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The idea of a value-added tax (VAT) is a foreign concept to most Americans. That puts us in the minority, though: VAT, a multi-layered tax applied at each stage of the manufacturing and marketing process, is used in more than 170 countries —including Canada, Mexico and just about all of Europe.
VAT is applied to most goods and services but if you're planning on international travel, there's a good chance you can get a refund on at least some of your VAT payments.
What we'll cover
- What is a value-added tax (VAT)?
- Sales tax vs. VAT
- VAT pros and cons
- How you can get your VAT refund
- Bottom line
What is a value-added tax (VAT)?
A value-added tax (VAT) is very similar to a traditional sales tax, in that the consumer pays it at the point of purchase. It's typically a percentage of the price of the product, but standard VATs range greatly among nations.
Sales tax vs. VAT
The largest difference between VAT and sales tax is when the tax is applied: With a sales tax, the levy is paid only once, by the retail customer. With VAT, though, each stage of the production process is taxed, from raw materials to the finished product.
For example, a farmer sells flour to a baker for $1 plus a 10% VAT. The baker pays the farmer $1.10 and the farmer sends 10 cents to the government. The baker then turns that flour into a birthday cake and sells it to a supermarket for $3, plus a 30-cent VAT. The baker reports the sale but only has to submit 20 cents to the government because she already paid 10 cents VAT when she bought the flour. Finally, the market sells the cake to a customer for $5, plus a 50-cent VAT. The customer pays $5.50 but the grocer only has to send 20 cents to the government to the government because he already paid 30 cents VAT when he bought the cake.
The government still gets its 50 cents from the sale of the birthday cake, but it's divided up along the supply chain — 10 cents from the farmer, 20 cents from the baker, and 20 cents from the supermarket.
Does the United States have a VAT?
The United States is in the minority of countries that don't levy a value-added tax, though most states have a sales tax that serves the same purpose. The US also charges federal excise taxes on certain goods, including fuel, alcohol and tobacco products.
Supporters of a VAT in the US claim it would streamline the revenue process and limit tax fraud. But critics argue it takes revenue control away from states and forces small businesses to carry much greater administrative costs.
How to get a VAT refund
Visitors to countries with VAT still have to pay it, but they can qualify for a refund on certain items. (The European Commission defines a visitor as"any person who permanently or habitually lives in a country outside the EU.")
It's a fairly complicated process and it's easy to miss a step, be told incorrect information or just have your request rejected for no discernable reason. So be sure you want to put in the effort.
First, ensure your items are eligible: They must be new and unused or unworn. The idea is that the goods are for "export," not for use on your trip. And there is typically a minimum amountyou have to spend in a store to qualify — as of November 2023, the minimum in the EU is 175 Euros. So it's usually high-ticket items, like jewelry or fine clothing, that qualify for a VAT refund, not a paperback novel or suntan lotion.
There are also a number of goods and services that are not eligible for refunds, including hotel rooms and meals.
It's also important to confirm the store you're patronizing participates in a VAT refund program. Some don't and others have very specific requirements. VAT policies may vary within a country, too: While refunds are not available in the majority of the UK, you can sometimes get one in Northern Ireland.
Let the shop know you're interested in a VAT refund. You'll need to provide proof of your "visitor" status—usually your passport, though you may have to show your airline ticket, as well—and fill out some paperwork. Many stores have relationships with refund companies such as Global Blue or Planet, which can streamline the process.
Shipping your purchases home directly from the retailer is another way to avoid paying VAT, but the added cost may outweigh any savings.
You can try to get your VAT refund through the mail but the process takes much longer and can be unreliable. Most people submit their requests at the airport on their way home. You'll have to present your documents to a customs agent, whose stamp is required as "proof of export." There could be a substantial wait, so be sure to get to the airport early. And you may have to present the items, so don't pack them away in your checked luggage.
The good news is that larger airports have currency exchanges or branches of refund companies that will give you your money, minus a fee.It may come in local tender or as a charge back on your credit card.
While you may have to jump through hoops to qualify for your VAT refund, a credit card with no foreign transaction fees can save you from more financial hassles while traveling.
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Bottom line
A value-added tax can catch some travelers off guard and getting a VAT refund takes patience and persistence. But if you're eyeing a big-ticket purchase while traveling, it can be worth the effort. So make sure you learn the proper procedures and keep track of your paperwork.
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