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The increase in the price of fuel observed since the beginning of the year, around 17 cents per liter, already provides the State with a net gain on the VAT levied, which would allow it to pay back the additional cost by lowering the tax on products (ISP), without losing tax revenue.
This return mechanism was approved in October 2021 and was the first measure announced by the government to offset rising fuel prices. In mid-October, ISP tariffs on petrol were reduced by 2 cents and on diesel by 1 cent, in return for the gains in VAT receipts induced by the increase in the price excluding tax. The calculations can be done in several ways and their result largely depends on the time periods chosen.
At the time, the Secretary of State for Fiscal Affairs, António Mendonça Mendes, indicated that the tax gain for the State would be calculated by comparing the average additional value of the VAT levied in 2021 with that of 2019, to withdraw the year of the pandemic account in which the price of fuel was very low. Already this year, and in the face of the continued weekly rise in prices – aggravated after the start of the war in Ukraine – the Ministry of Finance said in response to the Observer earlier this week:
The ISP reimbursement mechanism for VAT gains arising from the increase in fuel prices remains in force, so that the temporary reduction then decided remains in force, the evolution of the PVP (sale price to the public) being constantly assessed to take appropriate action. measures”.
Using the average VAT charged in 2021 and the same amount for 2022 as reference periods for comparison, the state charged about 3 cents more per liter of petrol and diesel. However, it must be taken into account in these accounts that the tax fell in October 2021, so part of this gain is already returned.
But if we close the comparison period to the 11 weeks of last year that followed the tax cut, with the first weeks of 2022 (until the end of February), the state still gains 1.3 cents per liter of diesel and practically a penny (0.9 cents) in gasoline. The margin to reduce the tax again is therefore 1 cent per litre, which is almost irrelevant when we see that both fuels have increased by 17 cents this year.
If the calculation is based on the evolution of the average weekly prices verified since the beginning of this year, then the State collects around three centimes more per liter of VAT.
However, these accounts could take on another dimension as of next week if the increases determined by the rise in prices of the two products on the international markets this week are confirmed. The increases will likely be the largest on record and can exceed 14 cents per liter (some say 19 cents) for diesel and as high as 8 cents for gasoline.
With these increases, the State’s VAT gains compared to the last weeks of last year soar to more than five cents in diesel and 4 cents in gasoline. Even if the Ministry of Finance restores the entirety of this margin, through the equivalent reduction of the petroleum tax on diesel and gasoline, here again the effect would be limited given the magnitude of the cumulative increase. In this high-rise scenario, gasoline would add an annual price increase of 25 cents per liter and diesel an increase of 30 cents.
Apart from the fact that in a context of total uncertainty on the evolution of prices — this peak may be temporary or long-lasting — the State would commit hundreds of millions of euros in tax revenue (on an annual basis) which would make the risk of not recovering in the medium term, because for that it would have to resume tax increases with an impact on the final price, in a context of already very expensive fuels.
As the Secretary of State for Energy, João Galamba, acknowledged on Friday, the government can take measures to mitigate the impacts on final prices, but “a crisis of this magnitude in all areas of fuel obviously does not give not give the government complete freedom to undo the negative effect of a crisis”.
The Ministry of Finance, which is responsible for the decision to lower the oil tax, did not respond to questions from the Observer as to whether, when and to what extent it will do so.