What is Value-Added Tax (VAT) & Who Pays It?

Here are some details about value-added tax, including how it operates and how to claim a refund if you shop while traveling.

If you’ve ever gone shopping while traveling outside of the United States, you’ve likely noticed a VAT. Or value-added tax, on your receipts. Here are some details about VAT, including what it is, how it operates, and potential refund options. Contact our professionals if you need additional help.

Value-Added Tax (VAT) Definition

When sellers add value to goods or services, they are subject to a value-added tax. Consumers pay the VAT tax, which is often a portion of the transaction price. Much like they do with sales taxes or excise taxes. In the United States, there is no VAT.

The Workings of Value-Added Tax (VAT)

The typical value-added tax rate is a percentage of the purchase price. For instance, if you spend $100 on a pair of shoes and the value-added tax rate is 20%, you would be required to pay $20 in VAT at the register.

  • Every nation has a different rate of value-added tax.
  • The term goods and services tax, or GST, is sometimes used to refer to VAT.
  • Some nations exempt some products or services from paying taxes.

The VAT rate in an EU nation must be at least 15%, according to the EU. Certain items are eligible for discounted pricing, which must be at least 5%.

Businesses may be required to pay value-added tax on the products and services they purchase, but they typically receive a refund from the VAT their clients pay. The businesses then pay the government the balance.

Does the US have VAT?

In the United States, there is no VAT. However, despite the absence of a value-added tax in the US, consumers are still required to pay federal excise taxes when buying products like cigarettes, alcohol, and fuel. In addition, sales taxes are collected by several states and towns. Since they are all taxes on consumption, the ideas are conceptually comparable. The method used to collect the tax differs. There is VAT in over 100 nations.

Obtaining a VAT Refund

You can be eligible for a refund of the VAT you pay when you shop in a nation that has one if you travel there. Warning: There are numerous processes, and some travelers conclude the hassle isn’t worth it. Here are some broad guidelines, but before you leave, make sure to research the VAT laws of the nation you’ll be visiting.

  • Normally, you must pay the value-added tax at the time of purchase and then submit an application to the store for a refund.
  • Typically, to be eligible for a VAT refund, your purchase must exceed a particular threshold. For instance, to enter the EU, you must spend at least 175 euros on merchandise. Spending 100 euros at one store and 100 euros at another does not satisfy the minimum because the barrier is not cumulative. Consolidating your purchases can be worthwhile if you’re hoping to get a VAT refund.
  • Food and lodging expenses are frequently ineligible for VAT refunds.
  • Normally, to receive a VAT refund, you must be a tourist. Your passport’s address is important in this case. If you are temporarily residing in the nation but have a permanent residence elsewhere, you may be considered a visitor.
  • You’ll probably need to fill out a form and provide the store clerk with documentation proving your residence abroad.
  • VAT refunds are not offered at all stores. Some stores handle the refund processing themselves, while others work with outside companies. Request written instructions on how to submit a VAT refund claim.
  • A customs official must stamp your refund paperwork as proof of export when you return with your belongings. You won’t be reimbursed for your VAT if the stamp is missing.