Portugal promises tax-friendly regime

http://www.theguardian.com/business/economics-blog/2013/oct/22/portugal-tax-rate-business

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Portugal, like Ireland, resembles a middleweight boxer after a diet. According to the normal economic rules, it should be fighting lower down in the featherweight division, but the politicial elite is convinced the country need only drop one division, not three. With so much muscle wastage, Lisbon knows punching anything near its former weight will be difficult. So it's time for steroids. This comes in the form of international investment and exports.

Portugal's economy minister António Pires de Lima is touring Europe and the US to drum up business and win the favour of global firms, promising a tax-friendly regime. Among a range of tax credits and cuts to red tape, he wants to reduce corporation tax to somewhere between Ireland's 12.5% and the UK's objective of 20%. By 2016, Portugal hopes to be at 17%.

Could Lisbon be joining a tax race to the bottom? De Lima says he had no choice but to reduce a headline corporation tax rate that was one of the highest in Europe. But as he said on Monday, the headline rate is just the start. A multinational looking for a base in Europe's periphery could avoid tax altogether once Portugal's other tax write-offs are deployed.

This capitulation before the rampaging needs of capital is a depressing development. Tax is no longer something big companies will tolerate paying. Those that still pay believe they are mugs, or at least their investors think so.

The pattern is repeated across the Mediterranean in Turkey, where its vast expanse of free zones allows multinationals to manufacture and export without paying tax. Only national insurance applies. Ankara goes so far as to allow employees zero income tax if they work for major exporters. Portugal has not gone that far. A 20% flat income tax rate is the top offer for exporters.

Like Ireland, Portugal must nod to the requirements of Brussels and its paymasters. The Germans in particular are sensitive to countries low-balling for business. The SPD opposition has made then crackdown on Ireland's tax concessions explicit in its terms for a coalition with Angela Merkel's CDU. The Portuguese, in not following the Irish example, appear to have done enough to avoid Berlin's gaze.

Yet Portugal needs Berlin to pay attention as its bailout ends next summer. Growth will barely reach 1% in 2014. The country will still be going backwards should the private markets insist on charging a premium for loans. The yield on Portugese bonds, which is a proxy for the interest rate Lisbon must pay, is still above 6%. It could fall to 4% by next June if all goes well. But that leaves a gap and a growing debt pile. Only with a big Brussels backstop, the kind that promises emergency loans and liquidity via the European Stability Mechanism (ESM), can there be any hope of growing faster than the debts accumulate. Another plank of the SPD's negotiation is a desire for Berlin to support growth in the eurozone. An SPD/CDU coalition could put in place all the pieces of the jigsaw Portugal needs to escape recession and punch above its weight. The only problem is that big business will reap most of the rewards.

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