Watch Out for the Incredible Shrinking VAT Refund

April 25, 2011 — -- By Ed PerkinsSmarterTravel Contributing Editor

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 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:

• 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.