For European travels, check your VAT
|Many American travelers and companies neglect to seek tax refunds.
When you travel to Europe, be it for business or for pleasure, you expect to spend money. And when you make retail purchases, you can expect to pay a value-added tax (VAT), even though you may not notice it.
The VATthe European version of American sales taxis easy to overlook because it is already built into retail prices. Unlike a retail sales tax, however, a VAT is charged and collected at each stage of the production process, not only on the final sale. The VAT is normally borne by the consumer in the price paid for goods and services. Rates ranging from 15% to 25% are charged on both business and individual transactions.
What is also easy to overlook is that you and your company can get refunds of VATs paid. U.S. companies and their employees can apply for VAT refunds as a logical part of managing travel and entertainment (T&E) expenses. Amounts that can be recovered vary widely. For a company participating in an overseas trade, recoverable VAT expenses may amount to a few thousand dollars; for a multinational company that frequently sends its employees to Europe, VAT refunds may total millions of dollars. Any U.S. company that is not registered to pay VATs and does not have a permanent office in the country to which it sends its employees may be eligible for VAT refunds.
According to a recent estimate by the international accounting firm Coopers & Lybrand (New York), U.S. companies claim only 20% of the VAT refunds they are entitled to. This may be because U.S. companies and travelers are simply unaware that they can recover VATs, but another reason may be that filing for a VAT refund is not easy.
Refund policies vary
The purpose of allowing nonresidents and businesses to recover VATs is to level the playing field and stimulate trade, but some countries are more generous in their policies than others. Refunds for tourists are usually confined to purchases sent or taken home; no refunds are given for hotel rooms, meals, and the like. The amount of time that it takes to get a VAT refund varies from country to country. Typically, it takes 618 months to receive a refund.
Most of the European countries that offer VAT refunds are members of the European Monetary Union: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain. Other participating countries are Canada, Denmark, Hungary, Iceland, Korea, Liechtenstein, Norway, Sweden, Switzerland, and the United Kingdom.
An important element in VAT reclamation is identifying and gathering your VAT valuable original invoices (receipts). A number of processes can be used to minimize this burden. For example, your companys travel agent can be a significant help by providing a detailed travel report that shows which employees spent time in VAT-refundable countries. Your company can use its expense reimbursement provider, credit card processor, and T&E system provider to help identify VAT-valuable invoices.
After receipts are gathered, various reporting systems are available to generate customized reports that can help focus your companys VAT reclamation efforts. The company can either hire an outside firm to file for refunds or use a software system to file online for them.
In addition to collecting necessary documentation, a company that intends to do its own VAT filing must have personnel who are familiar with the different European tax authorities, read and write the appropriate languages, and maintain in-depth and current knowledge of VAT regulations throughout Europe. Not many American companies have the necessary expertise or resources.
More specific questions
Does the VAT rate determine the refund? VAT rates vary considerably among and even within countries. In general, the standard rate throughout Europe is 15%, but it can be as high as 25%. Although VAT rates are an important factor in assessing refund potential, an analysis of which expenses are refundable and the effort involved in applying for a refund also should be considered. High rates do not necessarily mean high refunds.
What expenses are eligible for refund? Typical expense categories that qualify for business refunds include hotels, meals, car rentals, fuel, transportation, telecommunication, conference and trade shows, training, and professional services. Many of these expenses are specifically related to T&E.
Non-travel-related expenses should not be overlooked. Depending on a companys operations, the refund potential in this category can often be many times greater than that from travel-related expenses. Some of these expense categories are
Are business and tourist VAT refunds treated differently? Both corporate and vacationing tourists traveling to Europe are entitled to refunds, but the amount each group is entitled to and the procedure for obtaining a refund differ greatly. Tourists can apply for refunds as individuals and are entitled to VAT refunds on some merchandise but not services. Tourists usually apply for and receive refunds when they depart the country in which their expenses were incurred. Validation from customs officials is ordinarily required to prove that purchased merchandise is being taken out of the country.
Although business VAT expenses may be incurred by individual employees, the corporationnot the individualsmust apply for the refund. Because applications for VAT refunds must be made according to the rules established in each country, the preparation of VAT refund claims can become an administrative nightmare. To obtain a VAT refund, the various authorities require a company to submit original invoices issued by the service provider. Credit card receipts, statements of charges, carbon copies, duplicate originals, express checkout statements, and invoices marked copy or duplicate are not acceptable. Although specific invoice requirements vary slightly from country to country, all receipts submitted for a VAT refund must include the following information:
Claimants must submit original invoices that contain the registered name and address of the company filing for refund. Invoices that have no company name or the wrong company name and address will be rejected by VAT authorities. Because original receipts are required to obtain a VAT refund, the VAT refund process is extremely paper-intensive. Generally, each country will accept only four quarterly claims per year from a company. Companies that do business abroad must monitor changes in VAT legislation that can affect eligible items or the amounts of a VAT refund. A company that handles its own refund operation must keep abreast of these developments as well as tax law changes in each country where it conducts business.
Is there an alternative to the normal VAT refunds? Yes, at least for tourists. Of the 20 European countries that impose the VAT, all except Iceland, Ireland, and Switzerland participate in a program called Europe Tax-Free Shopping (ETS). This program represents 70,000 merchants and is growing. When you buy from participating merchants that display the ETS logo, you show your passport and receive a Tax-Free Shopping Check. The check shows the amount of refund owed to you after ETS has deducted a fee of about 20%. When you leave that country or the last European Union country on your itinerary, you show your purchases to an appropriate customs official, who stamps your checks. You then obtain your refund from the ETS desk on site, by mail, or by transfer to your credit card account.
Is the Canadian GST the same as European VAT? The Canadian Goods and Services Tax (GST), Harmonized Sales Tax (HST), and Provincial Sales Tax (PST) are similar to the European VAT. Business and tourist travelers may obtain GST, HST, and PST refunds from Revenue Canada (2204 Walkley Rd., Ottawa, ON K1A 1A8; 613-952-3741).
Are third-party VAT refund services available? Yes. A company can outsource the task of filing for a VAT refund to any number of third-party services. These companies will calculate your VAT refund potential and produce a refund application on your behalf. They work on a contingency basis, and fees range from 12 to 20% of the total refund.
Should you get outside help? The answer depends on how much business you do in Europe. If the amount is insignificant, you are probably better off handling your own VAT refunds. If the volume of European business your company conducts is significant, however, obtain competitive bids from a number of VAT reclamation firms. Compare each firms proposal against your estimated in-house costs. Your decision should be based on a thorough cost benefit analysis.
Milton Zall is a freelance writer based in Silver Spring, MD. He is a certified internal auditor and a registered investment adviser. Send your comments or questions regarding this article to firstname.lastname@example.org or the Editorial Office by fax at 202-776-8166 or by post at 1155 16th Street, NW; Washington, DC 20036.