Areas of Strength

• Portugal has a well-established workstream on monitoring and reporting tax expenditures (TEs), recently reinforced with the creation of the specialised U-TAX unit. Portugal’s Ministry of Finances reports on TEs since 2014, with disaggregated information since 2021 (relative to 2020) prepared by the Tax and Customs Authority (“AT”). The governance framework provides for evaluation procedures and monitoring obligations. The recently created U-TAX unit within the AT has reinforced the assessment framework on new and existing tax expenditures. It has recently concluded an evaluation of existing TEs to feed into an upcoming RRF-related tax reform.
• Portugal has one of the lowest VAT compliance gaps in the EU, thanks among other factors to the extensive use of e-invoicing (“e-Fatura” system). At 3.6% of total VAT liability, Portugal’s ratio is one third of the EU’s average (9.5%). The comprehensive and mandatory reporting framework significantly strengthens VAT compliance, as issuing an invoice is mandatory for every transaction and all VAT taxpayers must report every invoice issued to the Tax and Customs Authority.

Areas for Improvement

• Efforts on monitoring compliance gaps in Portugal are so far limited to the area of VAT. Portugal does not produce, for the moment, gap estimates in the areas of CIT nor PIT. Recent initiatives to improve tax compliance (e.g., the Simplification Agenda) could boost their impact through faster adoption of AI tools in the tax administration. Fast-ageing staff jeopardises the ability of Portugal’s tax administration to cope with these challenges. Further targeting of audits can contribute to improve tax compliance and reduce the incidence of the shadow economy in certain sectors.
• The use of tax expenditures in Portugal is widespread, though future implementation of an RRF-related reform could help simplify the legal framework. Portuguese authorities estimate that foregone revenues from tax benefits amount to more than 7% of GDP. Preferential VAT rates in mainland Portugal lead to more than half of the estimated foregone revenues. The case of the intermediate VAT rate for restaurants has been singled out in the recent evaluation from U-TAX, which calls for applying the standard VAT rate to this kind of services. The long phase-out of the ancient “non-habitual residence” (NHR) regime is expected to continue to drag on public revenues in the coming years. Streamlining existing tax expenditures could bring Portugal’s tax revenues – as percentage of GDP – closer to the EU average and cushion the medium-term effects on tax systems of an ageing population.
• Portugal has one of the highest rates of outstanding tax arrears in the EU, due to several legal and procedural constraints. The absence of significative improvements in recent years calls for more proactive measures in the area.

Tax Complexity

Portugal ranks 10^th out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Portugal 7^th among the Member States with regards to Tax Framework Complexity, and 16^th with regards to Tax Code Complexity. This may indicate that whereas the tax processes carried out by the tax authorities are rather efficient (notably in the area of guidance, according to the authors), there is room to improve the structure of the tax regulations (particularly in the area of group treatment, according to the authors).

The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Portugal can be found here.

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