THE Portuguese people are addicted to the motor-car, witnessed by the 250,000 new vehicles sold every year in this country.
And like many other governments, the Portuguese State is also addicted to the motor-car, as a safe and reliable source of easily collected revenue.
Compared with the problems of identifying and assessing business or investment activity in a notoriously tax-shy country, it is laughably easy to collect tax revenues through indirect taxes on the purchase and use of motor vehicles, and by direct taxes on the costs of their business use.
The hitherto severe restrictions on leasing and other forms of vehicle financing are now being relieved.
Taken in combination with changes in the market, the increasing numbers of good second-hand cars available and the increasing purchasing power of the consumer, patterns of behaviour are changing.
There has been a considerable increase in the volume of operational leasing, with a decreased emphasis on post-contract purchase at reduced residual values.
This reflects the heightened fiscal attack on resulting benefits and, perhaps, a “depersonalising” of the motor vehicle itself, the user being more interested in having a new model in 3 year's time, rather than taking personal ownership of his former company car.

Indirect Taxes
Despite having the lowest reported per capita GDP in the European Union, Portugal also suffers from some of the highest car prices in Europe.
The culprit is easily found - the much-maligned Imposto Automóvel (IA) a tax which is levied at the time of first registration, calculated by reference to a vehicle's engine capacity - the bigger the engine, the heavier the tax.
As a result, the average engine capacity of cars sold is small, with a heavy emphasis on cars in the region of 1200cc - 1600cc.
Both the sale price of the car and the IA are subject to VAT at the standard rate of 19%. Looking only at the IA element and the VAT charged on it, there is a tax burden of €2,375 for a 1200cc vehicle, €10,197 for a 2.0-litre car and €20,336 for a 3.0-litre car.
Some relief is given to take account of the reduced value of second-hand imports but this relief, in most cases, does not reflect a true level of depreciation, which may leave the Portuguese State open to litigation.
It is interesting to note the recent judgement against Finland in this matter, which employed a similar policy but was found guilty of discriminating against the free movement of goods in the European Union.
The Imposto Automóvel is a perennial subject matter for debate and proposed reform in Portugal. The proposals generally go in the direction of reducing the up-front tax burden and increasing tax costs during the life of the car.
No solution has been found, however, for the cash-flow problems resulting during the transaction period and the issue remains unresolved.
But there is some compensation for the Portuguese consumer, in the fact that pre-tax prices are among the lowest in Europe, although it is likely that increased price transparency within the Eurozone will have the effect of pushing prices towards an European average, to the detriment of the Portuguese purchaser.

VAT
The standard rate of 19% VAT applies to the purchase of all motor vehicles, as well as to spare parts, services, consumables and fuel.
In general, none of this is recoverable, except in the case of vehicles used for hire to the public or the provision of public transport services.
In the case of fuel, no deduction is available for VAT on gasoline, while 50% of the VAT on diesel may be recovered.
This, together with the considerable price differential, in favour of diesel, means that some 70% of fuel sold for use in road-going vehicles is diesel, perhaps the highest percentage in Europe.

Direct Taxes
Business
The tax provisions relating to motor vehicles have been changed on numerous occasions, each time tightening the fiscal grip on assets which are only reluctantly regarded as having a business use.
Depreciation is at 25% per annum, straight line, but applies to a maximum cost base of €30,000. For corporate tax purposes, depreciation, together with other expenses, is subject to an autonomous tax of 6%, which is always payable, even if the overall taxable income is nil or negative.

Personal Taxes
Until relatively recently, there has not been an aggressive assault on the private use of a company car as a source of tax revenue. This was, perhaps, a reflection of the high level of indirect taxes and the autonomous taxation of car expenses (above) which was tacitly accepted as a substitute for tax at the personal level.
While the private use of a car was, in principle, a taxable benefit, there has been no attempt to formulate the value of such a benefit and, in principle, no taxes have been levied.
This changed with the 2001 Annual Budget, so that a taxable benefit is now attributed, equal to 9% of the cost of the car.
For political reasons, however, a let-out clause was left in place, so that no benefit is assessed unless the employee's right to use the car is reflected in a written contract. As may be imagined, there are few cases where such a right is now reflected in writing!
As a final sting in the tail, there is now legislation intended to tax any benefit derived from the purchase of a car by an employee, at less that market value, either from his employer or from the lessor of a vehicle leased by his employer.
While the rules are complex, practical details remain to be worked out and it is questionable whether the legislation will ever result in the collection of material amounts of tax.