The OECD said today that Portugal should "continue to broaden the scope of application of the standard rate of VAT," arguing that reduced rates for certain sectors, including restaurants, "is an inadequate method" of promoting employment.
In a blow to Portugal’s restaurant and café sector which has seen more than 50,000 of its members’ businesses fold during the recession, a report out today with the nifty title 'Portugal: consolidation of structural reforms to support growth and competitiveness', which was commissioned by the Portuguese Government, the Organization for Economic Cooperation and Development (OECD) reported that Portugal reduced VAT rates generated substantial revenue losses.
In terms of the uniform VAT rate and its impact on the poorest in society the OECD claimed that "the use of these VAT reductions is often inappropriate and a large part of the advantages accrue to families in better financial conditions."
The OECD noted that Portugal has revised the structure of its VAT rates, promoting a wider use of the standard VAT rate since January 2012, but recommended that the authorities "continue to extend the scope of the standard rate of VAT."
The institution claimed that "social goals can be achieved more effectively through the network of Social Security than through reduced VAT rates."
The VAT rate is currently 23% but is due to go up 0.25 % in 2015 in a weak move to gain extra revenue that the government could not get from other sources due to a Constitutional Court ruling.
The OECD was more upbeat about employer social security contributions, "a cut in Social Security contributions for the employer can prove particularly effective in creating jobs, if the cuts focus on low wage earners."
The OECD also stated that "revenue from taxes with less impact on competitiveness should be increased, such as property taxes and environmental taxes."
The OECD team led by Angel Gurría recommended that in the medium-term Portugal should consider "reducing taxes on labour at the same time as it increases the taxes that cause less distortion" and also "continue to expand the use of environmentally related taxes by introducing other such as taxes on air pollutants and pesticides.”
The organisation was upbeat about the structural reforms in Portugal since the end of 2008, predicting that they could increase productivity and GDP by 3.5% in 2020 with further planned reforms adding another 5.5% during this decade.
Portugal was referred to as a "leading reformer", one of the countries that had followed the recommendations of structural reforms but "The key challenge for Portugal is to continue the pace of reforms," especially in energy, communications, transport and professional services.
