Feb. 13 (Bloomberg) -- For as long as she can remember, Portuguese pensioner Maria Alice Silva has enjoyed a guilty pleasure she hides from her friends: playing the lottery.
Now the government is counting on her secret indulgence by turning it into a weapon to fight tax evasion. It plans to spend as much as 10 million euros ($13.6 million) this year on luxury cars to give out as prizes in weekly draws. Rather than selling tickets, the entries are from the receipts consumers have been told to demand to prevent businesses from dodging sales tax. Alice Silva, 76, is already collecting them.
“In a couple of months everyone is going to be doing it,” she said after buying her regular fix at a store in Lisbon. “If I win, I can always sell the car and collect the money.”
Countries in Europe’s south have long struggled to match the revenue collection rates of those in the north. While Greeks were threatened with a knock at the door from an auditor if they didn’t ask for paperwork when paying for goods and services, Portugal has opted for an approach that’s more carrot than stick and previously used in Slovakia, Taiwan and Puerto Rico.
“It’s a smart move because it offers rewards to those who follow the law instead of punishing those who break it,” said Friedrich Schneider, a professor at the Johannes Kepler University in Linz, Austria, who specializes in shadow economies. “This type of incentive will work well in countries that are poor and where winning a car is a big deal.”
Billions of Euros
Portugal is essentially betting millions of euros in the hope of gathering the billions the government says is siphoned off by businesses every year.
The special lotteries will start in April, Paulo Nuncio, secretary of state for fiscal affairs, said last week. It will hold as many as 60 draws over 12 months to award “top-range” cars. The government is in talks with television stations about broadcasting the “lucky receipt” lottery, Nuncio said.
Here’s how it will work: receipts with a nine-digit personal tax number from cafes, hairdressers and other businesses will be automatically converted into one or more coupons that enter into the competition. Jogos Santa Casa, the operator of the country’s lotteries, will oversee it, and receipts from Jan. 1 are valid for entry.
“The government wants to end this scourge that is called the parallel economy,” he said at a press conference in Lisbon on Feb. 6. “If we make sure everyone pays their taxes, it will be easier to reduce the tax burden in the future.”
The country’s underground economy accounted for 19 percent of GDP in 2013, according to Schneider, the professor in Austria. That compares with about 13 percent in Germany, he said. In Greece, where failure to improve tax collection has been a source of conflict with its bailout masters, it made up 23.6 percent of the economy last year, Schneider said.
Opponents of the new lottery in Portugal say that asking for a receipt with a personal tax number for purchases as small as a cup of coffee is too time-consuming. It also sends the message that gambling is good, said Jose Manuel Esteves, general director at the Association for Hoteliers and Restaurants.
“It would be wiser for the government to lower the sales tax rate,” said Esteves. “Everyone knows that a high tax burden leads to an increase in tax evasion.”
Portugal has raised taxes every year since seeking the 78 billion-euro emergency aid package from the European Union and the International Monetary Fund in 2011.
The next year, the government raised the sales tax to 23 percent from 13 percent for some businesses, including restaurants. The value-added tax rate of Portugal, along with Greece, Ireland and Poland, is the seventh highest in the EU, according to the European Commission. Hungary’s 27 percent rate is the highest, while Malta’s 18 percent rate is the lowest.
The country plans to follow Ireland and exit that three-year bailout program on May 17. To help get its finances in order, the country is trying to increase revenue and cut spending to meet a budget deficit target of 4 percent of gross domestic product this year, down from about 5 percent in 2013.
“Dodging taxes is wrong, but some businesses have managed to stay afloat because of that,” said Oscar Afonso, vice president of the Economy and Fraud Monitoring Observatory at the University of Oporto in the north of Portugal. “The new measures are an incentive for people to pay taxes.”
The chance of winning a car may also resonate in a country that’s the poorest in western Europe and where the EuroMillions lottery is a popular distraction.
In 2012, Portugal’s GDP per capita was about 9 percent below that of Greece, at about 15,600 euros, according to European Union data. The Portuguese spent 855 million euros on EuroMillions, which is shared by nine EU countries, in the 11 months through November last year. That was double the amount spent in Belgium, which has a similar population.
Portugal is not alone in using demand for lottery games to fight against tax evasion.
Taiwan has used a similar system since the 1950s, according to a 2009 study by Professor Junmin Wan from Fukuoka University in Japan. Puerto Rico, a U.S. commonwealth, has also used a similar plan to try to reduce the size of its underground economy. Slovakia began offering as much as 10,000 euros in cash and cars in a tax lottery last year.
“The interest has exceeded our expectations and thanks to the lottery we were able to identify hundreds of retailers who sought to bypass the system,” Slovak Finance Ministry spokesman Radko Kuruc said by telephone yesterday.
Nuncio, the secretary of state, predicts the lottery will result in a 50 percent increase in the number of receipts issued by businesses this year from 4 billion invoices in 2013.
Alice Silva, the pensioner in Lisbon, can’t wait for the government to start. She plays the lottery in the hope of improving her life and that of her nephews.
“I have gone through some tough times during my life and that’s why I play the lottery,” she said. “It’s a chance to improve my financial situation.”
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