According to paragraph 1 of Article 104 of the Constitution of the Portuguese Republic “[p]ersonal income tax shall aim to reduce inequalities, shall be single and progressive and shall pay due regard to the needs and incomes of households”. In other words, the constitutional legislator was strongly concerned with the existence of a personal income tax (“IRS”) that would be endowed with personalised elements, taking into consideration not only the taxpayer, but also the entire household (as opposed to a real or merely objective tax).
Considering that, it would be expected that the legislation that regulates personal income tax in Portugal – the Personal Income Tax Code (“IRS Code”) – would, throughout its mechanics, demonstrate various and significant personalisation elements. However, tax credits correspond to the element par excellence of the personalisation of the IRS, and in our opinion, this is where the most serious legislative error, bordering on unconstitutionality, is to be found.
Under Article 78 of the IRS Code, it is possible to understand that the legislator allows tax credits to be made in respect of dependents and ascendants living in the same household as the taxpayer (Article 78-A), general household expenses (Article 78-B), health expenses (Article 78-C), education and training expenses (Article 78-D), real-estate expenses (Article 78-E), expenses of invoices communicated to the Portuguese tax authorities (Article 78-F), alimony payments (Article 83-A), retiring homes expenses (Article 84), or expenses of individuals with disabilities (Article 87).
However, except for alimony payments, all these expenses have deduction limits that can be established (1) linearly and precisely or (2) according to “Indexante dos Apoios Sociais”[1].
Therefore, the question arises as to how far the personalisation of the tax is actually guaranteed with this type of limitations; on the other hand, serious doubts arise as to whether Article 104 (1) of the Constitution of the Portuguese Republic is being complied with, since by establishing unitary values (low in most cases and far removed from social reality) tax credits have been progressively eliminated. Taking into consideration the example of the possibility to deduct health expenses (Article 78-C), in the past, these expenses could be deducted 30% of their value without any quantitative limit, while in the current wording of the IRS Code, these expenses can only be deducted 15% of their value (50% reduction), with a quantitative limit of EUR 1,000.00.
As a result, we believe that the legislator was overly concerned with the need to raise public revenue, forgetting one of the fundamental principles of personal income tax – personalisation. It is not possible to say that a truly personal tax exists when in this case the limits on deductions do not consider inflation and the true and effective economic reality of the taxpayers and their household; and if this is the case, there are serious problems of compatibility with the regime established in Article 104 (1) of the Constitution of the Portuguese Republic.
Francisco Ludovino Reis
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[1] According to Ordinance no. 294/2021, the IAS is a social support index that should take into consideration the real growth of Gross Domestic Product (corresponding to the average of the last two years, determined in the third quarter of the previous year) and inflation (corresponding to the average variation of the last twelve months, without housing, available at the end of the previous year).