Academics propose lowering IRC by 7,5 points and eliminating spills in Portugal

Portugal is one of the countries in Europe with the highest rate of this tax charged to companies

Reducing the IRC by 7,5 percentage points would increase Portuguese GDP by 1,44% in the short term, according to a study by the Francisco Manuel dos Santos Foundation (FFMS), coordinated by economist Pedro Brinca.

One of the main conclusions of this study is the finding of a negative impact on productivity and wealth creation due to the fact that Portugal has not followed, in recent years, the trend of most Eurozone and OECD countries in reducing the tax burden on the companies.

The normal rate of IRC (Corporate Income Tax) in Portugal is 21%, but companies are also subject to the municipal surcharge (income from local authorities) and the state surcharge that was introduced during the time of the troika.

According to OECD calculations, the effective CIT rate in Portugal is 27,5%, one of the highest values ​​in Europe.

The group of economists and jurists responsible for the study created a model to measure the impact on the economy of a reduction in the effective IRC rate at all levels of 7,5 percentage points (pp) and came to the conclusion that this tax reduction would increase GDP (gross domestic product) by 1,44% in the short term (after a period of two years) and by 1,4% in the longer term (after ten years).

And why a reduction of 7,5 pp? Because it would be the size of the decline that would bring the effective rate in Portugal closer to the European average, Pedro Brinca explained to Lusa.

The reduction in the IRC would have a positive impact on investment, competitiveness and even on consumption since, in this scenario of a tax reduction of 7,5 pp, labor remuneration would also increase by 1,79%, as companies would be able to retain and share more profits with workers.

In this research, the authors argue that the loss of tax revenue due to the reduction of the IRC could be financed through various budgetary compensation instruments, namely consumption taxes, labor taxes, public expenditure or social transfers.

Thus, the FFMS study leaves governments with three recommendations: a “substantial reduction in the nominal IRC rate”, an abolition of the state surcharge and, also, the consideration of eliminating the municipal surcharge, creating, in this case, compensation measures for local authorities .

The other major conclusion of this study is that “legislative instability in the IRC code has a negative impact on economic activity”.

And they prove this with numbers: “A reduction in the effective IRC rate by 7,5 pp, followed by an increase in the rate by the same 7,5 pp after one year, causes GDP and, mainly, consumption to fall significantly. permanent (0,03% and 1,01% in the long term, respectively).”

Pedro Brinca and the other authors of this investigation recall that the IRC Code has undergone more than 1.350 changes since its introduction in Portugal in 1989.

To promote the stability of the IRC, the study proposes that rules be introduced that regulate the production of tax laws.

These academics recommend “the stipulation of a deadline for the entry into force of tax rules, long enough to ensure predictability among taxpayers” and also “the mandatory carrying out of economic impact assessments” whenever tax changes occur.

In addition to Pedro Brinca, Afonso Souto de Moura (from Banco de Portugal), Francisca Osório de Castro (specialist in tax law), João B. Duarte (from Nova SBE), Miguel Cortez Pimentel (specialist in tax law) and also Paulo Núncio, lawyer and current parliamentary leader of the CDS-PP and who helped draw up the AD (Democratic Alliance) economic program.

In its Government program, the AD proposes a reduction in the IRC from 21% to 15%, at a rate of 2 pp per year, the gradual elimination of the progressiveness of the state surcharge and the gradual elimination of the municipal surcharge, ensuring, in the case of the latter , “compensation through the State Budget for lost revenue for municipalities”.