Recommendations by Professor Rita de la Feria led to reforms implemented in Portugal's 2012 State Budget which boosted the efficiency of tax and generated savings of 1.2 per cent GDP.

Impacts

  • In August 2011 Professor De la Feria was nominated Adviser to the Portuguese government on VAT Policy.
  • She primarily assisted in preparing two State Budgets, namely the Portuguese State Budget 2012 and Portuguese State Budget 2013.
  • The success of these measures in reforming VAT allowed De la Feria and the Portuguese government to focus on introducing changes to promote growth, in particular by helping small and medium-sized businesses in the subsequent State Budget for 2013.

"Together these measures resulted in a big reduction in the goods and services with reduced rates of VAT" (Michael Keen, Deputy Director in the Fiscal Affairs Department at the IMF)

About the research

In April 2011, Portugal became the third European country to apply for financial assistance to help them cope with its budget deficit. A bailout was agreed on the condition that Portugal cut its budget deficit over the following three years. Reforming the country's VAT system offered considerable scope for increasing tax revenues. The reforms focused on not placing higher burdens on low-income households or jeopardising jobs and growth in key economic sectors.

Professor Rita De la Feria recommended four principles to broaden the VAT's tax base that took into account local conditions - in other words, measures to subject more goods and services to taxation that didn't cause undue hardship or threaten economic recovery.

The first principle eliminated reduced rates of VAT for certain 'merit' products - non-essentials consumed mainly by high-income households.

The second principle was to maintain reduced rates of VAT for essential goods and services such as food and medication. Higher VAT on necessity items risked increasing prices and severely affecting low-income households, as essential goods are consumed regardless of price.

The third principle maintained reduced rates of VAT on items that could jeopardise jobs or exports, for example keeping lower rates of VAT in the labour-intensive tourism sector.

The final principle focused on removing different rates of VAT for goods or services that fall within the same category, like eliminating different rates for 'healthy' and 'unhealthy' food. These distinctions only encourage fraud and avoidance as well as creating high compliance costs.