NEWSLETTERS

Tax Planning

ABUSIVE TAX PLANNING?
"Legitimate tax planning consists of a technique of reduction of the tax payers tax burden by which he renounces a certain action as this may lead to a certain taxable obligation or, he chooses between several options that are open to him within the law, the one that, by the intended action or omission of the tax legislator, creates less tax burden for him. Illegal tax planning consists of any action resulting in an undeserved reduction, by contradicting with the tax legislation principles or rules of the tax obligation of a certain tax payer."

With apologies for adapted translation to Prof. Saldanha Sanches in "Os limites do Planeamento Fiscal"

ARTICLE 38º 1. (----) "2. Any acts or juridical business are ineffective tax wise when they are essentially or mainly directed, by artificial or fraudulent means, and with abuse of juridical concepts, to the reduction, elimination or deferral of taxes which would be due as a result of facts, acts or juridical business with a similar economical purpose, or the obtaining of a fiscal advantage that would not be obtained, totally or partially, without the use of such means, resulting in tax being levied according to the applicable rules in its absence and not producing the above mentioned fiscal advantage." In, Lei Geral Tributária

Within the ambit of existing legislation concerning Money Laundering, a number of new laws have been enacted.

Amongst these changes we find lawyers and solicitors’ obliged to maintain in their files sufficient information identifying their clients under the terms of Law number 11/2004 of 27th March – regulating the prevention and repression of money laundering of funds with illicit origin.

As with other European Union countries, Portugal has legislated to combat tax evasion and the latest change is with Decree Law number 29/2008 of 25th February which attacks tax fraud and evasion.

This Decree Law proposal was highly criticised and contested by several sectors namely the Bar Association (see Opinion “Parecer” 27/2007 of 15th October) economists and tax experts of national recognition.

The new legislation is applied to almost every single tax or duty (IRS, IRC, VAT, IMI, IMT and Stamp Duty) and obliges the promoter of a tax planning scheme and to the beneficiary of such planning as well (depending on the specific situation) the obligation to disclose details of the scheme within a certain period subject to a fine in the event of non co-operation.

The law identified “abusive tax planning” as the objective to reach and attack. However, if this objective is designated in Art. 1, it rapidly dropped its adjective “abusive” and we remained with the phrase “tax planning” alone throughout the rest of the document.

Under the terms of this law, it is considered "tax planning, any scheme or act that reaches, or it is expected to reach, in an exclusive or predominant manner, the obtaining of a fiscal advantage by the tax payer".

But it will be qualified as abusive when it is designated as such by the General Tax Director, who, will then include and describe it in a webpage of the Internet (as per article 15 of the same diploma).

If the law determines in this wide way what is “tax planning” it fails to do so towards what is regarded as "abusive".

In that planning concept it will embrace all the activity of a qualified accountant (TOC - técnico oficial de contas) or of an auditor (ROC -revisor oficial de contas) or even that of a book-keeper. In this legislation perspective it could include, as tax planning, a Retirement Pension Plan (PPR) that the ordinary might adopt with intention to plan for his future and also reduce his taxable income (IRS) as payments into such a plan may be offset against the income of the individual – this under the terms of article 4 (1) (c) of the law, which would make the obligation of reporting such a scheme fall on the promoting institution.

As a primary target it is, as always, the entities with head office in a territory designated as a preferential tax regime defined in bylaw (Portaria) 1272/2001 of 9th November –normally known as Offshore Companies. Essentially, in the case of a mere intervention, whatever the situation, of a company with head office in such an offshore territory listed in the bylaw, the duty of communication exists immediately – its breach or non- compliance, will subject the promoter or the beneficiary to fines ranging up to 40.000 Euros under the terms of Art. 17.

The law defines “promoter” as the entity that, resident or established in Portuguese territory (which also involves corporate forms such as permanent representations) which, regardless of payment or otherwise, supplies services of support, consultancy counselling, and similar activities in respect of tax matters. It is also designated, as specific examples the ones that are considered as promoters by the law:
A)	Banks and credit/financial institutions
B)	Auditors (ROCs)
C)	Lawyers and solicitors
D)	Accountants (TOCs) and others that provides accountancy services

In some cases the duty of communication does not exist. Such is the case of lawyers and solicitors when in the evaluation of a juridical situation of their client (under the terms of Art. 6 (1). For all of those who have a Professional duty of secrecy (Art 87 of the EOA – Bar Association Regulation - in the case of lawyer) that duty ceases under the terms of Art. 11 of the new law.

The obligation of disclosure is on the beneficiary of the tax planning in the cases mentioned in article 10 – this being whenever there is either no promoter involved, or the promoter is non resident. The beneficiary in these cases will have the duty to disclose whenever it is a corporation (with legal existence or not), or an individual in all situations in which an offshore company is involved or when a totally or partially exempt entity intervenes.

This law will enter in force on the 15th May 2008 and will be applied to all tax planning schemes that are under execution or that are proposed from that date onwards. The law does not establish however what are in fact “schemes under execution” as, by definition, all tax planning schemes should be of long term execution, obtaining the advantages during a long period of time – in such a concept this could involve all schemes proposed 10 or 20 years ago and that are still under execution.

The aim of this legislation is to compile a data base with all tax planning schemes (please note that it does not define abusive schemes but only schemes in general) in order to, based upon on the disclose made by the promoters or on the self-disclosing of such mentioned schemes, to reach a better and more effective legislation in the fight against tax evasion. ´

Whether the current administrative structure is able to cope with the submission of thousands of tax planning schemes, only time will tell, but what is of concern is the lack of legislative definition of what actually is abusive and aggressive tax planning – this law goes to the point of defining some of the concepts, escaping completely though, to what is in fact the aim to be reached – the so called abusive and aggressive tax planning.