2012-12-15 09:58:50
By PATRICIA KOWSMANN
LISBON—The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said.
The government is in talks with the European Commission's competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview.
That would be the lowest in the European Union along with Cyprus and Bulgaria, which have blanket 10% corporate tax rates, according to consultancy firm KPMG. The average corporate tax in the EU is above 22%.
"We want to make Portugal one of the most attractive countries in Europe for new investment," Mr. Santos Pereira said. "We believe that by providing very strong fiscal incentives to new investments we will safeguard the budget side and at the same time become a lot more competitive," he added.
Portugal, which must meet strict budget targets under a €78 billion ($102 billion) bailout program established with the EU and the International Monetary Fund in May 2011, would need approval from its international creditors to proceed.
While wealthy euro-zone countries and the IMF are beginning to recognize the need for measures to boost growth in austerity-hit countries, they have been reluctant to endorse tax cuts in countries under bailout programs.
If implemented, the proposed tax cut would be a departure from a series of tax increases that countries including Portugal, Greece and Spain were forced to take as part their bailout conditions.
A spokesman for the European Commission confirmed that it is in talks with the Portuguese government over a corporate income-tax overhaul. He wouldn't say if the commission would back the proposed tax cut.
"We would want to be sure that anything proposed would help the competitiveness of the economy," said spokesman Simon O'Connor, "but at the same time it would have to be in line with state aid rules," referring to EU regulations that limit the assistance governments can give to the private sector. "There really isn't any scope for them to reduce revenue," he added.
Mr. Santos Pereira argued that since the cut would apply only to new investment, it wouldn't have any significant impact on the government's budget revenue.
The plan could face resistance from other euro-zone members seeking to keep a level playing field in the region. Ireland fought to keep its low 12.5% corporate tax rate after it took a bailout in late 2010 over the objections of France.
France, which has one of the highest corporate tax rates in Europe at around 33%, has complained about low rates in other countries. But the government there is in the process of creating around €20 billion of tax breaks that will allow French companies to reduce labor costs.
Mr. Santos Pereira's plan could also stir reactions at home, since companies already doing business in the country would still pay the higher rate.
For Portugal, regaining competitiveness is important. Over the past decade, the country of nearly 11 million, Western Europe's poorest, grew an average of 1% a year as it spent most of what it produced and borrowed on building new infrastructure instead of investing on productive sectors. Labor laws that made it expensive to lay off workers and a sluggish bureaucracy and legal system, made the country less attractive to foreign investors.
Portugal is trying to fix those problems under its bailout program, but cost-cutting measures have led the country to three years of economic recession and high unemployment, which in October reached 16.3%. Bank of Portugal expects gross fixed capital formation—a gauge of business investment—to fall 15% this year after an 11% drop in 2011.
Mr. Santos Pereira, who was an economics professor at Simon Fraser University in Vancouver, Canada, before taking over the Portuguese ministry, said Portugal's economic revamping will pay off.
Changes to make the labor law more flexible and companies easier to be set up, fiscal incentives to new investment and the use of EU funds to train the Portuguese to work in export-led industries will provide sustainable economic growth, he said.
"Fifteen years ago, Germany was the sick man of Europe, and it regained its competitiveness by reforming its laws and legislation and by investing quite a lot of resources in technical training. Their model in terms of industries, exports and technical training is the model we are getting back to in Portugal," Mr. Santos Pereira said.
The government expects the industrial sector—including car-making, textiles, and even the traditional shoemaking—should contribute about 20% of GDP by 2020, up from 13% currently, and close to Germany's 25%. Portuguese exports, meanwhile, should equal 50% of GDP by then, up from 37% currently.
Despite the sharp slowdown in economies in Europe, including in Portugal's largest trading partner, Spain, the country was able to increase exports by 7.5% last year. Bank of Portugal expects a further 6.3% rise this year.
That is largely due to Portugal's growing exposure to growing markets outside Europe, including China and Portuguese-speaking Brazil and African countries such as Angola.
Mr. Santos Pereira said exports to outside the EU are growing by 30% a year, while growth to the euro area has been 1%.
"We need to continue this trend of diversifying our exports and use our common language to develop business networks," he said.
The official said Portugal continues on track to exit its bailout program by mid-2014. "We are doing whatever we can in order to maintain the course and meet our requirements in the international scene."
—Matthew Dalton and William Horobin contributed to this article.
Write to Patricia Kowsmann at [email protected]
WSJ
LISBON—The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said.
The government is in talks with the European Commission's competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview.
That would be the lowest in the European Union along with Cyprus and Bulgaria, which have blanket 10% corporate tax rates, according to consultancy firm KPMG. The average corporate tax in the EU is above 22%.
"We want to make Portugal one of the most attractive countries in Europe for new investment," Mr. Santos Pereira said. "We believe that by providing very strong fiscal incentives to new investments we will safeguard the budget side and at the same time become a lot more competitive," he added.
Portugal, which must meet strict budget targets under a €78 billion ($102 billion) bailout program established with the EU and the International Monetary Fund in May 2011, would need approval from its international creditors to proceed.
While wealthy euro-zone countries and the IMF are beginning to recognize the need for measures to boost growth in austerity-hit countries, they have been reluctant to endorse tax cuts in countries under bailout programs.
If implemented, the proposed tax cut would be a departure from a series of tax increases that countries including Portugal, Greece and Spain were forced to take as part their bailout conditions.
A spokesman for the European Commission confirmed that it is in talks with the Portuguese government over a corporate income-tax overhaul. He wouldn't say if the commission would back the proposed tax cut.
"We would want to be sure that anything proposed would help the competitiveness of the economy," said spokesman Simon O'Connor, "but at the same time it would have to be in line with state aid rules," referring to EU regulations that limit the assistance governments can give to the private sector. "There really isn't any scope for them to reduce revenue," he added.
Mr. Santos Pereira argued that since the cut would apply only to new investment, it wouldn't have any significant impact on the government's budget revenue.
The plan could face resistance from other euro-zone members seeking to keep a level playing field in the region. Ireland fought to keep its low 12.5% corporate tax rate after it took a bailout in late 2010 over the objections of France.
France, which has one of the highest corporate tax rates in Europe at around 33%, has complained about low rates in other countries. But the government there is in the process of creating around €20 billion of tax breaks that will allow French companies to reduce labor costs.
Mr. Santos Pereira's plan could also stir reactions at home, since companies already doing business in the country would still pay the higher rate.
For Portugal, regaining competitiveness is important. Over the past decade, the country of nearly 11 million, Western Europe's poorest, grew an average of 1% a year as it spent most of what it produced and borrowed on building new infrastructure instead of investing on productive sectors. Labor laws that made it expensive to lay off workers and a sluggish bureaucracy and legal system, made the country less attractive to foreign investors.
Portugal is trying to fix those problems under its bailout program, but cost-cutting measures have led the country to three years of economic recession and high unemployment, which in October reached 16.3%. Bank of Portugal expects gross fixed capital formation—a gauge of business investment—to fall 15% this year after an 11% drop in 2011.
Mr. Santos Pereira, who was an economics professor at Simon Fraser University in Vancouver, Canada, before taking over the Portuguese ministry, said Portugal's economic revamping will pay off.
Changes to make the labor law more flexible and companies easier to be set up, fiscal incentives to new investment and the use of EU funds to train the Portuguese to work in export-led industries will provide sustainable economic growth, he said.
"Fifteen years ago, Germany was the sick man of Europe, and it regained its competitiveness by reforming its laws and legislation and by investing quite a lot of resources in technical training. Their model in terms of industries, exports and technical training is the model we are getting back to in Portugal," Mr. Santos Pereira said.
The government expects the industrial sector—including car-making, textiles, and even the traditional shoemaking—should contribute about 20% of GDP by 2020, up from 13% currently, and close to Germany's 25%. Portuguese exports, meanwhile, should equal 50% of GDP by then, up from 37% currently.
Despite the sharp slowdown in economies in Europe, including in Portugal's largest trading partner, Spain, the country was able to increase exports by 7.5% last year. Bank of Portugal expects a further 6.3% rise this year.
That is largely due to Portugal's growing exposure to growing markets outside Europe, including China and Portuguese-speaking Brazil and African countries such as Angola.
Mr. Santos Pereira said exports to outside the EU are growing by 30% a year, while growth to the euro area has been 1%.
"We need to continue this trend of diversifying our exports and use our common language to develop business networks," he said.
The official said Portugal continues on track to exit its bailout program by mid-2014. "We are doing whatever we can in order to maintain the course and meet our requirements in the international scene."
—Matthew Dalton and William Horobin contributed to this article.
Write to Patricia Kowsmann at [email protected]
WSJ
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