR400m (USD542m) in lost VAT and income tax.


Of all the bail-out eurozone countries, Ireland has most reason to look to the future with some optimism after exiting its bail-out programme in December 2013 with all targets met, and having experienced some economic growth. What’s more, foreign direct investment flows have remained healthy throughout the crisis, especially from US companies, which directly employ 115,000 people in Ireland (out of a total population of 4.7m), indicating that Ireland’s corporate tax regime remains competitive.

Shortly after formally exiting the bail-out programme, the Irish Government published its medium-term "Strategy for Growth" paper, which covers the period from 2014 to 2020. The document's purpose is to "point the way to a stable and prosperous future, and away from the failed policies of boom and bust that have cost us so dearly."

It makes clear that, within "strict overall budgetary constraints, taxation and expenditure policy must be oriented to continue to support economic growth and job creation." Significantly, it also hints that the Government may be able to achieve a combination of tax cuts and increased spending if revenue growth is reasonable.

Crucially, the Statement makes clear the Government's "100 percent commitment” to the 12.5 percent corporation tax rate, stressing that "it is settled policy and will not change". It will continue to fund tax increases through the review and elimination or restriction of "overly-generous, poorly targeted or otherwise unaffordable tax reliefs", and income tax hikes will be avoided. Non-compliance and aggressive tax avoidance will be tackled, "so as to support fairness".

Individual taxation on the other hand, remains high. Various estimates put Ireland's marginal tax rate at between 52 and 55 percent. By contrast, the Organisation for Economic Cooperation and Development (OECD) average stands at 36 percent. However, on July 11, 2014, Prime Minister Enda Kenny pledged that the Government will begin to reduce the individual tax burden in the upcoming Budget.

In a speech setting out the Coalition's priorities, Kenny said that cuts will be announced in October, and will be delivered over a number of Budgets. He said that the 52 percent rate is "not tolerable or sustainable in the long run."

Nevertheless, the EU and OECD wolves continue to circle Ireland, demanding change to a tax regime that has been “blamed” for the phenomenon of tax base erosion and profit shifting by multinationals.

On June 11, 2014, the European Commission announced that it was reviewing advance tax rulings provided by Ireland (and two other member states in respect of other companies) to establish whether special tax arrangements were being offered in contravention of EU state aid rules. The European Commission said it has reviewed the calculations used to set the taxable basis in those rulings and, based on a preliminary analysis, had concerns that they could underestimate the taxable profit and thereby grant a selective advantage to the respective companies by allowing them to pay less tax.

In response to questions in Ireland's House of Deputies on July 3, 2014, Finance Minister Michael Noonan said that protecting Ireland's economic interests “is foremost in [the Government’s] considerations on this issue".

Our response to the European Commission will be clear – the appropriate amount of Irish tax was charged, no selective advantage was given, and there was no state aid," he said. "We will provide a detailed, technical legal rebuttal to the Commission's position and, if necessary, defend our position in the European courts."

The Commission’s state aid investigation is expected to take up to five years.


Like Greece, and – even though they haven’t required bail-out funding yet – Italy and France, Spain’s problems are rooted in an uncompetitive economy badly in need of structural reform. Prime Minister Mariano Rajoy has begun to tackle these issues, but tax increases have been unavoidable: various “crisis” taxes have been introduced, and VAT has been increased by 3% to 21%. But is there finally some light at the end of the tunnel for Spanish taxpayers? Recent statements from the Government appear to suggest so.

In May 2014, Spain's Council of Ministers approved the nation's Stability and National Reform Programs, which aim to strengthen economic recovery, increase growth, and boost job creation, through a reform of taxation and the introduction of measures to support the financing of the economy.

The Government wants to overhaul the tax system and to fund cuts to direct taxes and social contributions through a reduction in tax expenditures and environmental and indirect tax hikes. Specifically, it is considering reducing the number of personal income tax brackets, lowering the rate and threshold of the top tax rate, and progressively cutting corporation tax to around 20 percent.

Then, on June 1, 2014, Rajoy unveiled plans to cut the corporate tax rate to increase the competitiveness of domestic companies. The tax reduction will come into effect on January 1, 2015, and will be implemented in two stages, the prime minister said. The measure is part of a stimulus package worth EUR6.3bn (USD8.6bn).

And on June 20, 2014, the Spanish Cabinet approved reductions to both corporate and individual income tax. Budget Minister Cristóbal Montoro said that the income tax rate cuts will result in an average cut to Spanish taxpayers' income tax liability by 12.5 percent, although lower earners will get the lion's share of the benefit.

However, it isn’t all one-way traffic. In July 2014, Soraya Saenz de Santamaria, Spain's Deputy Prime Minister, said after a meeting of the Council of Ministers that Spain will levy a 0.03 percent tax on banking deposits, a measure expected to raise some EUR375m in revenues.


Developments in Portugal meanwhile have taken a worrying turn, as this feature’s introduction suggests.

In June, it emerged that Portugal is to forego the final EUR2.6bn loan payment under its bailout program following a ruling from the country's constitutional court, which outlawed austerity measures outlined in the 2014 budget.

The Portuguese Government unveiled its medium-term economic plan in April 2013, which proposes to marginally raise the headline VAT rate and the social security contribution on employees, and to lower the extraordinary solidarity contribution on pensions.

The medium-term economic policy is outlined in the Government's Strategic Budgetary Document for 2015-2018. The measures contained in the DEO are designed to reduce the territory's deficit to 2.5 percent of gross domestic product by 2015, and to allow the Government to ease cuts to pensions and public sector salaries.

An improvement in Portugal's 2013 budget balance is attributable to windfall revenue from the Government's one-off tax regularization scheme, Statistics Portugal said in its Eurostat summary in March 2014. However, the constitutional court’s ruling has opened a fiscal gap of roughly EUR700m.

Statistics Portugal has also revealed that the national tax burden increased by 8.1 percent in 2013 compared to the previous year, mainly due to a rise in direct taxes but also because of a one-off tax amnesty. The overall tax burden rose to EUR57.8bn last year, corresponding to about 34.9 percent of gross domestic product (GDP), after a reduction the year before.


The Cypriot parliament narrowly approved conditions set by the Troika for a EUR10bn bailout loan, passing legislation for a controversial "bail-in" on uninsured bank deposits of more than EUR100,000 in the country's two largest banks, as well a property tax increase in April 2013. In the process, Cyprus also had to lose its status as the lowest taxer of corporate income, as the rate was increased from 10% to 12.5%.

So far, the episode seems not to have wrought too much damage on the Cypriot economy, or its position as one of the most popular jurisdictions for holding an investment companies. Indeed, Cyprus earned plaudits from the IMF recently for the way it has gone about putting its house in order.

The IMF made the comments after the completion of its fourth review of Cyprus's performance under an economic program supported by a three-year USD1.38bn financial assistance package. The conclusion of this review enables the disbursement of another USD115m, bringing the total disbursements under the arrangement to USD574m. Naturally, Cyprus has had to pay a price for this assistance: as well as the tax hikes already mentioned, VAT has gone up to 18% and the tax on interest hiked to 30%.

"The Cypriot authorities are to be commended for their achievements during the first year of their economic program”, said IMF Managing Director Christine Lagarde.

"The authorities' ambitious fiscal consolidation and prudent budget execution have helped reduce the fiscal deficit”, she added.

However, Lagarde warned that given lingering macroeconomic uncertainty, the authorities should continue to implement the budget cautiously.

Cyprus finds itself in a similar position to Ireland as regards external attitudes to its tax regime, particularly from the OECD and the EU, and in November last year hit back at an assessment that the country is "non-compliant" in relation to international standards for transparency and information exchange.

Arguing that the OECD Global Forum on Tax Transparency was based on out-of-date information, Cyprus's Finance Ministry said that the rating does not take account of changes in the law that were implemented in 2012. The Ministry highlighted that the law now requires that information on trusts should be made available, and that provisions have been removed that allowed for the issue of bearer share warrants in public companies, and for companies that are Cyprus-incorporated but not tax resident, to avoid filing tax returns.


Many of the countries worse hit by the eurozone debt crisis have given the impression recently that they are moving onto a more stable footing. However, the Portuguese crisis demonstrates how fast things can change for the worse in the eurozone and how precariously poised these countries remain from an economic point of view. So even though the likes of Greece, Spain and Ireland are actively considering tax cuts, sovereign debts remain high and banking systems are still fragile, all of which adds up to an uncertain future for the eurozone economies.


Tags: tax | Tax | Ireland | Cyprus | Spain | Greece | Europe | Portugal | budget | Finance | European Commission | corporation tax | court | pensions | law | interest | investment | banking | property tax | France | gross domestic product (GDP)



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