Portugal - Response to BEPS

Portugal - Response to BEPS

Combatting tax evasion domestically and globally has been high on the Portuguese government’s agenda. Portugal is on board with the OECD’s Action Plan and is expected to adopt most of the OECD’s recommendations in its domestic law. In January 2015, the government approved a 3-year plan that includes over 40 measures to tackle tax evasion and address the country’s grey economy.

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Portugal

The State Budget Law for 2016, approved in March 2016, continues to reflect the Portuguese government’scommitment toward implementing the OECD BEPS Action Plan and associated recommendations. In line with other European countries, the Portuguese government’s commitment to fighting tax evasion puts special focus on international cooperation, the tax treatment of hybrids and levels of substance in holding structures.

Tax competitiveness

In addition to its focus on tackling tax evasion and increasingtax revenues, the Portuguese government is taking steps toincrease the country’s tax competitiveness, by adopting aworldwide participation exemption regime and by reducingthe statutory corporate income tax rate from 25 percent in2013 to the 21 percent rate currently in force.

The State Budget Law for 2016 introduced the followingchanges:

  • The participation exemption regime for dividends andcapital gains was amended to increase the minimumparticipation to 10 percent (from 5 percent) and to reducethe minimum holding period to 1 year (from 24 months).
  • The carry-forward period for tax losses assessed on orafter 2017 was reduced to 5 years (from 12 years).

Transfer pricing

The State Budget Law for 2016 introduced a mandatory CbyCreport in line with BEPS Action 13 for multinational groupsthat comply with specific requirements.

CbyC reporting applies for resident companies that:

  • are subject to the requirement of preparingconsolidated financial statements
  • hold or control, directly or indirectly, one or moreentities whose tax residence or PE is located inanother jurisdiction
  • have recorded in the consolidated financial statements of the last annual accounting period an amountof combined income of at least EUR750 million(where income includes sales, provision of services, government subsidies and other income), and
  • are not held by one or more resident entities that are required to submit this financial and tax information return or by one or more non-resident entities of a country with which is in force an agreement for the automatic exchange of fiscal information, that should submit, directly or through a designated entity, thesame or a similar return.

Portugal’s CbyC reporting requirements may be extended to foreign companies, namely, resident entities participated in by non-resident entities that are not obliged to submit a similar form in their country and would be subject to a similar obligation if resident in Portugal. CbyC reporting is also required where the non-resident participating entity is resident in a jurisdiction that hasnot entered into an agreement for the automatic exchange of fiscal information with Portugal.

The information to be reported includes, among others, the allocation of income between related and unrelated entities, taxes due and paid, as well as specific economic indicators and a list of the main activities carried out by companies of the multinational group. Penalties apply for failure to prepare the CbyC report.

The local rules do not set any requirements or recommendations that cover, for example, the sources of information to be used to fulfill CbyC reporting or the approach that might be followed to reconcile differences in accounting policies.

As part of its continuing efforts to boost transparency by international companies, Portugal has signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbyC reports. The MCAA enables the consistent and swift implementation of new transfer pricing reporting standards developed under OECD BEPS Action 13, and it ensures that tax administrations can understand how multinational enterprises structure their operations while safeguarding the information's confidentiality.

Unilateral BEPS action to date

When the final BEPS Actions were released in October 2015, Portugal had already enacted several unilateralanti-BEPS measures, namely:

  • earnings-stripping rules to limit interest deductibility basedon EBITDA levels
  • denial of the participation exemption regime wherethe dividends received give rise to a deduction forthe subsidiary
  • an obligation to disclose aggressive tax planning schemes.

This work has continued, and some additional concerns were addressed in the State Budget Law for 2016.

For example:

  • authorization for the Portuguese government to change its current patent box regime (introduced in 2014) in line with the modified nexus approach recommended under BEPS Action 5
  • authorization to transpose into Portuguese law the EUDirective 2014/107/UE regarding automatic exchange oftax information and to establish a regime to exchangeinformation under the Common Reporting Standard (CRS).

Exchange of tax rulings

Some international companies in Portugal are concerned about the implications of the EU proposal to introduce the automatic exchange of information between member states on their tax rulings. Currently, Portuguese tax rulings and APAs are confidential and binding. Rulings are only made public on an anonymized basis if the same issue is ruled on more than three times.

Companies that have received unilateral rulings in Portugal could face the exposure of sensitive tax information if the EU proposal proceeds. This development, combined with changes in the transfer pricing rules, highlights the importance of reviewing existing documentation to determine and address any potential exposure to tax risk.

These concerns have significantly increased since the OECD released its report on BEPS Action 5, considering the transparency measures and the prospect of global automatic exchange of information of tax rulings and APAs.

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