“The use of consumption tax exemptions and reduced rates narrows the tax base and should be minimised,” OECD said.

The OECD said “there is scope to raise environmental taxation, given that the domestic pricing of some fuel sources do not reflect the environmental costs of their use” because “broadening the tax base buttresses public finances.”

On OECD’s Economic Survey: Portugal 2019, published on Monday, the organisation discussed the case of VAT, noting that “in Portugal, more than half of the potential VAT revenue in Portugal goes untaxed as a result of exemptions, reduced VAT rates and weak tax enforcement and tax evasion.”

This is one of the explanations for the ratio between VAT and the actual levied to be lower than the OECD average, at 49% compared to 56% of the average of countries that are part of the organisation.

Among the examples of reduced VAT that apply in Portugal, the organisation points to the case of restaurant and catering services, which saw a decrease from 23% to 13% in 2016, in addition to having “narrowed the tax base,” it is a measure that ends up “favouring high-income households who are more prone to consuming restaurant meals.”

Regarding tax matters, the document stressed that reducing the revenue-raising capacity of consumption taxes, such as VAT, should be avoided since “such taxes are less harmful to economic growth than those on personal income and corporates.”

The organisation praised recently adopted tax solutions in Portugal, such as the tax on sugary drinks and additional real estate tax and stressed that these measures have increased the “tax mix efficiency,” since immovable property taxes have a less negative effect on economic growth.

Although the weight of tax revenues in the gross domestic product (GDP) increase 2.3 percentage points between 2009 and 2017 (from 40.4% to 42.7%), the organisation said that there is room for fiscal reforms to increase efficiency and stability of the tax system.

Measures to promote the simplification of the tax system and reduction of “ambiguity in the tax language.”