First, the purpose of this paper is to present the recent changes in the treatment of tax credits arising from expenses related to environmental protection made by Portuguese individuals. Second, it aims to assess whether the corporate income tax treatment of provisions for environmental expenses is a force for stimulating environmentally conscious investments by firms or, because of the divergence between accounting and tax computation of such expenses, it is a discouraging factor.
The paper is based on the analysis of tax policy choices, in terms of the individual income tax and the corporate income tax, and its potential impact on environmentally related economic decisions.
In the personal income tax area, the severe restrictions applied to some tax credits, due to the Portuguese public finance situation, brought limitations to some environmentally related deductions, but spared the most relevant one, judging by the amount of credit. A positive discrimination was thus granted to this credit. In the area of provisions for environmental expenses, the recently changed Portuguese corporate tax code cannot be seen as environmentally friendly, especially if the accounting recognition of these costs is compared with its tax treatment. Fiscal policy imposed here is a disadvantageous tax regime.
The study shows that the tax policy decision makers are sending mixed signals to economic agents. If the environment is a priority for policy makers, then a more coherent tax policy could be devised.
The paper can be a relevant contribution for a better assessment of tax policy choices regarding the impact on environmentally related decisions by individuals and firms. The inducements (or penalties) of different polices are highlighted, and policymakers can find a framework for a more rational analysis of policy options.
