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If you’ve ever traveled outside the United States and done some shopping, chances are you’ve noticed a VAT, or 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 value-added tax (VAT)?
A value-added tax (VAT) is a tax on products or services when sellers add value to them. In some countries, VAT is also called a goods and services tax. Similar to but not exactly like a sales tax, VAT is applied throughout the process of a good's production, with consumers paying a percentage of the tax upon sale.
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How value-added tax (VAT) works
Value-added tax is typically a percentage of the sale price. For example, if you purchase a pair of shoes for $100, and the VAT rate is 20%, you would pay $20 in tax at the register when you pay for the shoes.
Value-added tax rates vary by country, and some countries exclude certain goods or services from the tax altogether. For example, 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.
Is there VAT in the U.S.?
There is no VAT 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. Over 100 countries have a VAT .
» MORE: See how to deduct sales tax on your income tax return
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How to get a VAT refund
If you visit a country with a VAT, you might be able to get a refund on the tax you pay when you shop there. However, there are many steps, and some travelers decide the VAT 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.
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, though, 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.
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.
FAQs
A value-added tax (VAT) is a tax on products or services when sellers add value to them. In some countries, VAT is also called a goods and services tax. Similar to but not exactly like a sales tax, VAT is applied throughout the process of a good's production, with consumers paying a percentage of the tax upon sale.
How does a value added tax or VAT work? ›
The main difference between a VAT and a sales tax is that a VAT is instead collected multiple times during the production of a finished product. Each time value is added or a sale is made, the VAT tax is collected and remitted to the government.
How does the VAT tax refund work? ›
You will receive an invoice for the goods. You must show the invoice, the refund form, the goods and any other necessary documents to the customs officers of the last EU country you leave. The customs officers must stamp the form as proof of export. Without the stamp, you will not obtain the refund.
How does VAT work in the USA? ›
The US lacks a federal VAT system due to its federalist system of government, which delegates tax management responsibilities to individual states.
How do you calculate VAT refundable? ›
To calculate VAT refund, subtract the total VAT paid on purchases from the total VAT received from sales. The resulting amount will indicate whether you are owed a refund or need to make an additional payment.
Is a VAT refund worth it? ›
Although you aren't entitled to refunds on the tax you spend on hotels and meals, you can get back most of the tax you pay on merchandise. For some, the headache of collecting the refund is not worth the few dollars at stake. But if you do more extensive shopping, the refund is worth claiming.
What are the advantages of value added tax VAT? ›
It can simplify exports and imports because a uniform tax percentage applies to a wider population. Additionally, it's imposed on many businesses, so it presents a system that universally taxes people the same amount, compared to other types of tax.
How are VAT refunds paid? ›
Repayments are usually made within 30 days of HMRC getting your VAT Return. Contact HMRC if you have not heard anything after 30 days. Your repayment will go direct to your bank account if HMRC has your bank details. Otherwise HMRC will send you a cheque (also known as a 'payable order').
Can you claim VAT back from the USA? ›
This tax is associated with shopping in the European Union, though more than 160 countries around the world use value-added taxation. It's a sales tax paid by consumers (not businesses), and it doesn't exist in the United States. Only visitors—including U.S. tourists—are able to qualify for a VAT refund.
Who pays VAT returns? ›
Registered businesses also keep VAT records, charge the right amount of VAT to their supplies, submit VAT returns, and pay any VAT due in a timely manner.
VAT stands for value added tax and it's a type of indirect tax. Indirect tax means that the payment of tax is passed onto another entity. So, let's say your business is VAT registered. You add VAT to your sales invoices and send them to your clients.
Do I pay VAT if I buy from USA? ›
If customs taxes are due, your courier will contact you with information and costs, but you may also be charged VAT and/or excise duty as well. VAT is charged on most goods at the standard rate of 20%, but some goods may be eligible for a reduced rate at 5% or even zero-rated at 0%.
How do you claim VAT back? ›
Claiming back VAT involves completing a VAT Return – usually each quarter. If completing the VAT Return form online on HMRC's website, you must enter how much VAT your business was charged in that three-month accounting period for goods and services you are able to claim VAT on. This is known as input VAT.
How do VAT refunds work? ›
VAT refunds
If you are resident outside the EU you are entitled to a VAT refund on goods you have bought during your stay in the EU if the goods are shown to customs on departure within 3 months of their purchase together with the VAT refund documents.
How is a VAT return worked out? ›
Unless you're using the flat rate scheme, you can calculate your VAT return by following the steps below: Add up the total VAT you've collected on sales (output VAT) Add up the total VAT you've paid on business-related purchases and expenses (input VAT) Deduct your input VAT figure from your output VAT figure.
How much VAT is refundable? ›
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. European Commission: Taxation and Customs Union. Guide To Vat Refund For Visitors To The EU.
How do you calculate VAT value added tax? ›
Calculating the VAT Amount
For a purchase price of x, we multiply x by 15%. But recall that 15% means 15 per 100 or 15/100. So the VAT amount on x is simply x multiplied by 15/100 = (x)(15/100). This means that there is VAT payable of R7 on a purchase price of R50.
How does VAT work with tax? ›
VAT is a consumption tax that is levied at each stage of the supply chain, from production to final sale to the consumer. Businesses registered for VAT must charge VAT on the goods and services they supply and pay the VAT they have charged to HM Revenue & Customs (HMRC).
Who needs to pay VAT? ›
Businesses must register for VAT whether they are incorporated or are sole traders, whether they pay corporation tax or not. Businesses with revenue below this threshold may also benefit from registering for VAT. VAT registration allows businesses to reclaim VAT on goods and services purchased by your business.
Who pays VAT taxes? ›
Key Takeaways. A value-added tax (VAT) is paid at every stage of a product's production from the sale of the raw materials to its final purchase by a consumer. Each assessment is used to reimburse the previous buyer in the chain. So, the tax is ultimately paid by the consumer.