THE INCREASE in the maximum rate of IVA (VAT) from 19 per cent to 21 per cent, which came into force on July 1, means that consumers are experiencing a general increase in prices – a situation that is causing families across Portugal to tighten their belts and even driving many to seek cheaper prices at stores over the border in Spain.
Prices that have gone up include those charged for fuel, cars, clothing, shoes and cleaning products, among other items. Prices not affected are those for basic food items, water, electricity, transport, books and newspapers. The prices charged for items such as medicine, which attract a tax rate of five per cent, also remain unchanged.
Some large stores
Somewhat surprisingly, rather than taking advantage of the situation and putting up prices, several large stores have announced that they will make the best of the situation and are refusing to increase their prices, in order to please customers. The stores taking this approach include Modelo Continente, Carrefour, Pingo Doce, Freeport, Feira Nova and IKEA, all of which are endeavouring not to pass on the new tax to their customers through higher pricing. Their example might even prompt other retailers to follow suit, although this still remains to be seen.
40 per cent of purchases
affected by tax increase
According to the Instituto Nacional de Estatística, the national statistics
institute, 40 per cent of purchases made by the average family in Portugal are of products that attract the maximum amount of IVA.
In the case of diesel fuel, the increase in IVA means motorists pay up to 1.9 cents more per litre and petrol could increase by 2.3 cents per litre, taking the cost of a litre to 1.18 euros. When it comes to the purchase of a new car, the price of an average mid-range vehicle, increases by between 400 and 500 euros.
In order to try and ensure that commercial establishments are not abusing the tax increase and randomly increasing prices of products that do not attract the new tax increase, 62 inspectors from the Ministry of Finance and the Inspecção-Geral das Actividades Económicas, the economic activities inspection authority, have taken to the streets to visit supermarkets, cafés and restaurants. The establishments were visited on June 29, before the tax increase came into force, and have now been visited again by inspectors who checked prices.
A total of 461 establishments within 18 districts have been inspected with the object of “preventing unjustified increases in prices, under the pretext of the alteration of IVA from 19 to 21 per cent,” commented a source from the Ministry of Finance.
Portuguese dash to Spain for shopping
Despite promises from many of Portugal’s supermarkets to maintain price levels and deliver the lowest prices possible on a wide range of products, many shoppers are travelling over the border to Spain, where the normal rate of tax stands at only 16 per cent.
Often, shoppers find that the saving they make on petrol more than covers the cost of the trip itself and, while in Spain, the Portuguese are stocking up on detergents, clothing, shoes and toiletries, in a bid to reduce their monthly household expenses.
For example, people living in the Évora area find it easier to travel over the border to Spain’s Badajoz (100km away), where they can find a large Carrefour hypermarket.
Modesto Molares, head of sales at Badajoz Carrefour, has admitted that he was not expecting to see such high numbers of Portuguese at his store last weekend. “No one here at Carrefour was expecting to see so many Portuguese. In general on Saturdays, quite a lot come here to do their shopping, but the amount we have seen today is not normal!”
With the city of Huelva also being just an hour’s drive away from Faro, and boasting stores such as Carrefour and El Corte Inglès, an increased number of residents from the Algarve are also likely to make the trip to Portugal’s neighbour to save a few euros.
Porsche sales boom
For some companies, the impending tax increase encouraged a sudden rise in sales last month. In June, luxury car manufacturer, Porsche, registered record sales in Portugal – 48 cars were sold last month against a previously record number of 35 in one month. Nuno Costa, spokesperson for the brand in Portugal, believes this development “can only be due to customers rushing to buy before the rate of IVA went up”. Due to the increase from 19 to 21 per cent, clients purchasing a Porsche before July 1 were able to make a saving of between 1,000 and 2,000 euros.
Toll charges have increased.
Around half the toll fees charged on motorways on the Brisa network have suffered an increase due to the IVA rate being increased to 21 per cent. In total, 150 of the 360 tolls (41.6 per cent), distributed between the various vehicle classifications (1, 2, 3 and 4), have seen an increase in the charge to motorists. On the A2 motorway, which connects the Algarve with Lisbon, the cost for cars is now 16.80 euros against the 16.55 euros charged previously. A table of the new charges has been published on Brisa’s website, www.brisa.pt
Early promotions take the place of sales
Many commentators are reasoning that the increase in IVA is one of the reasons for the sudden emergence of early promotions at clothing and footwear stores in Portugal.
Summer has only just begun, but shops are full of signs that advertise reductions and, in many cases, items are already being reduced by as much as 50 per cent. They are called promoções (promotions) because the law determines that saldos (sales) can only begin in just over a month’s time, but, in practice, there is very little difference between the two. By the time the sales begin, there is likely to be very little left on the shelves – little worth buying that is.
Clothing chain Lanidor, which has stores all over Portugal, recently advertised their 50 per cent promoções at cash machines and, when The Resident visited their store in the middle of June at Forum in Faro (a couple of days after the ‘50 per cent promoções’ had begun), there appeared to be very little left to buy.
The economic crisis, the lack of buying power and the competition from the Chinese stores are the main reasons given by shop owners – mainly clothing and footwear retailers – for going ahead with large reductions that would normally only be made during the official sale period that starts on August 7.And the increase in IVA from 19 per cent to 21 per cent which applies to footwear and clothing, has only served to further exascerbate the poor performance of retailers.
After experiencing slow sales, business owners see promotions as a way to overcome the problem, but the strategy is being viewed with some concern by the sector’s trade associations.
Change in law is required
Due to the fact that the idea of sales has been lost among consumers over recent years, the Confederação de Comércio e Serviços de Portugal (CCP), Portugal’s commerce and services confederation, has been calling, for some time, for the government to revise the law in regard to sales and promotions.
The CCP believes that anticipating sales with a reduction in prices is “a shot in the foot to traditional commerce, at a time when margins are tightly squeezed”. For this reason, the CCP presented the previous government with a set of recommendations for altering the current law.
The CCP’s proposal suggests that there should be “a pre-sale period that must take place one month before the sales begin and the reductions made should be up to a maximum of 20 or 30 per cent”. At the moment, the legislation does not limit the percentages of the reductions, meaning the only distinction between sales and promotions is the date when they are taking place.
With regard to the possibility of altering the law, the Ministry for Economy and Innovation would only issue the following statement: “The law in place is efficient and allows the control of the economic activities of professionals in this area. If there are any changes to the law, these should safeguard a high level of protection for consumers and allow healthy competition.” It also comments that it would be “interesting to see the voluntary taking up of this code of conduct relating to prices, and have the unions and associations of the sector subscribe to it”.
New outlet stores are not helping situation
In addition, Laura Rodrigues, president of the Associação de Comerciantes do Porto (ACP), Porto’s retailers association, calls attention to the fact that promotions “are a way of concealing the fact that sales are happening”, and that the situation has made “unfair competition worse in the retail sector. The emergence of large stores like the outlets, which sell their items at reduced prices all year round, the Chinese shops and the lack of inspections” are, according to the ACP president, some of the reasons that have led shop owners to decide to start promotions earlier.
For retailers, a normal selling period does not exist because, according to Laura Rodrigues, “consumers fail to buy during the normal season because they are waiting for promotions. Therefore, the existing legislation must be re-thought”.