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Mind the Gap, Please! How Portugal Could Reform Its VAT System

  • Portugal’s VAT policy has several oddities, such as the upcoming hike in VAT rate for meals if wine or soft drinks are offered.
  • The complexity of the VAT system has led to distorted consumption behavior and significant base erosion.
  • Portugal’s tax system ranks low in the International Tax Competitiveness Index, and reform focusing on simplification and base expansion is needed.
  • The VAT allows for efficient revenue collection, but Portugal’s standard rate of 23% is higher than the EU average.
  • In 2021, Portugal collected only 51% of the ideal VAT revenue, with the gap attributed to compliance issues and policy choices that erode the tax base.
  • The use of reduced rates and exemptions for goods and services contributes to the large VAT gap.
  • Closing this gap would generate significant revenue for the country.

Source Tax Foundation

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