Inflationary effects cast shadow over 15th-month proposal, inspectors warn

Inflationary effects cast shadow over 15th-month proposal, inspectors warn

The Portuguese Business Federation is back in business by proposing a 15th salary exempt from the tax office. Tax experts interviewed by JE praised the measure, but there are those who warn of possible inflationary effects.

From the risk of inflationary effects to a measure that brings “effective” benefits to workers and companies, the inspectors interviewed by JE partly disagree with the willingness of the CIP – Confederação Empresarial de Portugal to once again demand that it be allowed under OE2025: the disbursement of the 15th salary exempt from the Tax Authority. Remember that this measure ended up being distorted by the interpretation of the Tax Authority (AT).

In the previous legislative council, CIP has proposed that employers can pay the 15th month of salary tax-free.Any voluntary payment by companies for the fifteenth month, up to the basic salary received by the worker, without income tax and exclusion from the basis of contributions with regard to social security.

Remember that this measure ended up being adopted by the previous government for OE2024 but the tax authorities included this increase for the purposes of calculating the IRS rate to be paid, when the “bosses” proposed a measure that was effectively tax neutral.

Potential “inflationary effects”

Rogerio Fernández Ferreira, former Secretary of State for Tax Affairs and co-founder of RFF Advogados, highlights that this is a topic already known to the CIP and has been discussed for some time: “It seems to me to be a useful way to increase disposable income”, highlighted JE.

But despite the praise, this inspector and former government official leaves some reservations: “However, it may have some inflationary effects, and in terms of international comparisons and perceptions of income and costs associated with it, it contrasts with what happens abroad, where you get twelve or thirteen months a year (not fifteen).”

In the opinion of this inspector, “it would also be useful for workers to understand the financial effort made by those who pay, which can best be achieved over a twelve-month period and mainly in payroll with the associated costs, as is the case in France for example (salary, retention, associated costs (social security contributions, insurance and permits)”).

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Inflationary effects? “Theoretically yes”

João España, a lawyer specializing in tax law at Broseta and founder of Espanha & Associados, told JE that this measure could have inflationary effects, at least in theory: “In theory, yes. More money in your pocket leads to a greater propensity to consume, increased demand and consequently higher prices. But since the effective effect of this measure, in my opinion, would be residual, in practice it would be irrelevant from a macroeconomic point of view.

For this expert, “the opportunity is clear”: “Improving workers’ income with less financial effort. As a rule, balance sheet bonuses, due to their irregular and even arbitrary nature, are not subject to Social Security contributions (neither for the employer nor for the employee), but the IRS exemption allows them, with the same fees by the company (which can take these premiums at a deductible cost under the IRC if certain conditions are met), leaving the worker with more money in his pocket.

“The risk would be twofold: from a tax/tax revenue perspective, the company would convert part of its “normal” bonuses into this type of bonus – which seems unlikely to me, since the companies in question would have already increased their bonuses. Headcount by 5% to meet the legal requirement. From an economic perspective, it seems to me to be a pro-cyclical measure, since it would allow already established and profitable companies to compete, in attracting workforce, with companies that are just starting out or are struggling. Highlights.

Despite the advantages of this measure, João España considers that it would be “another patch” that lacks effectiveness “at any level”. For this lawyer, “a general and occasional reduction in the IRS would be much better from the point of view of fiscal policy and even public accounts (the loss in the IRS would certainly be compensated by an increase in VAT revenues, as most Portuguese people do”. He cannot even think of saving), but it would have a real and, above all, uncertain impact on public accounts.

“Effective” benefits for workers and companies

Samuel Fernandez de Almeida, Managing Partner From MFA Legal, it is considered that there are no risks in this CIP proposal, and that, as indicated by the Portuguese Business Federation, it can be translated into “effective” benefits for workers and companies.

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“There are no real risks here. What the CIP proposes – based on the current government’s model and proposal to give an exempt productivity bonus of up to six times the national minimum wage – is that it would be effectively exempt from social security contributions and for IRS purposes,” he began, referring an inspector to JE.

Regarding the way the IRS adopted the CIP proposal in OE2024, Samuel Fernandez de Almeida explained that “although the income is exempt, it is relevant for purposes of calculating the rate (and therefore adds to other taxable income and could eventually result in an increase in the IRS bracket), as applicable for tax withholding purposes in the month in which the 15th salary is paid. The impact here can be partially offset by the new withholding tax schedule.

“In the current 2024 model, there is a technically mitigated tax benefit through the potential change in size and increase in taxes on other income. The CIP program is intended to be a pure relief, with effective benefits for the worker and the company.

Regarding the possibility raised by Rogerio Fernandez Ferreira regarding the possible inflationary effects of adopting this measure, Samuel Fernandez de Almeida rejects this reading: “I have some doubts, because economic growth will be lower and the expectations of some of our partners are not so”. Which is more encouraging, especially in Germany. At the moment, inflation seems to be under control, with the ECB anticipating a further reduction in the key interest rate.

Financially, Managing Partner From MFA Legal, he considers that “it will be necessary to stop and reduce the financial strangulation on the middle class and companies”. However, this tax expert fears that “the discussion will not go beyond the IRC and IRS Jovem rate” when a series of reforms are needed, which should include a reform of the tax system. He concludes that “the political and economic situation is very adverse, either due to the lack of a stable majority in Parliament or due to budget constraints with strong pressure on the spending side”.

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“More money in the pockets of those who work”

“This is the same proposal they have already made and that PS switched to dividend distribution as long as all workers got 5% increases,” Luis Leon, inspector and co-founder of ILYA, highlights to JE.

“The fundamental issue is that for every 100 euros in total, the company spends $123.75 and the worker will receive a maximum of $89 (if they do not pay the tax authority) and can receive less than 50 (at a rate of 50.5%).” In other words, the state’s revenue is the most profitable from salary increases. The CIP proposal aims for 100% of the salary portion to go into the pockets of those who work, this specialist explained.

For JE, Louis Leon sees this as “the most likely proposal in the context of the current public accounts that would allow more money to be put into the pockets of those who work”.

When asked about the financial priorities of the next evaluation organization, Luis León finds it very difficult to understand why the Socialist Party is resisting the changes in the IRC, and even questions the commitment of the political forces that support the current government: “The IRC, during the troika, was considered structural by the PS and the PSD. Something structural cannot depend on political tactics. That is why, in my opinion, it is illogical for the PS to draw a red line with the IRC. I remember that during the troika there was an agreement between Passos Coelho and António José Seguro to reform the IRC and that there was a gradual reduction in interest rates. It was put into law. It was António Costa who tore up the agreement to become Prime Minister with the support of the BE and the PCP.

By Andrea Hargraves

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