The tax season is over now and as the leader in filing expat tax returns, we plan to soon publish some of our insights.
However, before that, we should be addressing something that came up quite a lot during the tax season - the cost of filing a tax return.
A bit like the Tardis, Portugal is sometimes bigger on the inside. From the outside, it seems like a relatively small country, but inside, there are a few completely different worlds and it's not just the Portuguese and expats but it's also different groups within the expat community.
A little while ago, we left a post in the FB group that suggested that charging a few hundreds of Euros for a tax return is taking advantage of people and indeed, many people in Portugal are perfectly happy to do their own tax returns or pay a local accountant 30 or 50 or 100 Euros and feel that this is the right price for the task of filing a tax return. From their perspective, charging 400-700 Euros as we do (or more) is outrageous.
At the same time, not a single one of the 150 people who used us to file a tax return this year considered the price to be anything other than reasonable.
During the tax season, we did not want to engage in too much of a debate and we are aware that this could be a heated subject, but we felt that the case for paying hundreds of Euros for a tax return need to be made for the future, so we are making it here.
These are the primary arguments:
1. getting taxes right is important.
Most procedures in Portugal would let you correct errors. If you mess up a form for exchanging a driving licence or even an immigration form, you will normally have an opportunity to correct the error.
If you make an error in your taxes, you have a limited time to submit an amended return, there is normally a fine and an increased chance of an audit. If you miss the deadline, there is nothing you can do anymore.
So, getting taxes right in the first time is more important than any other administrative process.
2. Sometimes you can't get it right
Importantly, getting the taxes entirely right is sometimes not possible. The NHR has many grey areas and the form is lacking on some points. This means that there are points where rather than submitting your taxes in only one way (as is the case for most nationals), there are multiple ways and you need to run a risk assessment and understand the risk-benefit analysis of each option.
This is a nuanced and difficult exercise that needs to be understood and communicated very carefully. Local accountants will rarely be skilled in communicating nuance and possibilities even if they understand them well. Instead, they will tell their clients "let's see what happens" or "maybe it will work" which leads to anxiety and feeling of lack of control
3. Enforcement is minimal but when it happens, it is brutal
One of the reasons that very low quality services exist in Portugal is the low rates of audits. Many mistakes are never identified. Unfortunately, many mistakes lead to automatic assessments of high tax rates but some do not and these could go unnoticed for years.
However, when a case is picked up for an audit, the authorities can be very aggressive. Since we also have a litigation department, we see the cases that are picked up and have seen people receiving tax assessments of hundreds of thousands of Euros. Many if not most of the people who engage with the tax authorities after an audit end up leaving Portugal.
4. Expat taxes aren’t normal taxes. Taxes are normally handled by accountants, but expat taxes are business for lawyers or very specialised accountants.
We see this ALL THE TIME – people looking for a local accountant to submit their taxes, assuming that just because they could use any accountant in their original country, they can do the same for expat taxes and failing to understand the complexity and nuance of the NHR system.
The NHR system is so complex that each stream of income is treated differently and each source country is treated differently. US expats are exempt from capital gains on securities whilst everybody else isn’t. Canadian government pension is taxed in Portugal, whilst American and British isn’t. US board members generate foreign-sourced income, whilst British board members do not.
Filing NHR taxes correctly requires understanding Portuguese tax law, following the most recent jurisprudence and being able to read and understand complex double taxation treaties. It also often requires collaboration between a qualified professional in Portugal and one in the US, UK or another country. This means that the pool of competent professionals who know how to do it correctly is narrow.
5. Failing to read the cultural cues.
Most expats come to Portugal with expectations engrained in their culture that the person who they speak to will tell them what they know and what they don’t know and refer them if needed to someone else.
However, this is not how Portuguese service culture works.
The Portuguese professionals are very polite and avoid conflict.
They will rarely say “no” to work directly. They will take the work but if they encounter difficulties, they will normally address it by making themselves unavailable and fail to respond to messages.
Expats are often puzzled when not receiving a reply on the same day and are not sure what to do. In reality, a long pause in communication is normally an indication of a problem that is not being communicated directly.
6. A 30 or a 100 Euro fee is paid to type the form. It's impossible, even for a small local firm, to do anything more than that.
As experts in expat taxation, we are obsessed with figuring out the correct answer to every question. Some returns bring no new points but occasionally, we come across complex matters - income obtained on board ships out of territorial water, income obtained from the United Nations, income by pilots, employment income split between jurisdictions. When we do - we can spend hours researching the law and jurisprudence, we have panels of experts and external advisors and we dig in until we get to the bottom of it. Charging properly for our work allows us to do that.
What does a professional charging 30 Euros for a tax return do when coming across a complex matter? They aren't paid for research - they are paid for completing the form, so they would either disappear or make up an answer and hope not to get audited.
7. Lawyers are better when things go wrong
Lawyers and accountants can both help clients with tax returns. For normal tax returns, accountants are a sensible choice, but for expat tax return, lawyers have the edge.
The reason is that lawyers are better in dealing with grey areas and are also that they can have your back if there is a disagreement. If the tax authorities fail to accept your position, accountants would fold and refer you to a lawyer, but lawyers can take your position to arbitration or to court and continue to argue it. Having access to the judiciary allows lawyers to take bolder positions and defend them and this could be critical to tax rates.
Importantly, all advice from lawyers on tax matters is confidential, whilst advice from accountants is not. This means that the tax authorities could demand to receive a copy of the advice given by accountants, whilst they cannot do the same for legal advice.
8. Many returns aren't as straight-forward as clients think
Many people believe that their tax returns are simple and straight forward, but in reality, even pension income is tax differently depending on source and country and nearly all NHR tax return are fairly complex, certainly in comparison to a standard tax return in Portugal.
It is clear to us that many people are struggling and are not in a position to pay hundreds of Euros. We hope to offer means-based support next year. In the meantime, we urge you to read our information and guides on the site - these are all free of charge.
For other who can afford it, we hope that we have now made the case clear why it is good to be investing in doing taxes properly. We don't expect to convince everybody, but we believe that it is important to articulate our position.