I think the original sentence reads better. If you say Portugal is ON the West of Spain then I would interpret that as saying Portugal lies within Western Spain, though this still reads badly for me.

I think 'Portugal is to the west of Spain' is a better sentence. Imagine someone standing in Spain, if you asked him 'where is Portugal?' he would say 'To the West'. Perhaps this example helps.

Portugal is to the west of Spain. If you must use on: Portugal borders Spain on the west. But "to" works here, too.