Portugal To Increase VAT

by Ulrika Lomas, Tax-News.com, Brussels

01 October 2010

The Portuguese government has announced a further rise in the rate of value-added tax as part of an austerity package designed to narrow its budget deficit, which stands at almost 10% of the value of the economy.

Prime Minister Jose Socrates announced that the cabinet has agreed to a 2% increase in the VAT rate to 23%, and a new tax on the financial system, although details of the financial tax have yet to emerge.

The 2% VAT hike is expected to take place on January 1, 2011, just six months after the government increased VAT by 1% to 21% on July 1, 2010.

The July VAT hike was part in an earlier wave of austerity measures approved by parliament in May 2010, which also included a 2.5% increase in corporate tax on company profits exceeding EUR2m, likely to remain in place until the end of 2011.

The latest efforts to consolidate the budget also included substantial cuts in government spending, including a 5% pay cut for civil servants earning more than EUR1,500 per month.

The Socrates administration is aiming to cut the budget deficit from 9.3% of gross domestic product last year to 7.3% this year and 4.6% by the end of 2011.

Opposition parties are, however, opposing further increases in taxation, putting the minority Socialist government in a precarious position. The severity of the austerity package could also provoke civil unrest.

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