IMF and Brussels call time on reduced VAT on tourism and hospitality

The International Monetary Fund and European Commission have called time on Portugal’s favourable VAT treatment on guest accommodation and 13% on the hospitality sector.

And even Portugal’s own tax authorities which has been looking at the benefits of special treatment for the country’s tourism sector is wondering if it really is bringing any real advantages to consumers as prices have shot up in restaurants, bars, cafés, clubs and other leisure venues since Covid-19.

And according to Portugal’s Ministry of Finance statistical and analysts department, U-TAX, the country lost €1Bn in tax revenues in 2024 and the picture is likely to be similar for last year.

For a decade, Portugal’s tourism sector has benefited from preferential VAT rates, following the crisis that placed the country under a ‘troika’ bailout.

But the measure, which at the time was justified by the need to recover employment levels, is now being questioned.

The International Monetary Fund (IMF) this week called for an end to the reduced rates on accommodation and catering services, repeating an assessment already made by the Ministry of Finance. A new study by the European Commission also questions the effectiveness of this type of tax expenditure.

Since 2016, the use of accommodation services has benefited from a reduced rate of 6%.

For catering services, the intermediate rate of 13% was also applied. During the ‘troika’ years, as a result of calls from creditors to increase VAT revenue, Portugal began taxing tourist consumption at the standard VAT rate, at the time raised to 23%. After the crisis, this was one of the first measures to be reversed.

The situation today is very different from 2016. While the unemployment rate has been at historically low levels, these sectors are not facing problems with creating jobs, but rather of finding staff, as they have frequently pointed out.

But for the IMF, the problem is primarily one of equity (read unfair competition). In recommendations to the government following a technical visit to Portugal as part of the regular consultations, the institution repeated its advice on Wednesday that the government needed to simplify and revise the tax and tax benefits system. (a recommendation also made to the country by the European Commission), identifying preferential tourism rates as a benefit that should be scrapped.

So is it time to stop baby sitting Portugal’s hospitality, catering and accommodation sectors? If you’re in these sectors and don’t agree and can justify with a credible  argument, e-mail me at: [email protected] 

Source: Jornal de Negócios