“What scares international investors when they look at Portugal is not knowing what to expect”

Tax simplification and tax reductions , particularly for companies, are some of the promises of the current government led by Luís Montenegro. These measures are relevant and feasible for José Carmo, a partner at the audit and consulting firm Carmo e Cerqueira , given that the current "more stable majority on the right" represents "an opportunity unlike any we've seen in many years."

However, these measures are not sufficient to support the Portuguese business community and promote the country as a destination for international investment. The head of the audit firm, whose clients include Ibersol, Iberdrola, Sonae, and the Violas Group, believes that measures must be adopted to capitalize national companies, while also ensuring political and legislative stability to maintain foreign investors' interest in Portugal. "You can't change the rules of the game halfway through," warns José Carmo in an interview with EContas.

What is the impact of constant political changes in the areas of taxation and auditing?

We have different levels of taxation. We have taxation that essentially affects taxpayers and domestic companies. And we have taxation that affects foreign investors. It's crucial to reduce the tax burden, but it's also crucial to give investors the certainty that they know what they can expect.

How do these political and tax changes affect foreign investors?

Foreign investors aren't as concerned or affected by tax levels. Naturally, lower tax rates will lead to higher returns. But, at the end of the day, for an international investor deciding to invest in Portugal, taxation is just a line item in the business plan. From their perspective, stability is much more important. In other words, what they want to know is that they'll pay a certain amount at the end of the day. This way, they can calculate their profitability and, ultimately, understand whether or not investing in a country offers an economic advantage. For these investors, what can't happen is the constant uncertainty that has been seen in Portuguese legislation, with rules changing midstream.

For example, we have investors who invested in real estate convinced they were investing in an area that met the criteria for 6% VAT, but in real estate, VAT is a cost. And suddenly, after making that investment, they discover they're actually in areas where the VAT is 23%. This 18 percentage point variation between the rate they were expecting and the rate they'll actually pay is the difference between a profit or a loss on the deal.

It's very important to reduce the tax burden, but above all, it's important to give investors the certainty that they know what they can count on.

Does this scare away foreign investors?

Exactly. What scares international investors when they look at the Portuguese markets is, above all, not knowing what to expect. There were also several investments and requests underway, and suddenly the rules for local accommodation changed. Once again, these are issues that affect the ecosystem in which the foreign investor is investing. Even with changes in government, there are fundamental issues that naturally need to be negotiated and agreed upon between the parties.

Simplification is possible and desirable, even to attract more foreign direct investment and boost growth. This investment isn't just in real estate. Many entities are looking at companies in Portugal for acquisitions and expansion. The footwear sector, for example, is desirable in the eyes of international investors. Now, they need to ensure there's some stability, particularly in legislation—not just tax, but also labor.

And how can national companies be supported?

In the case of domestic companies, there's constant talk of corporate capitalization. I can't create incentives against this. Taking advantage of the more liberal, right-wing ideology, this is an opportunity to revisit corporate capitalization measures , both fiscally and non-fiscally. We can reinstate a measure that existed in the past, which involved exempting or reducing taxation for investors who invest in company shares and participate in capital increases, for example. These types of measures must be created.

Is it possible to negotiate these measures between parties, considering the change in the governance structure?

It's more difficult today because the governing body has changed, but there should be better coordination among the governing parties . In 2013, a reform of the Corporate Income Tax (IRC) was initiated with an agreement between the PSD and CDS, which were in government at the time, and also the PS, still led by António José Seguro. The PS was part of this working group precisely to ensure that the measures would last beyond the government's term; in the case of the PSD and CDS, they did not win the elections. What is certain is that as soon as the PS won the 2015 elections, the IRC reform was immediately shelved, and other measures were taken.

It's an opportunity to revisit corporate capitalization measures. We can reintroduce a measure that existed in the past, which involved exempting or reducing taxation for investors who invest in company shares and participate in capital increases, for example.

Taking advantage now that there is in fact a more stable majority on the right, or at least a more stable majority in terms of the number of votes, it is possible to implement a set of reforms, particularly in a more structural way, which will then prevent – ​​because there is a very high possibility of agreement – ​​any future backtracking on all these measures.

It is more stable in dimension, but that does not necessarily mean that there are understandings…

If we look at the electoral programs and the nature of these political parties, reducing the tax burden was common across all of them . This will also require some simplification of the tax process, otherwise it will be impossible. From this perspective, there is an opportunity, unlike any we've had in many years, because more than two-thirds of Parliament—including the Liberal Initiative—has this simplification in its agenda. We're not talking about turning the country into a haven of economic debauchery. We're talking about making the country more efficient, more competitive, and more attractive.

How can this simplification be done?

The Corporate Income Tax (IRC), for example, is overly complex. It's a system that aims to tax profits, but then has a set of exceptions and situations that aim to reduce that taxation. There's an opportunity here to clarify a number of aspects, particularly those that are more right-wing and that favor investment and businesses, thus increasing their competitiveness. This could be a good opportunity to simplify the IRC code. The Liberal Initiative has proposed a measure to implement a flat tax that taxes all income, not just business income, at a fixed rate. It would end up being much simpler, much easier to monitor, and we would be able to guarantee tax revenue.

Is this a measure you would like to see implemented?

I don't think it's possible, either through the PSD itself, which has a more social slant, or through Chega itself, which doesn't have as liberal a stance as the IL or some wings of the CDS. I think there's still a long way to go to get here, but that doesn't mean we can't simplify and streamline processes, as is the case, for example, with autonomous taxation.

Should autonomous taxation be eliminated?

Eliminated or adjusted to what is actually fair. Now, having a standalone tax rate of 35% is perverse.

What should be the role of the Tax Authority (AT) in this simplification?

The AT should simplify and standardize. Then, the tax authorities' image needs to change. Tell me if you know anyone who receives a letter from the tax authorities at home, even if it's just to give them the access code via CTT, don't panic. The general public doesn't perceive the state as a good entity.