Portugal needs to review its tax system

The European Commission wants Portugal to simplify the tax system, increasing the efficiency of tax and customs (TA) administration and reducing the administrative burden on taxpayers.

This is one of many suggestions that the EU executive has passed on to the country in the country-specific recommendations published as part of the European Semester spring package.

“Improve the efficiency of the tax system and the social protection system, in particular by simplifying the two structures, increasing the efficiency of the respective administrations and reducing the associated administrative burden”, writes the European Commission in the recommendations it dedicates in Portugal.

In the same document, in its analysis of the Portuguese tax system, the Community Executive highlights the discrepancy that exists between the IRS withholding tax (made monthly on salaries) and the tax that the taxpayer actually had to pay (calculated annually in the IRS regulations). “Direct tax deductions are often too high, leading to considerable refunds the following year,” write the European experts.

Reimbursements too high

The problem is the degree of adjustment of the IRS withholding tax tables (the rate applied to salary each month) to the IRS levels (through which the annual tax due in the adjustment of the IRS in April of the following year is calculated). The government has adjusted the deduction tables, but some argue, including the European Commission, that the gap remains too high.

It follows from the criticisms of European experts that they prefer a system in which there are fewer reimbursements in the annual statement, with less tax deducted each month. This year, the executive has already adjusted the restraint tables, incorporating the impact of the creation of two new levels that is planned in the state budget for 2022 (OE2022), but refuses to update the levels from the IRS at the expected rate of inflation for this year.

Complex laws

But this is not the only problem identified by the European Commission in the Portuguese tax system. Another of the European recommendations is the simplification of the tax advantages in force in Portugal, which is also a concern of the government. The current system, with more than 500 tax benefits and scattered in more than 60 laws, is “quite complex and not sufficiently transparent”. “The economic efficiency of tax expenditures would benefit from being constantly monitored”, advise European experts.

In addition to identifying this problem with the IRS, the techs also note that the structure of the IRC generates “complexity” for taxpayers (businesses, in this case) and represents an “additional burden” for authorities. tax since, in addition to the national tax, there are surcharges such as the municipal surcharge and the state surcharge.

This complexity, which occupies the resources of the tax machine, has costs: the expenses incurred for the task of collecting taxes are “relatively high”, being in 2019 around 20% higher than the European average. At the same time, AT’s investment in information and communication technologies is “low” compared to the European average.

“Making tax administration more efficient would help reduce the time it takes to pay taxes in Portugal and reduce the large volume of tax arrears (at 37.1% of total net revenue at the end of 2019, they were among the higher in the EU)”, concludes the European Commission.

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