Is VAT Reduction in Restaurants in the Works?

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The food and beverage industry may be in for good news! If two coalition parties and the largest opposition party in the country, which are engaged in on-going national salvation negotiations, will come to an agreement, the industry may soon enjoy a possible cut in their value-added tax (VAT) obligations.

At present, VAT is levied at 23 percent for bars, cafés and restaurants, all of which are essential players in the tourism and travel industry in Portugal. The current tax was a measure that has attracted and continues to attract widespread criticism from industry players because of its adverse impact on consumer spending, among others.

The measure was part of the demands imposed by the bailout Troika, namely, the International Monetary Fund (IMF), the European Commission and the European Central Bank. It was designed to increase the flow of taxes into government coffers, thus, boosting economic recovery from the financial crisis gripping many countries in Europe.

The Socialist Party (PS), the opposition party, and the Democratic and Social Centre – People’s Party (CDS-PP), the junior coalition party, have repeatedly supported the VAT reduction from 23 percent to 13 percent. Their argument is based on their assertion that the 23 percent VAT has not provided any significant fiscal benefits to the state.

Even the stalwarts of the Social Democratic Party (PSD) appear to be increasingly in favor of the change. In previous years, the party has been hesitant in backing the change.

In an official statement, the Associação da Hotelaria, Restauração e Similares de Portugal (AHRESP) asserted that the discussions with government authorities on the matter have been “fruitful”. Such positive developments have come about because of the openness shown toward changing the prevailing applied rate, per the statement.

Media reports are also suggesting that the Socialist Party was using the proposed VAT reduction to 13 percent as one of its main demands for negotiations with the government. The negotiations are in relation with the government’s request for support in additional measures to balance the national books of accounts.

Finance Minister Luís Albuquerque’s unexpected visit during one of these meetings fuelled speculation to this effect. It is assumed that she was invited to give her views on the proposed rate reduction and her willingness to accede to it. No word yet on the matter since everything is still up in the air at this point.

It must be noted that a series of news reports pointing to the 23 percent VAT as beneficial to the state – it has boosted state coffers. The boost came in the heels of an initial drop in fiscal revenue.

Studies have also pointed to the benefits of the rate reduction. One of these studies was conducted by Ernst & Young (EY), said study of which was contained in a 56-page report published in June 2013.

According to the report, the rate reduction will lead to the retention of an estimated 30,000 jobs in the industry. If the 23 percent rate persists, these jobs are more likely to be lost because the employers cannot afford to pay the salaries of the employees. If so, the economic outlook for the nation will be adversely affected.

AHRESP also asserted that the reduction will make accounting sense. The difference in losses from fiscal revenue of 280 million euros against the monetary values recovered by social security, unemployment subsidies and IRS payments amounting 346 million euros justify the reduction in rate.

And it is not just the restaurant sector that will benefit from the rate reduction. The golf and hotel sectors will also be at an advantage in the rate reduction since customers are more likely to indulge in their passion for golf and travel with the more affordable prices on products and services.

Published in: Business / Guide to Portugal / Taxation