By: PEDRO SIMÕES
financial@portugalresident.com
RECENTLY, WE heard in the press that Portugal was sued by the European Union because VAT is being paid on car tax. However, that information was not totally correct. Before discussing the news, we should know what we are speaking about.
When you buy a new car, or if you import one and put Portuguese plates on, you will have to pay tax (Imposto Automóvel now called Imposto sobre Veículos). For example if the tax you pay for your car is 1,000 euros, you will pay 210 euros of VAT (21 per cent on 1,000 euros). You pay a total tax (VAT plus Car Tax) of 1,210 euros.
This means that you are being taxed twice. You are paying VAT on the car tax. Is this considered a double taxation? Portugal doesn’t think so. The European Union advised Portugal to change the law because it considered that Portugal is charging taxes on taxes. Double taxation is illegal.
Recently, Portugal changed the method of calculating car tax and from July 1, protecting the environment has been taken into consideration. However the VAT on car tax hasn’t changed. The process that the European Union thought its Commission opened, is a preliminary process before taking Portugal to European Court. Portugal now has to answer the Commission and present its reasons why it is taxing that way.
The process was initiated by the European Commission, which has, as its president, Portuguese José Manuel Durão Barroso, and came in sequence of a decision of the European Court of Justice (ECJ) regarding a process against Denmark for the same reasons.
The ECJ considers that VAT should not be charged on car tax paid, according to number five of article 16 of the VAT Code, which comes from art. 11º, A, n.2, alínea a) from Sixth VAT Directive (directive 77/388/CEE from Council, dated May 17, 1977).
The court considers that the important fact is that car tax is paid in sequence of the first plate and not related with the sale itself, and that is why VAT should not paid on car tax. So, VAT should not be paid on car tax. If so this will be a double taxation.
On the example I gave, that means instead of a tax of 1,210 euros, you would just have to pay 1,000 euros.
Portugal has to answer the European Commission this month, detailing the process.
However, the Portuguese Government, through the Finance Minister, has already told the press:
1. It is the European Court of Justice and not the European Commission that says that Portugal must change the law, and at this point there is no process in court against Portugal regarding this matter;
2. The law in Portugal has been the same since 1986, when Portugal started to work with VAT, which was more than 20 years ago;
3. The European Commission will have no answer from Portugal about the reasons they are keeping this law;
4. The Danish process is different to what is in Portuguese Law.
The Portuguese answer to the press is showing us that the law will not be changed. VAT will continue to be charged on car tax.
Portugal has showed that it doesn’t want to change the law. After receiving the report from Portugal, the Commission should send the process to ECJ. I think it will take a long time to have a final decision although the ECJ is faster than Portuguese courts, but we will have a long time ahead before having a final conclusion.
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