Banks blast government over lack of competitiveness

By Chris Graeme

chrisgraeme@sapo.pt

THE ASSOCIATION of Portuguese Banks has accused the government of arrogance in its dealings with the sector.

In last Tuesday’s debate on the Portuguese State Budget for 2007 in parliament, Prime Minister José Sócrates announced stringent new measures to force the banking sector to either pay a higher percentage of the legal Corporation Tax (IRC) or face tough and invasive questions and investigations as to why it isn’t doing so.

Under PS Portuguese tax law, businesses, including banks, have to pay a tax rate of 25 per cent IRC, but the countries leading bank, Millennium bcp, only paid eight per cent in 2005/6, while Banco Espírito Santo – the country’s third largest bank – paid 15 per cent.

Critics within the PS and left-wing parties, such as Bloco Esquerda and PCP, say that at a time when Portugal is suffering economically, when the government is trying to find enough cash to fund the social security and health systems, it is unjust and obscene for the banks to be paying lower levels of IRC, while making record profits.

One economic analyst at Banco Espírito Santo, who preferred to remain anonymous, told The Resident: “It is a difficult situation because the banks argue rightly that their staff will never receive a state pension fund, while the banks also operate their own private health systems. Yet they still have to pay billions to the treasury for social security payments.

“The banking sector is one of the few in Portugal that is sustaining the rest of the economy, providing thousands of jobs and investing huge amounts of money in small and medium sized businesses and new technology to help keep the country competitive within the European Union,” he argued.

On the other hand, the banks have come in for a lot of criticism in recent months – they have lent in a socially irresponsible manner in recent years, have used unorthodox methods including bullying to force cash-strapped families to pay off loans and have been servicing accounts holding money from dubious sources.

On Tuesday, José Sócrates announced tougher and more stringent measures to ensure that banks pay their fare share of taxes, do not use complicated loopholes and, what is termed in the business as financial engineering, to pay less tax.

The reply from the banking sector was sharp and to the point on Tuesday afternoon with João Salgueiro, President of the Portuguese Banking Association, launching a strong string of accusations at the government.

In an interview with the Portuguese national newspaper, Público, João Salgueiro said that the government, in its bid for popularity, was confusing its media image with reality.

He said that the International Monetary Fund has praised the Portuguese banking sector for being modern, well run and competitive, unlike other sectors in Portugal.

“This government too is more professional and has been successful in its agenda, but its financial legislation isn’t competitive, such as its double taxation regime, which it has now altered,” he added.

“There are three other stumbling points that prevent this country from being competitive: one is the high IVA (21 per cent), which is scaring off business to Spain and is one of the reasons why our national productivity is growing slower than theirs,” he stressed.

The other problem was that people were enjoying cheaper petrol in Spain, while Spanish companies could buy what they wanted because they got decent tax breaks from the government enabling them to better compete.

He also said that government business taxes for Portuguese companies, even those which had a strong public interest, often located their headquarters abroad because the tax system was so uncompetitive in Portugal. “We’re competitive in hardly any sectors. We’re not on the labour question, neither in the bureaucracy, or justice, education, teaching and certainly not in finance and taxation,” he blasted.

He said that the government’s general taxation regime for small and medium companies that were the backbone of the Portuguese economy was not favourable, while the country could only bring in foreign investment through contract sweeteners and special low tax regimes.

“The banking sector has collaborated in all the government’s campaigns of national interest including paying for the information technology systems, collection and processing of social security and pensions, which brings in hundreds of millions of euros in taxes to the state, so when the government talks in this arrogant way it is talking like Juan Peron and sounds like Peronism,” he said.

“The government is looking for conflicts in order to avoid taking essential measures and the strategy of conflict that the government has adopted with various social classes is in some cases justified, but in others is superficial and symbolic. Instead of just concentrating on austerity measures it needs to make wealth creation as its main objective,” he concluded.