Since local lodging was reformed into its current configuration in 2014, almost a third of total offerings have been registered and have begun to pay tax. Surprisingly, even though millions of tourists can find holiday lets online, Portuguese inspectors only manage to discover a handful of non-compliant operators. This compares poorly to Barcelona where city examiners raised €600,000 in fines in just six months. Once again, the proposed tax hike leaves cheaters untouched while penalising those who play by the rules.
Will increased tax rates raise revenues?
To the contrary, doubling assessment of local lodging will not double revenues. The non-compliant majority will retreat even deeper underground. Those recently registered may resort to partial declarations that are almost impossible to detect. Either way, higher tax rates are likely to mean lower tax revenues. Were a concerted effort made to bring on board those who have as yet to declare, income could easily double or triple. “Less is more”. Equally important, across-the-board enforcement would encourage the perception that the system is fair and that all are sharing the burdens equitably.
Local lodging is driven by the forces of supply and demand, not legislation. Owners are motivated by income potential. Taxation is at best an afterthought. The lack of affordable rental apartments is a local, not a national, problem, largely confined to the historic neighbourhoods of Lisbon and Porto. It is nothing new. For decades, landlords preferred to leave their apartments empty rather than turn them over to tenants who became the virtual owners under prevailing legislation. An alternative to punitive taxation imposed nationwide on all local lodging establishments might be targeted tax incentives in these specific urban areas.
With a population of just 10 million in Portugal, there were 36.5 million non-resident tourist overnights during 2014. Like any other country in the EU, foreign citizens entering Portugal are required to declare their presence within three working days to the Portuguese Immigration and Border Service (SEF). Many owner/operators of local lodging establishments have been caught by surprise by these reporting requirements to SEF. With the new legislation in 2014, compliance with this requirement skyrocketed, adding to the security of the country in an unstable world. A reversal in this trend will only undermine the important progress that has been achieved.
Change always creates discomfort and shakes up the status quo. It is beyond a shadow of a doubt that the start-ups of the peer-to-peer economy are a challenge for tax-collecting governments and established businesses alike. Suddenly, there is a “new kid on the block” who is operating under a different set of rules or no rules at all! However, with millions of new consumers adhering enthusiastically to innovative offerings, the basic principal of supply and demand cannot be ignored. While bureaucrats may be tempted to regulate their way into a comfort zone, a country dependent on all forms of tourism like Portugal cannot afford rash moves. Tourism is one of the few economic areas of proven results with continuing promise for further growth. Creative solutions, coupled with a healthy dose of patience and forbearance, can surely meet the legitimate needs of most, if not all, concerned without over-regulation and prohibitions.
By Dennis Swing Greene
Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.