Portugal plans gradual company tax cuts to revive economy

LISBON Tue Apr 23, 2013 1:21pm EDT

Portugal's Economy Minister Alvaro Santos Pereira speaks during a news conference in Lisbon April 23, 2013. REUTERS/Rafael Marchante

Portugal's Economy Minister Alvaro Santos Pereira speaks during a news conference in Lisbon April 23, 2013.

Credit: Reuters/Rafael Marchante

LISBON (Reuters) - Portugal's government plans to lower company tax rates "significantly" as part of a wider plan of incentives to drag the economy out of its worst recession since the 1970s, Economy Minister Alvaro Santos Pereira said on Tuesday.

He also promised to step up the financing of the economy by state-owned bank CGD that will provide 1 billion euros this year and 2.5 billion in 2014, and later to create a development bank to boost such funding further, especially for exports-oriented small and medium-sized companies.

"We want more investment and the main instrument here is the reform of the company tax that we intend to carry out via a significant decrease in tax rates to make investment more attractive," Santos Pereira told a briefing.

The company tax rate in Portugal is 24 percent.

The plan partially reflects recent concerns among European policymakers about how far budget cuts aimed at containing the region's debt crisis have damaged economic growth, although Lisbon has promised to press on with budget tightening.

Santos Pereira said the plan should lift the share of exports in its gross domestic product to 50 percent by 2020 from this year's estimated 40 percent. Despite the recession, exports of goods and services have been rising in the last two years, making up one of the few bright spots in the Portuguese economy.

Annual GDP growth potential is expected to rise to 2 percent in 2020 from an average 0.7 percent in 2000-2010, before the country slid into its deep recession. The economy is expected to shrink 2.3 percent this year after last year's 3.2 percent slump before returning to meagre growth in 2014.

SPENDING CUTS TO CONTINUE UNDER BAILOUT

"Although significant, the tax decrease will have to be gradual because we don't have the financial conditions to make a very swift cut," Santos Pereira said.

The government has already said earlier any plan of economic incentives would not compromise budget goals agreed under its international bailout so that Lisbon can end the rescue program as planned by mid-2014 and be able to rely on debt market financing.

Last week, the government approved new spending cuts to put the budget agreed with the European Union and International Monetary Fund back on track after the country's constitutional court rejected parts of this year's plan.

The tax reform and other measures will still have to be discussed with employers, unions and the opposition. Santos Pereira did not provide further details of the planned tax cuts.

"It is fundamental that we have a social consensus to define what the magnitude of this decrease will be over time," he said.

Santos Pereira has previously suggested that the company tax rate could be lowered to around 10 percent for companies carrying out new productive investment. Such a cut would make the rate one of the most competitive in Europe, but it would also have to be agreed with Brussels.

Fellow bailed out nation Ireland has defiantly defended its low 12.5 percent corporate tax rate from EU-led attempts to enforce a hike, but some analysts suggest Portugal's austerity efforts amid the recession may now be rewarded by Brussels that could allow lower corporate taxes under certain conditions.

The growth plan is also aimed at trying to win back a broad political consensus for the EU/IMF bailout after the main opposition Socialists refused to back any more austerity.

The coalition government has a comfortable majority in parliament, but Lisbon's lenders want broader support to give the reforms a better chance of long-term success. The Socialists have so far ruled out any consensus unless the government abandons new spending cut plans.

(Reporting By Andrei Khalip and Filipe Alves, editing by Shrikesh Laxmidas, Ron Askew)

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