I’ve been asked a question. It’s an old one. Those of you who have been reading my material for some time will know my views on buying homes abroad, and especially holiday homes. But what about businesses?
I’ve been asked whether it’s a good idea to buy a property (or two properties) in the Lisbon area. The problem with this is that every deal is unique, but let me throw out a few questions, and make a few observations.
First, I would be very wary of starting any business in the eurozone at this time. You may be successful, but it is a time to be wary. You would need to check out how similar businesses are going, and what the competition is. Is there room for more? In my experience there is very little room for many traditional businesses. The way to find out is to rent somewhere for three months and wander round the businesses and see for yourself how they are doing.
The second thing to look at is the business climate. Some countries are pleased to see you. Panama is one, Singapore is another. There are good places to work in. You dont even have to work in Singapore. How about KL? Dont want to go so far? Then why come to Portugal? There is an anti-business climate here.
You should go where the tax structure favours business ventures, especially start-ups, which is why I mentioned Panama. Check it out. Portugal has a tax structure that seeks to close down businesses.
Let me show you something very simple which will show you what I mean. Tax structures are put in place to do one of two things. The first is to bring in enough money to fund government expenses. The second is used to discourage some activity. Tobacco is taxed highly, ostensibly to discourage users. Certain activities are taxed heavily because they pollute, and so on.
However, let’s have a look at how Portugal’s tax system works. A small business is heavily taxed, and the level of purchase tax (IVA) is punishingly high at 23%. At that rate it is set to discourage the purchase of goods and services. This will tend to depress the manufacture of goods and the provision of services, and so the economy will contract. That is apparently what Portugal’s government wants. Is that the kind of business environment you want to enter?
Let me explain how revenues are usually collected. All taxation is primarily based upon the maximising of revenues. This is done by using a bell curve model and test taxing. A bell curve is a mathematical structure which looks like a pregnant woman, or a guy with a beer gut, viewed sideways. In other words we have a straight line to the right, and a curve to the left. The curve starts at 0 at the top and ends at 0 at the bottom. Each of these points represents the collection of zero tax.
What any government seeks to find is what is called the sweet spot, the band where most tax is collected, the fattest part of the curve, or the furthest extent of that beer belly. When you find that region you keep your tax levels close to that point. If you move away from that band you will automatically get less tax. So, if you raise taxes it means either of two things. It either means you haven’t found the sweet spot yet, or that you want to decrease the tax take for some reason, or, alternatively, seek to depress that particular market.
Portugal has decided to make its tax system punitive instead of productive. It has moved away from the sweet spot. There will therefore be a lower tax take, and people will be discouraged from making money. That’s not a good environment in which to start a business.
It doesn’t mean you wont be successful, but it does mean there are head winds to cope with.
There are other points to make on this subject, but I’ll come to them next week.