The impact of corporate income tax on the Portuguese economy

Introduced in 1989, Corporate Income Tax (IRC) has become an important instrument for the competitiveness of the country's economy.

The general corporate income tax rate is now 21%. In recent years, Portugal has consistently reversed the downward trend in the rates of this tax, which had been seen overall since the end of the 20th century.

This reversal came in 2010, after the economic and financial crisis, with the introduction of an additional tax – the State Surtax – which is levied on part of company profits. This tax is now included in the Corporate Income Tax Code and the tax has also become more progressive, with the introduction of new brackets and higher rates in the State Surtax.

This unprecedented study aims to contribute to the analysis of the impact that the Portuguese tax system and its successive changes have on the country's economic and social reality, by mapping the reforms that have taken place over the years.

And it seeks to understand whether the fact that Portugal has not followed the downward trend in the tax burden on companies seen in most eurozone and OECD countries has had a negative impact on productivity and wealth creation.

The analysis, carried out by a multidisciplinary team of six economists and lawyers specialising in tax law, coordinated by Pedro Brinca, is based on the following research questions:
 

• What is the expected impact on the national economy of a reduction in the effective corporate income tax rate?
• What is the impact of successive changes to the IRC tax framework, i.e. legislative instability, on the Portuguese economy?
• What is the economic impact of progressive IRC?

To do this, the authors used a general equilibrium macroeconomic model – variants of this model are often used by European institutions such as the European Central Bank and the European Commission – which was calibrated for the Portuguese economy. In this way, it was possible to analyse the impacts of the CIT on a set of macroeconomic variables.

The conclusions reached by the researchers and their recommendations are available in the full study or, in abridged form, in the fact sheet available on this page. And they are explained in the video below.