9/1/2011 3:45 PM ET|
Get a tax refund from your vacation
Dozens of countries provide systems to refund the value-added tax, or VAT, and it's simple for tourists to get the money back.
You walk into a store and give a $100 bill for an $80 charge. Do you wait for the $20 change? Of course you do.
Then why do so many people fail to claim the VAT refunds they're entitled to get?
VAT stands for "value-added tax." Used extensively in Europe, it's a tax on consumption -- in its simplest form, it's basically a sales tax. Technically, it is collected by registered traders on supplies of goods and services sold to customers. Each trader in the chain of supply from manufacturer to retailer charges VAT on his or her sales and is entitled to deduct from that amount, before remitting to the government, any VAT paid on purchases.
The effect is to impose the tax on the added value at each stage of production. The final consumer pays the full retail price, plus the accumulated VAT. The difference between a VAT and a sales tax is that the sales tax is paid once by the final consumer. The VAT is paid in stages, with a credit for taxes already paid earlier in the supply chain.
In some countries, a VAT is recognized under different names. Each country has its own rates and rules, but the basis is always a tax on consumption.
Where the refunds are
To encourage foreign trade and the free flow of goods and services between countries, legislation has been passed for foreign individuals and companies to claim refunds for VAT paid on some purchases.
Dozens of countries provide systems to refund at least some VATs, including Austria, Belgium, Bulgaria, Canada, Croatia, the Czech Republic, Cyprus, Denmark, Estonia, Finland, France, Germany, Greece, Holland, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Monaco, Norway, Poland, Portugal, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland and the United Kingdom.
The refund rules for tourists are very different from those for businesses, and the rules and rates are different in each country. But certain primary guidelines and procedures are the same.
Refunds for tourists
According to international-shopping website Global Blue, which specializes in VAT refunds for tourists, Americans abroad leave behind an estimated $80 million in unclaimed VATs each year.
With VAT rates as high as 25% in some countries (e.g., Sweden), why would anybody fail to collect his "change"? "Ignorance of the law is the primary reason," according to Conor Condon, the assistant VAT manager of Taxback.com, a company that collects refunds mostly for businesses. The hassle of saving original receipts, filing paperwork and finding where to submit the appropriate forms also discourages refund applications.
But picture dead presidents on those receipts. They represent cash in your pockets.
Once understood, the process can be simple. To qualify, you have to spend a minimum amount in a store on a given day. The actual minimum varies with each country. While businesses can get refunds on purchases of goods and services, tourist refunds are normally limited to VATs paid on goods.
When you make a qualifying purchase, you need to keep the receipt. In its most basic process, you bring the receipt to the airport when you leave the country, find the VAT refunding location (look for signs), fill out a form and submit your application. Your VAT refund will be paid on the spot or mailed to you.
Some stores, such as Harrods in London, make it possible to complete an application on the spot. You'll still have to drop off paperwork at the airport when you leave.
Alternatively, you can have a service such as Global Refund, Premier Tax Free or, for businesses, Taxback.com, get your refund for you. These companies typically charge a processing fee of 2% to 4% for tourists and 4% to 20% for businesses. How long can you stand in line before your plane leaves the terminal, and how much is your time worth? (Note: Some countries let you mail in the forms later.)
Can you plan ahead? Some companies issue special credit cards that track your qualified spending. Swipe your card at the airport as you leave, and you're done. So far, in Europe this option is limited to Finland, but expansion is planned.
Refunds for businesses
This is where the big bucks are left on the table. And surprise: Foreign governments don't make it easy to collect. Complexity trumps compliance, and dollars go unclaimed.
A recent survey published by the Organisation for Economic Co-operation and Development, or OECD, revealed that 80% of U.S. businesses incur expenditures in foreign countries. About 72% of U.S. businesses expressed a degree of difficulty with procedures for refunds. These problems arose out of complex VAT legislation, convoluted policies and procedures of taxing authorities, inefficient reclaim processes and a high amount of rejections.
The OECD study found more than $1 billion in VAT paid, with half the responding businesses recovering 50% or less and a quarter recovering less than 25%. Almost 21% were unable to recover any foreign VAT paid.
I can understand why a tourist might forgo a VAT refund. I left $14 in Norway last month because I didn't have the time or the patience to stand in line for an hour at the airport. But with billions of qualified business dollars spent over a period of years, we're beginning to talk real money here. Why not hire a company and pay a recovery fee?
Jeff Schnepper is the author of the best-selling book "How to Pay Zero Taxes," which is in its 30th edition. He is a former professor of taxation, accounting and finance. Schnepper now has a full-time tax planning and legal practice in Cherry Hill, N.J. Click here to find Schnepper's most recent articles.
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