Value-Added Tax: What It Is and How VAT Works

Here's how value-added tax works, what it is and how you can get your VAT refunded if you shop while traveling.

Tina OremOctober 8, 2020
Value-Added Tax: What It Is and How VAT Tax Works

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If you’ve ever traveled outside the United States and done some shopping, chances are you’ve noticed a value-added tax on your receipts. Here’s what VAT is, how it works, and how you might be able to get your money back.

What is VAT?

Value-added tax is a tax on the value sellers add to products or services. It is similar to sales tax or excise tax in that the consumer pays the tax based on the value of the good or service. There is no VAT in the United States, but over 100 countries have one.

How value-added tax works for consumers

Value-added tax is typically a percentage of the sale price. For example, if you purchase a pair of shoes for $100, and the value-added tax rate is 20%, you would pay $20 in VAT at the register when you pay for the shoes.

  • The value-added tax rate varies by country.

  • In some countries, VAT is called goods and services tax, or GST.

  • Some countries exclude certain goods or services from the tax.

  • The European Union requires that an EU country’s VAT rate must be at least 15%. Some things qualify for a reduced rate, which has to be at least 5%.

  • Although businesses may pay value-added tax on the goods and services they buy, they generally get to recoup those payments from the VAT they collect from their customers. The businesses then remit what’s left to the government.

Value-added tax in the United States

Even though the United States doesn’t have a value-added tax, it does require consumers to pay federal excise taxes on the purchase of gasoline, alcohol, tobacco and other products. In addition, several states and cities collect sales taxes. Intuitively, the concepts are similar in that they are all taxes on consumption. The difference is in how the tax is collected.

How to get a VAT refund

If you visit a country that has a VAT, you might be able to get a refund on the tax you pay when you shop there. Beware: There are a lot of steps, and some travelers decide the refund process isn’t worth the trouble. Here are some of the general rules, but before you travel, be sure to check the VAT rules in the country you plan to visit.

  • You usually have to be a visitor to get a VAT refund. The address on your passport matters here. You might qualify as a visitor if you’re living in the country temporarily but have a permanent home somewhere else.

  • Spending on food and hotels often isn’t eligible for VAT refunds.

  • Typically, you have to pay the value-added tax at the time of purchase, and then apply for a refund from the shop.

  • Some shops don’t offer VAT refunds. Some shops process the refund directly, and some shops use third parties to process the refund. Ask for written instructions about how to claim your VAT refund.

  • You’ll likely need to show the store clerk proof that you live outside the country, and you’ll have to fill out a form.

  • Sometimes the shop charges a fee for VAT refunds, so be sure to ask about that ahead of time.

  • Usually, your purchase must be over a certain amount in order to qualify for a VAT refund. In the EU, for example, you have to buy at least 175 euros worth of stuff in a shop. The threshold isn’t cumulative, meaning that spending 100 euros in one shop and 100 euros in another shop doesn’t meet the minimum. It may be worth it to consolidate your shopping if you’re angling for a VAT refund.

  • When you go home with your loot, a customs officer has to stamp your refund paperwork as proof of export. Without the stamp, you won’t get your VAT refund.

  • Usually you’ll need to mail your stamped VAT refund form to an address the shop provides. But you don’t always have to wait to get back home. Some big airports, ports and train stations have VAT refund offices where you can get your refund right away — if the retailer you shopped at uses that office.

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