2021 tax burden highest ever, 35.8% of GDP

The tax burden in 2021 was the highest ever, accounting for 35.8% of Gross Domestic Product (GDP), according to data from Statistics Portugal (INE), which estimates about €450 million in VAT remained uncollected in 2019.

The tax burden, a ratio between total taxes and mandatory contributions, was 30.7% in 2001, 32.2% in 2011, 34.4% in 2015 and 34.7% in 2018, 34.5% in 2019 and 35.3% in 2020, the year in which, for the first time since 2012, it recorded a nominal decrease reflecting the negative impacts of the Covid-19 pandemic on economic activity and the economic policy measures taken.

In 2021, according to data from the INE, the tax burden returned to an upward trajectory, “more than offsetting” the nominal decrease of the previous year, with general government tax revenues at €75.6 billion, the highest value of the series.

This result translated to an increase of around €5 billion compared to 2020 and about €1.6 billion compared to 2019, with the institute explaining that as the nominal variation of tax revenue (+7.1%) was higher than that of GDP (+5.6%), the tax burden as a percentage of GDP increased to 35.8%1 in 2021, up from 35.3% in the previous year.

The €5 billion increase in tax revenue mainly reflected the behaviour of VAT revenue, social contributions and personal income tax, which rose by €2.253 billion, €1.449 billion and €806 million, respectively. On the contrary, revenue from corporate income tax fell by €345 million.

Personal income tax (IRS) is the main direct tax, accounting for 72.1% of the total of this type of tax in 2021 (69.7% in 2020), with IRS revenue growing by EUR 805.8 million (5.7% change), mainly reflecting the increase in withholdings of income from dependent employment (+6.2%).

INE also highlighted the negative development of revenue from vehicle tax, not so much because of its magnitude (-14 million euros) but because it is the second consecutive year of decline, with revenue from this tax around 40% below pre-pandemic values.

The data revealed an increase in 2021 of all components of the tax burden, with the institute highlighting the 10.6% rise in indirect taxes, while social contributions increased by 6.9% and direct taxes by 2.2%.

The INE said that the high weight of indirect taxes in the tax burden is largely explained by VAT, showing that Portugal is one of the countries where VAT has the greatest weight in tax revenue (23.9%, with the EU27 average in 2020 being 17.3%) and that it is the eighth country where VAT has the greatest weight in indirect taxes.

The report released on Friday also talks about the VAT gap in 2019, which INE estimates to have been €450 million, which was equivalent to 2.3% of VAT collected that year and which the institute says is identical to that recorded in 2018.

This indicator measures the difference between the so-called theoretical VAT or the VAT that would result from applying the legal rates to goods and services susceptible to this tax in transactions recorded in the national accounts and the VAT actually collected by Public Administrations.

“The average annual gap for the period was estimated at €1.138 billion, which corresponds to 7.1% of the VAT actually collected. After the increase in the gap seen at the beginning of the available period, having reached the maximum value in 2012 (€2.2 billion, corresponding to 13.6% of VAT collected), there was a consistent decrease in this indicator until 2018, both in value and as a percentage of GDP,” the institute highlights.

In 2019, this trend was interrupted, with the gap rising to €450 million, corresponding to an increase of 8.6%, but as a percentage of VAT revenue, the gap was steady at 2.3%, identical to the figure observed in the previous year.

INE concluded that this stabilisation of the gap in 2019 reflected the 5.1% increase in effective revenue, 0.1 percentage point below the growth of theoretical VAT (variations of 6.3% and 5.7%, in the same order, in 2018).

The institute pointed out in the report that the reading of these results “requires some caution” since the calculated gap may reflect not only tax evasion phenomena but also other factors, such as variations in payment, refund and recovery times of VAT debts, or errors associated with the necessary simplifications for the calculation of theoretical VAT, namely arising from the degree of aggregation with which national accounts are compiled.