Madeira: Executive Summary

Madeira Executive Summary

Madeira is well located off the EU and Africa

Madeira is a small group of islands 1,000 km from Portugal and the African coast; 314 sq km accommodates around 268,000 people (March 2011) and many more tourists in season due to good scenery and a sub-tropical climate. The capital Funchal has an international airport well connected to European cities. The time zone is GMT. Madeira is part of Portugal and the EU; the language is Portuguese, although some English is spoken. The legal system is based on the civil code.

The Madeiran government has a good degree of autonomy from Portugal, but most legislation is Portuguese, including tax legislation. The economy is based on tourism, fishing, farming and financial services. As a peripheral and poorer region of the EU, there is considerable EU funding to support development, which can assist inward investment. The currency is the Euro.

Portuguese taxes are on the high side, given its rather low level of economic achievement, but the Portuguese government, with the agreement of the EU, created an International Business Centre on Madeira which until 2001 offered offshore status and very low taxes to manufacturing, service and financial companies, as well as a shipping registry. In late 2002, the EU approved an extension of the scheme, but this excludes new financial services companies. The scheme was extended in 2007.

The Free Trade Zone in the International Business Centre has been quite successful, unlike some such ventures. VAT applies in Madeira at a slightly lower rate than for the rest of Portugal.

Portugal has been careful and clever in developing Madeira's offshore economy. Given that the EU has approved every stage of the process, Madeira's tax advantages had faced little threat from the 'harmful tax practices' initiative until recently. Portugal has a large network of double tax treaties, and these can be used alongside the International Business Centre to obtain a very low tax burden for many types of trading and commercial activity. In addition, Madeira is covered by the full array of EU legislation against money-laundering, and is not known to be a target of criminal activity.

There were some concerns about the support of the Portuguese government for the MIBC during 2001, but the government elected in 2002 was dependent on Madeiran MPs for its majority.

Lately it has all gone wrong. Under-reporting of Madeira's public deficit over a number of years led to a debt burden of more than EUR6.3bn, and a bail-out from the Portuguese government totalling EUR1.5bn in early 2012, meant that Madeira's government had to agree to implement spending cuts and tax increases. Corporate income tax was raised from 20% to a rate of 25%, putting it in line with the rest of Portugal. Personal income tax rates on Madeira were also aligned with those on the mainland. VAT was increased from 16% to 22% from April, 2012, the number of public sector workers is to be reduced and those that are left will see a reduction in their 13th and 14th month salary payments.

It now seems all too probable that Madeira's low-tax industry will be hollowed out.

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