By CHRIS GRAEME
chris.graeme@theresidentgroup.com
A package of moderate tax increases has been announced by the Government to bring Portugal’s 9.3 per cent budget deficit back to 7.3 per cent of GDP this year and 4.6 per cent next year.
Finance Minister Fernando Teixeira dos Santos, after stating earlier in the year that the Government wouldn’t raise taxes, has done a complete U-turn by slapping one per cent on VAT across the board.
It means that the overall VAT rate will now rise from 20 to 21 per cent, while VAT on intermediate rate goods climbs to 13 per cent and on basic rate essentials to six per cent.
Portugal will have the third highest VAT rate in Europe – only Greece (23 per cent) and Finland (22 per cent) have higher rates.
The Government has also raised the basic rate of income tax by 1.5 per cent for all those earning more than 2,375 euros a month, while the majority of the population will pay an extra one per cent.
Translated, it means a single employee without children earning a gross salary of 2,310 euros a month will now pay 462 euros a month, up from 439 euros.
But a person earning 4,000 euros per month will now pay 1,020 euros per month in tax compared with 960 euros.
Only those taking home the minimum national salary of 475 euros per month will not be affected by the sweeping tax changes.
While the overall population has been spared more stringent fiscal austerity measures, it is the nation’s large corporations that will bear the brunt of tax hikes.
The government has introduced a so-called Crisis Tax of 2.5 per cent on the profits of the country’s largest companies such as Energias de Portugal (EDP), Portugal Telecom (PT) and Galp Energia, who will have to fork out an extra 54 million euros each on profits made.
Those three companies alone, which are the largest in Portugal, paid around 730 million euros in taxes into the State’s coffers based on their net profits in 2009.
The country’s five largest banks – Caixa Geral de Depósitos, Espírito Santo, Banco Comercial Português, BPI and Santander – will now have to pay an extra 43 million euros to the State.
But Portugal’s Small and Medium Enterprises (SMEs) will largely go unscathed by the Finance Minister’s action.
Companies that earn more than two million euro profits will have a tax of 2.5 per cent.
Up until now companies paid a tax of 12.5 per cent on the first 12,500 euros and 25 per cent on the rest.
In 2009, the average Portuguese company paid 15 per cent in Corporation Tax (IRC) and the Prime Minister José Sócrates has announced that: “All companies with taxable profits above two million euros per annum will suffer an increase of 2.5 per cent”, which means most SMEs will escape the hatchet.
In 2009, the Portuguese treasury received 31.7 billion euros in taxes from 228,189 companies, taxed at an average rate of 15 per cent.
And to show that they are in the same boat as ordinary people, State executives and politicians will pay an additional five per cent of their salaries per month.
That means the average Portuguese MP, who currently earns 3,815.17 euros per month, will now earn 3,624 euros.
The President of the Republic, Cavaco Silva, who earns 7,630 euros a month, will now earn 7,248 a month, while Prime Minister José Sócrates who earns 5,400 euros a month will now earn 5,130 euros.
Commenting on the tax increases, PSD analyst Miguel Frasquilho said that the “need to take additional measures was the consequence of successive errors over the past five years and the Government’s denial of the true situation”.
Constitutional expert Marcelo Rebelo de Sousa said that “cutting salaries at a time of crisis was a good idea” and it was good that politicians had “set an example”.
However, he said the measures didn’t “go far enough”.
A date for the implementation of these measures has not yet been announced, but it is expected that they will come into force towards the end of the year.
