VAT Refund Crisis in EU-Funded Projects in Portekiz Divides the Government

The disagreement over the refund of Value Added Tax (VAT) on projects financed by the European Union's Recovery and Resilience Plan (PRR) is deepening between the Portekiz Government and Private Social Solidarity Institutions (IPSS). The President of the Portekiz Merhametler Birliği, Manuel Lemos, clearly stated in a public announcement that social welfare organizations have not yet been able to recover the VAT amounts they paid for projects carried out with PRR funds. The root cause of the problem is that European funds do not cover VAT expenses, leaving this burden on the national budget, but the refund process is continuously delayed. Although authorities claim that various steps have been taken to resolve the issue and that processes are being expedited, feedback from the field indicates that no institution has received any payment so far. This situation causes civil society organizations providing social services across the country to face a severe cash flow crisis.

The Portekiz government of former Prime Minister António Costa, with a decision taken in 2021, announced that municipalities, universities, and IPSSs would only be able to recover VAT expenses in projects financed by the PRR. The main reason for this decision was that the funds did not cover VAT, and therefore the state had to compensate for this loss. However, the publication of the official decree required to implement the said regulation took a full two years and could only come into effect in 2023. This two-year delay caused serious financial difficulties for the institutions running the projects and disrupted the financial plans of many social institutions. This delayed step caused intense public criticism and posed a major obstacle to the effective use of European funds by the institutions.

The decree issued by the then Minister of Finance Fernando Medina was later modified several times by new regulations signed by Joaquim Miranda Sarmento and Castro Almeida. The changes emphasized that it is essential to provide the necessary treasury conditions so that institutions can finance their project implementations on time. In addition, it was aimed to reduce the bureaucracy surrounding VAT refund requests supported by the national budget in order for the Portekiz State to achieve the targets it committed to against the European Commission. Despite this, however, the decree changes and well-intentioned statements did not produce the expected practical solutions in the field. Institutions still have to struggle with complex bureaucratic processes and wage an endless battle to receive their refunds.

The PRR National Monitoring Commission (CNA PRR) continuously issues warnings due to these systematic delays in VAT refunds. The Commission's reports reveal that the delays create a very serious treasury pressure on the institutions responsible for investment implementations and that this situation sometimes leads to major constraints. It is noted that some institutions have had to take out high-interest loans from banks in order to continue their projects to close this financing gap. In the assessments written by Pedro Dominguinhos, it is emphasized that the CNA PRR recommended throughout the process that procedures should be simplified, payments should be made more predictable, and the mechanism should be operated more clearly. This financial uncertainty carries the risk of causing delays in social investments and disrupting community projects.

Regarding the issue, the President of the Merhametler Birliği, Manuel Lemos, stated that there is a highly disturbing perception that the Tax Authority currently evaluates the institutions within the scope of double taxation. Reminding that VAT is already considered a non-eligible expense item in PRR or PARES programs, Lemos argued that speaking of double taxation in such a situation is illogical. On the other hand, the Minister of Economy and Territorial Cohesion, Castro Almeida, who is responsible for European funds, acknowledged that there were some flaws in the different mechanism applicable to IPSSs, claiming that this problem has been resolved. Almeida stated that he asked the Treasury Ministry to speed up VAT payments, suggesting that according to the information available to him, these problems have been largely overcome. However, Manuel Lemos stated that he absolutely disagreed with these views, arguing that the crisis continues and emphasizing that institutions will not be able to recover their money unless more concrete steps are taken.