This is one of several suggestions that the community executive has passed on to the country in the Country-Specific Recommendations released under the European Semester Spring Package.

“Improve the effectiveness of the tax system and the social protection system, in particular by simplifying the two structures, strengthening the efficiency of the respective administrations and reducing the associated administrative burden”, writes the European Commission in the recommendations it dedicates to 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 every month on wages) and the tax that the taxpayer actually had to pay (calculated annually in the IRS settlement). “Direct tax withholdings are often too high, leading to considerable refunds in the following year,” write the European experts.

Refunds too high

At issue is the degree of adjustment of the IRS withholding tables (the rate applied to the salary every month) to the IRS levels (through which the annual tax due in the IRS adjustment in April of the following year is calculated). The Government has been adjusting the withholding tables, but there are those who argue, namely the European Commission, that the discrepancy remains too high.

It follows from the criticism of European experts that they prefer a system in which there are fewer refunds in the annual settlement, with less tax being charged every month. This year, the Executive has already adjusted the withholding tables, incorporating the impact of the creation of two new levels that is foreseen in the State Budget for 2022 (OE2022), but refuses to update the IRS levels to the expected inflation rate for this year.

Complex laws

But this is not the only problem that the European Commission identifies in the Portuguese tax system. Another of the European recommendations is the simplification of tax benefits in force in Portugal, which is also a concern of the Government. The current system, with more than 500 tax benefits and dispersed across more than 60 laws, is “quite complex and not sufficiently transparent”. “The economic efficiency of tax expenditure would benefit from constant monitoring”, advise European experts.

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

This complexity that occupies the resources of the tax machine has costs: the expense incurred for the task of collecting taxes is “relatively high”, being in 2019 about 20 percent above the European average. At the same time, AT's investment in information and communication technologies is “low” compared to the European average.

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