Corporation tax as an investment stimulus

The Portuguese Government is putting forward a reduction in the corporate tax rate as an urgent and necessary economic stimulus. Once again they are way off the mark.

What they are looking for is international investment, so Portugal needs to be competitive on a fiscal level, even if not when it comes to productivity. Once again, this is a public relations exercise. One big investor may bring 1,000 jobs, only to close and move on to the next cheapest country that appears, but brings a huge amount of short-term benefit to the Government.

The biggest taxpayers in Portugal are the fat cats, quoted companies, some with serious managers, mostly backed by ex-politicians and their cronies. Bringing the corporation tax rate down will principally benefit these companies, their shareholders and management.

However, the politicians are forgetting (again) the small and medium-sized companies that employ the vast majority of workers. The tax and burocratic burden on those companies is huge, with Social Security, monthly, quarterly and annual reporting requirements that continue to multiply. These companies actually pay very little corporation tax due to the difficulties of even breaking even in the current economic climate, so there is no benefit to them from reducing the tax rate.

In fact the small and medium companies pay tax regardless of their profitability. Firstly there is the legalised robbery of the Special Payment on Account that must be paid regardless of profitability and cannot be set off against the company's tax charge except if the company makes significant profits. So why call it "payment on account"? Secondly, the companies must pay tax on their motor expenses and other disguised staff costs, a charge that is doubled if the company is loss-making. This reflects the tax authorities total incapability to make sure that these benefits are taxed in the hands of the employee, which is foreseen under the tax law but never happens.

So how to stimulate the economy using corporate taxation measures? Reduce the punitive taxation on small and medium companies. Inspect companies that have the highest disguised staff costs and oblige them to declare the benefits properly, thus raising income from personal taxation. This will benefit companies across the board while only affecting the tax paid by higher earners (another politically correct move).

I'm available to join the inspection team!