Watch Out for the Incredible Shrinking VAT Refund

How does a VAT refund of €87 wind up worth only $80? At current exchange rates, €87 should come out to $124. That’s what a reader wanted to know:

“I bought $526 worth of leather goods on my trip to Italy, and I got a VAT refund check from the store. The store’s check said that the actual VAT was €87, but that my refund would be only €60. Even that reduced amount should have given me $85, but the final credit was just $80. What happened to my other $44?”

The short answer is that most of the money stuck to the hands of the outfit that “processed” your refund. Certainly, $44 is an excessive charge for a bit of paper handling, but, unfortunately, that’s how the system works. And our reader’s loss is par for the course.

VAT Refunds 101

Most European countries rely heavily on value-added tax (VAT) for a major source of revenue, and – by law – posted prices in local stores include VAT. Rates vary by type of product, and they run as high as 25 percent of the pre-tax price. That’s a major reason why “street prices” for most manufactured items are so much higher in Europe than in the U.S.

Governments regard sales of merchandise to tourists as “exports” and therefore exempt from VAT. To prevent fraud, however, as a tourist, you initially have to pay the full price including tax. You can claim a refund only when you can show that the merchandise was actually exported. If you’re an ordinary tourist, you can claim VAT refunds only for products. Although hotel, restaurant, rental car, and other service rates also incur hefty VAT charges, governments view such services as consumed locally and therefore not exported. Business travelers can collect some VAT refunds for services, but that’s a very complex issue – and one that probably doesn’t apply to you.

Although most VAT refund action is in the Europe/Mediterranean region, refunds are also available for tax on some purchases in Argentina, Korea, Lebanon, Mexico, Singapore, and some Canadian provinces.

Most countries impose a minimum amount to be refunded when determining eligibility for a refund. In Europe, Ireland has no minimum, but the minimum in other countries starts at around €25 and runs as high as €175 in France.

VAT Refund Check Systems

Probably the most widely used approach for a VAT refund is the refund check system:

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• Many European merchants – especially those catering to tourists – enroll in an international VAT refund system. Global Blue is by far the largest, claiming more than 270,000 participating merchants in 37 countries. Premier Tax Free is about a quarter as large. Typically, a merchant signs up with one or the other, not both, and prominently displays “Tax Free Shopping” or “Premier Tax Free” signs.
• When you buy something, the merchant gives you a VAT “tax-free shopping cheque” in the amount of the refund.
• When you depart from the European Union, typically at an airport, you show your merchandise to a customs agent and have the agent stamp the check. You then take the check to the refund service’s desk – Global Blue and Premier Tax Free maintain such desks at major European airports – for a cash or credit card refund.

The reader’s merchant used the Global Blue system, and that’s where he lost the refund value. Although the full refund amount added up to 17 percent of the final purchase price (20 percent of the pre-tax price), Global Blue refunds only about 12 percent of the purchase price and pockets the difference as a “handling fee.” That difference amounts to roughly 30 percent of the refund amount. The remainder of the reader’s loss was in Global Blue’s conversion to dollars.

Alternatives

You can sometimes avoid losing that 30 percent of your refund value. Start by requiring that the merchant issue a VAT refund form to you, then have that form stamped when you leave the European Union. After you return home, mail the form back to the merchant:

• Have the merchant mail you a refund check or issue a credit to your card.
• Or charge your purchase by credit card and sign two separate charge slips: one for the pre-tax price, another for the amount of the VAT. The merchant processes the pre-tax charge immediately but destroys the VAT charge once the VAT form arrives.

Clearly, both of these approaches require active cooperation of the merchant – and that you trust this merchant.

Hassles

Getting a VAT refund can involve some hassles:

• Typically, you have to show the merchandise to an agent after you’ve cleared exit customs when you depart from the European Union. That means your stuff has to be in your carry-on baggage.
• Although customs agents are on duty 24/7/365 at major airports, you can sometimes leave the European Union by train, boat, or driving without seeing a customs agent. You have to make sure to leave through a staffed border crossing.
• With the refund check system, after you have your stamped form you have to process it through a desk maintained by the refund network. I’ve seen lines long enough that some travelers have to forego their refund in order to make their planes.

You can, of course, have a merchant ship purchases to you. Those purchases are VAT-free, but you have to pay shipping. And you also have to pay U.S. import duty and maybe go someplace to get your stuff through U.S. customs. Shipped merchandise does not qualify for your import allowance, and even though U.S. duty rates on most items are low, you still have to pay something, and the process can be a hassle.

Beyond those hassles, keep in mind that prices for most manufactured goods are lower in the U.S. than anywhere in the European Union. Know your prices here before you buy anything there. Some items, however, are good buys in Europe – Italian leather, for example – and if you spend enough, a VAT refund can make the buys even better.

Your Turn

Have you been surprised by the bite taken out of your VAT refund? Tell us about it by adding a comment below.