More efficient court system “could raise investor confidence in Portugal”

OECD report also recommends “better regulation of business activity”

The Organisation for Economic Cooperation and Development (OECD) recommends that “better regulation of business activity and a more efficient judicial system could increase investor confidence” in the Portuguese market, and that companies require better services from the State sector.

These are some of the conclusions of the report “The Impact of the Regulatory Framework on Foreign Investment in Portugal“, released today.

The organisation recognises that “Portugal has improved regulatory impact assessment (RIA) practices and adopted mechanisms to facilitate stakeholder participation in the preparation of legislative and regulatory acts in recent years, for example through the introduction of competitive impact assessments and the electronic portal ConsultaLEX”.

However, “OECD indicators show that Portugal lags behind peer countries in both areas“, reads the document, in which examples are given: “RIA documents are not made available online and ex-post evaluation of existing rules is not mandatory”.

In addition, it adds, foreign investors report difficulties in understanding regulation and in dealing “with sudden changes in legislation in Portugal”.

The report highlights that “lengthy judicial proceedings may also undermine Portugal’s attractiveness for foreign direct investment (FDI) also affecting domestic investors”.

Although Portugal has carried out reforms in the judicial system and improved “the efficiency of its courts in recent years”, the “length of proceedings remains long in comparison with peer countries, especially in administrative courts”, says the report.

For example, one in two companies in Portugal considers the length of judicial proceedings to be an “important or very important” obstacle (data for 2022), says the document, estimating at around “two years and four months the time needed to resolve a case in an administrative court”.

Put another way, it takes, “a period of time seven times longer than in Lithuania“, to see a case resolved.

In light of this, the OECD recommends “making wider use of regulatory impact assessments and involving the private sector more actively in the drafting of legislation to ensure that regulation delivers its intended purpose, while avoiding unnecessary administrative costs for business”.

The OECD also notes that the good practices applied “in the recently developed consultation process to shape business licensing reforms could be generalised to the development of other business-relevant regulations”.

It also recommends further reducing the “length of court proceedings, increasing digitalisation in courts, strengthening human resources in support functions and making wider use of extra-judicial mechanisms”.

With regard to improving public services, the OECD recognises the positive impact of the government’s simplified bureaucracy Simplex programme, which has reduced administrative burdens for companies, but points out that foreign investors “continue to consider interactions with the Portuguese public administration as burdensome in many areas and ask for greater efficiency and quality of services by administrative entities”.

The entity therefore recommends simplifying licensing and authorisation procedures, “such as industrial licensing and construction licenses, among others, following the example of recent changes to environmental licensing.

In this sense, it is also necessary to “guarantee that authorities have the capacity to issue licenses within legal deadlines and to make effective the application of the tacit approval rule to increase predictability for investors”.

The report also recommends reducing the time spent and the administrative burden for companies in complying with their tax obligations, “by further simplifying corporate taxation, strengthening information and assistance services and increasing digitalisation in tax administration”.

The OECD argues that it is necessary to “evaluate and rationalise investment tax incentives to ensure that they achieve their intended objectives without adding too much complexity to the tax system”.

This also includes raising awareness and adopting “existing incentives to support green and digital transitions of businesses (including incentives to train workers in digital skills)”.

According to the report, “it takes around 90 days to obtain a licence to operate a business activity”, i.e. “more than double the time required in peer countries (2019)”.

On the other hand, tax compliance requires “234 hours of work per year, compared to 50 hours in Estonia (2019)” and almost half of companies (47%) “consider tax administration to be an important burden to business activity”, compared to only 3% of companies in, let’s say, Slovakia.

The OECD compares the regulatory framework for investment in Portugal with a group of peer European economies, identifies possible barriers to investment and assesses to what extent a more favourable business environment can help attract more FDI to the country. In addition, it proposes a number of reforms that the Portuguese government could consider to increase the level of FDI in the economy.