The IRC rate is 21% but there are those paying 31.5%. like? – Economics – SAPO.pt

Last year, the state collected 4.7 billion more taxes than expected, bringing the total to 58.3 billion euros collected from people and companies. Tax revenues rose 9.2% compared to the record 2022 figure, which contributed significantly to the $4.3 billion budget surplus achieved by Fernando Medina, then Finance Minister.

But how do taxes work? How are they held accountable? Yemen? And what are the many billions of euros that reach the public treasury?

To answer these questions, SAPO, in partnership with anypublishes a series of consultations starting here with the International Rescue Committee, the tax affecting companies that in 2023 generated more than 8.6 billion euros, 1.4 billion more than what was allocated by the budget of Medina.

Luis Marquez, EY Partner in Tax ServicesIRC explains in 7 answers.

1. How long has IRC been around?
The IRC (Corporate Income Tax) was created in 1989 as part of the financial reform process implemented by the government led by Professor Hans. Dr. Anibal Cavaco Silva, who aimed to create a single income tax system as opposed to the tabular system that had existed up to that point.

2. Who pays to IRC?
The IRC mainly aims to impose a tax on the profits of companies with their head office or effective management in Portugal, and which carry out commercial, industrial or agricultural activities. For companies domiciled in another country (i.e. non-resident entities), the IRC applies only to the proportion of income earned in Portuguese territory.

In this context, it is important to note that most companies that generate income in Portuguese territory are subject to the IRC. It should be noted that, in some circumstances, this tax may also be imposed on companies that registered a loss during a certain tax period, as the IRC is also imposed on certain expenses, which the legislator understands to have primarily personal use and not just commercial use ( For example, passenger vehicle expenses, subsistence allowances, representation expenses, among others). These expenses are subject to special taxes from the IRC, known as “separate taxes,” at specific rates that depend on the nature of the expense (and, in the case of passenger cars, the relevant amount of the vehicle’s acquisition cost).

In other words, the IRC is levied on a company's profits, as well as on certain categories of expenses that taxpayers incur from this tax.

3. How has IRC changed?
The IRC law has undergone several changes over the years, on the one hand to respond to the needs of the state budget (for 2024, according to data from the OE 2024, IRC revenues are estimated to rise to a value of just over 8 billion euros, which is the third most important tax in terms of tax revenues collected by the State), on the other hand to respond to the natural development of the economy as well as to support the various tax legal rules emanating from the European Union.

4. What is the IRC rate paid by companies in Portugal?
Currently, the regular IRC rate is set at 21% for mainland Portugal, and the current Executive expects, through the relevant government program recently introduced, a decrease in this rate (by 2 percentage points per year, up to the minimum tax established by international rules on OECD and EU level of 15%, in addition to reduced levels of state surcharges as well as municipal surcharges. (Explanation below). On the other hand, the rate in the autonomous regions of Madeira and the Azores is 14.7%, which represents a 30% decrease compared to the rate practiced in mainland Portugal.

5. Is the real IRC rate 21%?
Recently, since the financial crisis that the country experienced at the beginning of the second decade of the twenty-first century (i.e. since 2010, which subsequently led to the financial aid plan for Portugal within the scope of… Troika), the IRC has taken on a progressive nature, as its rate can increase depending on the value of the taxable profit.

Under these conditions, and as provided by law, when taxable profit exceeds €1,500,000, additional fees are charged (e.g. State leakage) at a rate of 3% on the excess amount and, when it exceeds €7,500,000, an additional rate of 5%, with an additional rate of 9% applicable when profits exceed the threshold of €35,000,000.

The progressive nature of the IRC has since then been the subject of technical debate, since the Constitution of the Portuguese Republic only expressly stipulates a progressive nature for the IRC and not for the IRC, and thus maintaining this status could potentially lead to non-compliance with the Basic Law. In addition, there is an additional municipal fee that can reach a maximum of 1.5%. In general, the “global” rate for IRC and surcharges can be as high as 31.5%.

6. Does the IRC penalize dividends?
The IRC is imposed on the accounting result determined in accordance with applicable accounting uniformity rules, which are duly adjusted in accordance with the principles laid down in the IRC Code. In this way, some income or expenditure that is relevant in accounting terms may not be relevant in tax terms, meaning that the amount of tax payable in the final terms affects the (taxable) result that is often different from the result specified in accounting where this contributes. The truth is in the distinction between the nominal rate (i.e. 21%) and the effective tax rate (which results from the division between the IRC amount due and the accounting result).

The fact that many businesses can benefit from using tax benefits may also contribute to this difference, which may contribute to a reduction in the amount of IRC due and thus also contribute to a reduction in the effective tax rate.

7. What is the tax?
The IRC plays a crucial role in the total tax revenues received by the Portuguese state, by taxing corporate profits in Portugal, ensuring companies' fair contribution to public finances and formulating their investment strategies. Its (current) progressive nature, along with the interplay between accounting and tax standards, reflects the search for fair and sustainable taxation, to promote the country's economic growth and financial stability, while encouraging transparency in business practices. Even if the aforementioned progress may be an issue that may still be possible. Resolved in the courts.

Answers provided to SAPO by EY, prepared by Tax Services Partner, Luis Marques.