A study by the Banco de Portugal (BdP) on VAT in Portugal and its impact on income distribution reveals that, generally, Portugal applies VAT rates lower than the euro area average on categories subject to reduced rates, specifically on products and services with 6% and 13% rates in the mainland.
“The most significant differences are observed in categories such as housing, water, electricity, gas, and other fuels (-2.2 pp), as well as in restaurants and hotels (-1.3 pp),” the study notes. The study will be published with the Economic Bulletin in June, next week.
Conversely, in categories where the standard VAT rate predominantly applies (23% in the mainland), Portugal shows values higher than the euro area average, particularly in communications and clothing and footwear, where the difference exceeds 2 pp.
The leisure, culture, transport, or household accessories category also exhibits a higher average VAT rate than the euro area.
Data analysis reveals that about 43% of household consumption expenditure is subject to the standard rate, one-third to the reduced rate, 15% is tax-exempt, and only one-tenth is subject to the intermediate rate.
“Given the rate differential, 75% of VAT revenue comes from the standard rate, and only 14% from the reduced rate,” the study states, further indicating that the importance of goods subject to each VAT rate varies among families with different income levels.
Thus, due to its application to essential goods, the reduced rate weighs more for lower-income families (those in the first quintile), applying to 37% of their consumption basket and representing 18% of the VAT paid by these families.
For families in the top quintile (the highest incomes), the reduced rate accounts for 27% of their consumption.
