Putting Portugal back in the centre – Why Portugal needs a major tax reform

That Portugal’s tax system is overly bureaucratic, stratified, burdensome and downright complicated is bemoaned by overseas investors and Portuguese businesses alike.

Nevertheless, despite various political parties coming up with ideas for reform, various governments have merely tinkered around the edges, and despite everyone with a modicum of intelligence seeing the elephant in the room, nothing gets done.

Indeed, Portugal has had no significant tax overhaul since the late 1980s when economist and Minister of Finance, Miguel Cadilhe tried his luck by introducing IRC and IRS taxes in 1989 just three years after VAT had been introduced in 1986.

Since then, and over the subsequent 35 years the type and scope of taxes in Portugal have mushroomed and multiplied at such an astonishingly bewildering rate and complexity that few really understand Portugal’s multi-layered tax system let alone all the tax sweeteners and loopholes that are applied to counter them.

Which is why it was interesting to hear from the President of the Portuguese Association for Social and Economic Development (SEDES), Álvaro Beleza on Thursday when he addressed a select group of businessmen at the International Club of Portugal in Lisbon and called for Portugal’s main political parties to set in train the greatest tax reform seen in a generation.

SEDES – founded to bring progress to Portugal

SEDES, which Álvaro Beleza – currently the director of the Blood Service at Lisbon’s Santa Maria Hospital – has been coordinating for 11 years, was founded in 1970 by a group of young people that the time who thought that Portugal should cease to be a rural, backward, underdeveloped and poor country, and instead become a forward-thinking, western democratic European country that would become part of the European Economic Community. (EEC)

These pioneer reformers thought that if there was be a regime transition from the last Estado Novo leader Marcelo Caetano towards democracy, Portugal would then be able to develop with the freedom to set up a social state. Unfortunately, however, these ideas fell on deaf ears and it took a revolution in 1974 to install democracy – but in truth only after an ensuing decade of economic and social chaos and turmoil.

“Our neighbours in Spain did not have a revolution but rather a gradual evolution towards democracy, which is why Spain did not lose what we lost in Portugal”, said Álvaro Beleza.

“We had young technocrats at the time who had well planned out how the country should develop in terms of regions. We had the Lisbon Higher Technical Institute which had an international reputation and prestige, but this path to planning had been interrupted by political instability following the 1974 Revolution”, explained

From Portugal’s adherence to the European Union in 1986, the country’s economic groups began to get involved in motorways and health and moved away from traditional industrial areas such as ship building, an area in which Portugal had excelled in its know-how for centuries. “We’ve paid the price for this and we’ve paid dearly,” said Beleza.

And Europe, he said, was now finally waking up to the error it had committed at the end of the second world war when it handed over the defence of the western world to the United States of America, and instead just thought about being an economic rather than a military power, but yet forgot the military aspect which was “a gross error”.

Portugal too was guilty of this problem. Traditionally, Portugal has been a shelter for refugees coming across the Pyrenees mountains, particularly in World War II.

More recently, Portugal has become a refuge for refugees fleeing the war in Syria in 2014, followed by those escaping the War in Ukraine from 2022, with many from these countries seeking to live in Portugal and Spain.

“This demand for Portugal was also evident from the creation of new companies in the industrial area. Today, unlike 20 years ago, there’s a tendency to create factories for cars, ships, aircraft in Finland, Sweden, the Czech Republic, and on this side of the Pyrenees in Spain and Portugal”, he said.

In the midst of this whirlwind caused from Trump’s election and the War in Ukraine, democracies in Europe, he said, face a serious problem.

“They are completely dependent on the United States. Europe has to rearm, it must have a military industrial complex like it must have a health industry, and for us this problem provides an opportunity that we need to seize upon”, said Álvaro Beleza.

“Today, we have universities, research institutes, entrepreneurs, and have a much ampler world than we had 20 years ago.

A cross-party consensus for reform

Álvaro Beleza said there needed to be a political consensus from the main political parties in the centre, and for favourable conditions to overseas investment in Portugal to be provided, creating a spirit of entrepreneurialism and incentives.

In summary, Portugal should not be afraid. Portugal should have ambition, be positive and hopeful because “we have great opportunities ahead of us”.

“We tend to complain a lot about everything everyday, with people with hands outstretched asking the government for something and we have to change that chip.

“Portugal could be the Denmark of the South but in order to do so it must reform its tax system (not necessarily cutting just IRC and IRS taxes), but reduce taxes in general and those who say cutting taxes is not competitive are ignorant.”

Álvaro Beleza called for a tax system that was more transparent, simpler, that anyone can understand and does not have over 600 tax benefits for lawyers and accountants to avoid paying taxes. “We haven’t any tax reform in years and the last one was in 1988 made by economist Miguel Cadilhe.

And this tax reform needed to be carried out by both the two main political parties working together.

“It is absolutely essential for us to have an environment that creates wealth, value, and attracts investment and companies,” he said.

It is these observations that led to a roadmap for true tax reform published by Carlos F. Alves and Carlos Tavares in March 2024 for SEDES in which seven tax ‘sins’ have been laid out with an equal number of solutions.

These included:

A simple and transparent IRC, with drastic reduction of tax benefits and a non-progressive system of taxation with a tax rate clearly below 20%, tending to maintain a similar level of tax revenue (in % of cycle-adjusted GDP);
An IRC that tends to tax operating results, with simple rules and structure;

The (complete) elimination of the negative tax discrimination of equity in relation to the onerous debt of companies and the economic double taxation of dividends;

A simpler and more moderate IRS, with a much smaller number of levels than the current one, with limits that gradually converge to those observed in the EU framework (with correction for purchasing power parity), with a more moderate progressive regime and, combined with the deductions regime, more promoting social justice and with rational and binding updating rules;

A system of IRS taxation in which all taxpayers are subject to taxation (with adequate compensation mechanisms for lower income) and in which, as proposed in the V Congress of SEDES, a binding and stable limit is established on the part of income that can be appropriated by the State;

A more equitable IRS, with a more balanced distribution of the tax burden and a deduction system that adequately addresses the family situation of taxpayers, their burdens in essential areas such as health, education and housing and the very purpose of combating tax evasion;

The establishment of effective means to combat the parallel economy, including the accountability of certified accountants; and measures and mechanisms that prevent the repeated declaration of tax losses by companies and the prolonged subsistence of undercapitalised companies.

During his address, the SEDES present also called for a reform of Portugal’s electoral system with MPs being selected by constituency voters rather than being elected from lists that parties or coalitions of parties put forward in each constituency because “at the end of the day it is people who count”.

Another area of Portuguese structural life that needed reforming was justice, which according to the leader of SEDES needed a change in paradigm and a revolution.

Unfortunately, despite successive reforms, he sad that country, in several indicators, is still not favourably positioned with regard to other European countries. In fact, despite some improvements, it is even scored negatively with regard to the efficiency and effectiveness of the courts. It is clear that, in these two dimensions, the Portuguese judicial system continues to be unable to provide a quality and timely response to specific problems faced by a system that should serve the general public.

“Justice needs to be served faster, it needs to be simplified, to act with greater agility for better results, and have an efficiency which today it doesn’t have,” said Álvaro Beleza. Who pointed out that any of the rules and legislation governing it stemmed from the 19th century and which needed to be adapted, including looking at ideas from other countries in Europe which could be adapted to the Portuguese reality.

“Justice needs to be reworked and reformed because it is the third pillar of our democracy and is vital for the trust and confidence of our citizens,” concluded Álvaro Beleza.