The 2005 budget steps up anti-abuse measures

news: The 2005 budget steps up anti-abuse measures

How will the 2005 budget affect you? Resident reporter Chris Graeme spoke to two partners at Deloitte to see what the various changes imply for individuals and companies.

PORTUGUESE taxpayers will pay more on retirement, education and mortgage savings accounts in 2005. This will prove one of the major impacts for non-corporate tax payers while for business, changes in the status of the Madeira tax free zone will see profits reduce by as much as five per cent.

The main difference for companies in this year’s 2005 budget is that it is no longer possible for banks to consider that 20 per cent of their global profits can be imputed to their operations in Madeira.

That 20 per cent limit has now been reduced, meaning banks can say that only 15 per cent of their profits are from Madeira operations, and are therefore exempt from Corporate Tax. This reduction means that the Corporate Tax rate has been effectively increased by 1.25 per cent.

“In relation to Madeira we feel this is fair enough because it prevents the banks from locating all their profits into offshore accounts where they are tax exempt,” says Rosa Freitas, a partner at Deloitte. “It will be difficult for banks to shift their money to other offshore places because of a set of measures that prevent them from doing so. If the banks do move their money to other offshores where they have contracts to place their profits they’ll have to justify their costs to the tax authorities,” she argues.

Luís Belo, also a partner at Deloitte, revealed that the government has introduced several other anti-abuse rules to offset fiscal flight. “The government has placed a provision where it promises that if you bring your money back from offshores to Portugal you will pay no extra taxes on that money. Neither will you have problems providing you pay five per cent on the capital that you repatriate to Portugal,” he says. This is a measure that the government intends to legislate on and which already exists in Italy and Belgium.It means that if a person decides to bring their offshore money back to Portugal, they pay no tax on the money they’ve made in past years providing they pay the blanket five per cent on the repatriated capital. “The intention of these measures and the amnesty for tax purposes is to try and keep money in the country, encourage money to return to the country and ‘moralise’ the system so that people won’t face any criminal proceedings,” adds Rosa Freitas. “Of course the government will have to co-ordinate this with other control measures otherwise people won’t take any notice of it,” she stresses.

There are no major changes with regards to local and district câmaras except regarding the rates for Municipal Property Council Tax, which has been increased slightly to reflect inflation.

The government is also going to facilitate the withdrawal of bank secrecy and will become much more flexible so that income tax authorities can examine, with a court order, people’s accounts with greater ease. It will also introduce specific rules in relation to the use of bank accounts. If you own a company you’ll have to separate your bank account from your personal account.

Finally, the burden of proof in cases of non-liability to tax has changed. Now it is the taxpayer that has to prove why he is not liable to tax on specific income he has or wealth that he shows. This means tightening up cases where celebrity people that have apparent signs of wealth and appear in magazines and on TV in the past presented tax returns with the national minimum wage. The onus will now be on them to prove how much money they’ve got and why it’s non-liable to taxation.

Another new provision in the budget relates to the unusual relation of fixed assets and the so-called Rule 35 of the Commercial Society Code. A rise to 60 per cent on depreciation and amortisation of fixed assets will now be accepted for tax purposes. This will allow companies to comply with that specific provision of the Companies Code concerning the capitalisation of Portuguese companies.

If companies don’t have enough equity to give their shareholders and creditors in order to remain solvent, a revaluation of fixed assets has to be undertaken to help them re-evaluate and incorporate their reserves in capital so these companies are capitalised and are not immediately dissolved. This possibility means that companies may be able to continue operations rather than face being shut down.

At the same time those companies will be in a better position to comply with Article 35 asreserves do not need to be used to increase the capital. They may be used to increase capital, but it is not mandatory as long as there is an equity account. “It is just a matter of re-evaluating the assets. There are some companies in very important economic groups that are valuable because the assets are there, it’s just their equity is not in accordance with Article 35,” explains Luís Belo. “Article 35 has a very strange history, it has been part of the Companies Code since 1987. It was frozen until one or two years ago when it finally came into force,” he adds. “Now companies have until the end of the year to be capitalised, otherwise creditors and shareholders can dissolve them. This is applicable when the equity of the company becomes lower than 50 per cent of the share capital,” he stresses. One problem is that, despite these measures having to be taken before the end of 2004, the budget will only come into force next year.

The last major change relates to the structure and restructuring of credit groups. Since 1990, there has been a law that permits reorganisation without a company paying municipal property tax, council tax or stamp duty. This law had been postponed several times.

Rosa Freitas and Luís Belo agree that there have been no major changes to measures affecting the Portuguese tax system, but that given the current macro-economic climate it was always going to be difficult for the government to really promote a reduction of both personal and corporate taxes. “In many ways some of the proposals are vague and imprecise and are likely to cause conflict in the future. It’s good to have new anti-abuse measures to fight fraud and tax evasion and try to avoid some of the abuses in the non-payment of corporate taxes,” they both conclude.