Portugal - Politics, government, and taxation

For much of the 20th century, Portugal has been ruled by an oppressive right-wing dictatorial regime and has maintained, often by force, control of its large colonial empire. In 1974, Portuguese revolutionaries initiated broad democratic constitutional reforms. In 1975, the country granted independence to its African colonies— Angola, Mozambique, Guinea-Bissau, Cape Verde, and São Tomé and Príncipe. Its constitution was further amended several times, most notably in 1992 when the treaty that created the EU, known as the Maastricht Treaty, was ratified, reflecting the new political and economic conditions of a united Europe.

The political system that emerged from the democratic reforms in the 1970s is parliamentary, with the role of the president being largely ceremonial, although certain reserve powers are also vested in this institution. The president is directly elected for a term of 5 years by popular vote and a person can hold the office for a maximum of 2 consecutive terms. In the Portuguese executive branch, the leadership role of the prime minister is much more important. The prime minister is the head of government and is elected by parliament on a motion by the largest parliamentary party or coalition.

Legislative power is vested in the unicameral (one house), 250-member Assembleia da Republica (parliament). Members are elected for terms of 4 years by proportional representation , but elections can also be called by the president at an earlier date (the next parliamentary election is due in October of 2003). There are 20 constituencies (electoral districts) in Portugal and the electorate chooses between numerous competing party lists.

The most influential Portuguese political parties include the center-left Socialist Party (PS), the center-right Social Democratic Party (PSD), the Communist Party (PCP), and the conservative Popular Party (PP). The PS returned to power in October 1995 after 10 years in opposition and was reelected in October 1999 with 115 parliamentary seats—not a majority, but significantly more than any other party. Its major dissent on economic policy with the PSD (81 seats), the main opposition party of the PS, is the greater stress that the PS places on social welfare spending. Both parties support a market economy, privatization , and European integration. The PCP (17 seats, in coalition with the smaller Green Party), which used to be the most effective party in clandestine (secret) opposition to the dictatorship before 1974, is one of the few remaining hard-line leftist parties in Europe. The PCP still advocates an extensive role of the state in the economy. Its once strong base in the industrial suburbs of large cities and the rural south was weakened during the 1980s and 1990s as the economy improved and poverty diminished radically. The PP (15 seats), previously known as the Center Democrats (CDS), underwent a number of transformations in the 1990s. These were accompanied by acute internal crises, and the party finally emerged in the late 1990s as the voice of the new right, holding a populist and anti-European stance.

In January 2001, the socialist president, Jorge Sampaio, was reelected with 55.8 percent of the popular vote, but roughly a year into its second term, the PS government, led by socialist Prime Minister Antonio Guterres, came under controversy. The economic climate was deteriorating, GDP growth was expected to slow from 2.7 percent in 2000 to 2.3 percent in 2001, and acute budgetary disputes and depressing corruption charges plagued the government. Another major confusion was caused by the findings of the of the long-running "Camarate Affair" investigation into a 1980 plane crash that killed the then Prime Minister Francisco Sa Carneiro of the PSD, as it is now widely believed that Sa Carneiro was in fact deliberately murdered.

The government's role in the economy became very significant in the decade following the 1974 revolution. One of the chief results of the upheaval was the takeover of many important industries by the state. Following its joining of the EU in 1985, however, Portugal adopted, partly as an adjustment measure, an active privatization program aimed at making the public sector more limited and more profitable. As a result, the Portuguese public sector accounted for 19.7 percent of GDP and for 5.5 percent of the country's total employment in 1988, and by late 1997, the numbers had been further reduced to 8 percent and 2.6 percent, respectively.

The privatization of state companies has been generally very beneficial for the country. The approaches towards accomplishing privatization have been quite varied, including selling shares in selected companies through a public stock offering in the capital markets, private sale, or often by using both methods combined. On a number of occasions, however, the government has kept a controlling share for itself that gives it the right to overrule strategic corporate decisions in the privatized companies. From 1989 to 1998, approximately 150 sales involving the shares of nearly 100 companies generated proceeds of more than US$21 billion, and 52 percent of the revenue was used for the repayment of existing public debt.

In 1998, 58 percent of the total market capitalization in the Lisbon Stock Exchange (BVL) was accounted for by the market capitalization of these privatized firms. In addition to some further expected sales of the stock of state-owned companies such as the telecommunications firm, Portuguese Telecom (PT), and the electricity company, Electricidade de Portugal (EDP), there are other major state firms still in the initial stages of privatization. These include the state airline, TAP, and a new energy holding company that combines the government's interest in petroleum refining and natural gas transmission.

In taxation, the government is trying to bring the Portuguese system closer to those established in other EU countries. A major reform of direct taxation took place in 1989 to that effect, but it was widely believed that occasional gaps remained between the law and its actual enforcement practices. The 1989 tax code defined taxable income as the profits of firms involved in commerce, industry, or agriculture. All income gained by local companies abroad is taxable, but tax liability may be cancelled or decreased by various tax treaties. The income of resident corporations and branches of foreign (non-resident) companies is taxable at a rate of 32 percent. The actual tax rate in many regions of Portugal is in fact 35.2 percent because some local surcharges exist, usually at a rate of 10 percent of the base tax.

The government intends, however, to cut corporate taxes by nearly one-eighth before 2003, and companies with revenues of less than Esc100 million would be granted even more preferential treatment. The introduction of the value-added tax (VAT) in 1986 helped the tax authorities detect and prevent widespread tax evasion by individuals and companies who were still plaguing the economy at that time. Tax evasion has been further reduced since the government was forced to dramatically improve its tax collection efficiency and to reduce its budget deficit without introducing new taxes. The government was forced to do this in order to qualify for the requirements of the EMU in 1998. A 20 percent advance tax is applied to all payments by businesses to independent contractors and all self-employed individuals with an annual income of Esc2 million or higher.

Portugal has an external debt estimated at US$13.1 billion in 1997. The debt is not considered disproportionate or burdening for the economy, and Portugal handles its financial obligations properly.

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