More Tax Rises In Portugal

26.09.12

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

The writing has been on the wall. Although taxpayers in Portugal may feel they are already paying more than enough tax, some form of further t

The writing has been on the wall.

Although taxpayers in Portugal may feel they are already paying more than enough tax, some form of further tax rises was inevitable.

In early September Prime Minister Pedro Passos Coelho acknowledged that he could not rule out more tax rises, even though the tax burden on Portuguese taxpayers was already very high.

Tax revenues are falling, deficit reduction targets are slipping, unemployment is soaring, and there is no clear end in sight to the Eurozone crisis. The continuing macroeconomic background besetting Eurozone governments such as Portugal has led to them recognising the need to raise tax revenues. Many governments, now including Portugal, are looking more closely at capital and wealth taxes to help boost revenue, which would affect retired expatriates who own property and investment assets. If you have not already done so, this is the time to look to protect your assets from tax, by speaking to a tax and wealth management firm like Blevins Franks.

Tax revenues fell sharply over the first half of the year, with the latest data revealing another drop in July. Over the first seven months of the year fiscal revenue was ?2.8 billion less than forecast. The Finance Ministry had been expecting it to grow by 2.8% over 2012, but instead found itself faced with a 3.5% year-on-year decrease over January to July.

The International Monetary Fund, European Commission and European Central Bank ? the ?Troika? ? finished their fifth quarterly evaluation of Portugal?s ?78 billion bailout programme on 11th September. It concluded that although the country was ?broadly on track? with its economic and fiscal reforms, higher unemployment, lower disposable incomes and a shift in tax bases away from more highly taxed activities have resulted in government revenues ?lagging significantly? behind the budget plans.

Portugal?s economy is expected to shrink 3% this year, and next year?s growth prospects have been downgraded from 0.2% growth to a 1% contraction.

The Troika therefore agreed to give Portugal an extra year to meet its budget deficit targets, to ease the short-term economic cost and social impact of this necessary adjustment.

The targets have been revised from 4.5% to 5% of gross domestic product (GDP) for this year; from 3% to 4.5% next year and to 3% in 2014.

This extension does not remove the need for further tax rises ? the opposite in fact, with Portugal agreeing to implement further austerity measures. This included a number of proposed tax measures as outlined by the government on 7th and 11th September.

The measure which received all the attention was the proposed increase in employee social security at the same time as cutting employer contributions. After the massive public outcry and demonstrations, on 24th September Senhor Passos Coelho said that this plan would be scrapped.

He stressed, however, that his administration must still fulfil its obligations to international lenders and so would need to find other ways to achieve its targets.

The government is therefore now likely to raise income taxes next year instead, as well as hike taxes on capital gains.

The initial tax proposals announced on 11th September included other measures are likely to receive comparatively less opposition.

The government had said it planned to significantly reduce the number of progressive personal income tax brackets. With the intermediate brackets removed, many people would pay more tax. At the time it said the top rate would remain unchanged at 46.5%, but this may now change. In any case, do not forget that the 2.5% ?solidarity tax? imposed on income over ?153,300 in 2012 and 2013 means the top rate is currently 49%.

And, in a sign of the times, the government proposed to increase capital taxes. Tax on investment income – capital gains, dividends, interest and royalties ? would be increased from 25% to 26.5%. Last year the rate was 20%, so you would be paying almost a third more tax on your investment income and gains.

Another proposal was to increase stamp duty on properties valued at ?1 million or more with effect from this year. Next year would see higher taxes on luxury goods like cars, boats and aircraft.

At the time of writing we do not know what the final tax measures will be, but it seems clear that more tax rises are just around the corner, quite possibly on income, capital and wealth.

The tax changes must be included in the 2013 budget proposals and approved by the EU and International Monetary Fund before they can authorise the next instalment of bailout fund.

Portuguese taxpayers have already had various tax rises imposed on them over the last couple of years.

The top rate of income tax increased from 42% to 46.5% in 2011, with a 2.5% surtax being imposed on higher earners this year and next. The flat rates of tax imposed on interest, capital gains and dividends jumped from 20% to 25%. Where the capital is held in a tax haven (including the Channel Islands and Isle of Man) it is even higher at 30%. Properties are also being re-valued ahead of a property tax rise.

Talk to a tax and wealth management firm like Blevins Franks which has an in-depth knowledge of both Portuguese and UK taxation and how they interact, and which understands the local tax implications the Euro crisis has for British expatriates. It will guide you through the tax planning opportunities to lower your tax liabilities in Portugal, as well as in the UK if necessary.

25th September 2012

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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