Portugal - Response to BEPS

Portugal - Response to BEPS

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. With an election pending in October 2015, current legislative proposals on transfer pricing are on hold. But whatever party wins power, the incoming Portuguese government’s support for the OECD project is not likely to change.

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Combatting tax evasion domestically and globally has been high on the Portuguese government’s agenda. 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. According to Portugal’s Ministry of Finance, its previous 3-year plan to fight tax evasion supported a 6.2 percent increase in tax revenues between January and November 2014.1

Boosting tax competitiveness

Steps are also being taken to increase the country’s tax competitiveness. At the beginning of 2014, Portugal introduced a corporate tax reform package that, among other things, decreased the headline corporate tax rate to 23 percent.

Within this corporate tax reform package, it was also determined that the corporate tax rate should be further decreased, to 21 percent for 2015) and to between 17 and 19 percent for 2016 (subject to analysis by a special commission convened to study the tax reform package).

Other incentives passed as part of this reforms are an extended participation exemption and a new patent box:

  • Portugal’s participation exemption regime for dividends and capital losses, previously only available for dividends from Portugal, Portuguese-speaking African countries or EU countries, was extended to all countries, excluding tax havens, provided some requirements are met (including a minimum 5 percent participation for at least 2 years in the payer company).
  • Under the new patent box regime, income derived from patents and other certain intangible assets registered after 1 January 2014 is only taxable on 50 percent of its amount (subject to certain conditions).

Both of these mechanisms were designed with the OECD BEPS discussions in mind, and they are somewhat less aggressive than equivalent regimes in place in other EU countries.

Transfer prices under scrutiny

Measures to strengthen Portugal’s transfer pricing regime are being discussed, but they are unlikely to be enacted until after the country’s national elections are held in October 2015 and the OECD’s BEPS recommendations are finalized. In line with the OECD’s proposals, Portugal’s draft transfer pricing rules would aim to provide for (among other things) stronger mandatory documentation requirements.

KPMG in Portugal understands that the CbyC report itself will not result in an increase in tax assessments. However, it is expected that their use as an audit tool may increase as the Portuguese transfer pricing regime evolves.

While current proposals remain on hold, the Portuguese tax authorities have increased their scrutiny of transfer prices under existing rules. In 2012, the tax authorities established a ‘large taxpayers unit’ with the goal of increasing the control and inspection of corporate groups concerning transfer pricing issues. Recently, the tax authorities have been reviewing more complex issues, with special focus on, for example, IP restructurings and on complex financing structures involving entities in Belgium, Luxembourg and the Netherlands.

Unilateral BEPS action to date

Although Portugal is generally waiting for the OECD’s work to be completed before proposing related BEPS reforms, the country has enacted several discrete BEPS-related measures over the past few years. For example:

  • A new legal framework for online gambling and betting came into force on 28 June 2015, with the purpose of establishing a legalized online gambling market in Portugal.
  • On 29 January 2015, the Portuguese government released a Strategic Plan to Fight Fraud and Tax and Customs Evasion for the period 2015-2017. Under this plan, the government intends to:
    • Increase the number of APAs to ensure predictability in the tax treatment of certain transactions.
    • Apply the transfer pricing rules for VAT purposes to transactions between related entities (subject to deduction rights in different rulings), in order to avoid abusive request for tax credits and reimbursements.
    • Evaluate current transfer pricing policy, particularly regarding international transactions and payments to related parties based in countries with more favorable tax regimes.
    • Increase the number of technicians assigned to the Portuguese Tax Authority’s transfer pricing team.• As part of the 2014 tax reform, Portugal tightened its CFC rules.
  • In 2013, Portugal adopted broad new earnings stripping rules limiting the tax-deductibility of interest on financial costs.
  • Portugal refined rules introduced in 2008 that require the disclosure of participation in certain aggressive tax planning schemes.

Disclosure of tax rulings

Some multinational 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 advanced pricing arrangements 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 tax risk.

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