One of the unique features of GST(VAT) globally is the revenue neutrality, where in the exports are not taxable in the country of origin but imports are at the destination. Accordingly, Place of Supply provisions are designed to facilitate that and every country has adopted the procedure to grant refund to foreign nationals if they have purchased locally but are taking it along with them on leaving that country; called as VAT refund for visitors. This process also attracts customers to visit a destination for shopping as they get comparative advantage in pricing. There are many jurisdictions which have started the process of establishing kiosks at the airport wherein the foreign nationals before stepping on the foreign territory can get their claim of VAT refund with a small verification process, which makes them a shopping-friendly destination. In addition, there are facilities for foreign nationals to experience VAT free shopping. This article is a study of and a guide on the European Union process relating to VAT refund for visitors to the EU which can also be customised and adopted in other jurisdictions including India.
What is VAT Free Shopping?
Value added tax (VAT) is a multi-stage sales tax, the final burden of which is borne by the private consumer. VAT at the appropriate rate will be included in the price you pay for the goods you purchase. As a visitor to the EU who is returning home or going on to another non-EU country, the Visitor may be eligible to buy goods free of VAT in special shops.
Who is a ‘visitor’?
As per EU mandate, a ‘visitor’ is any person who permanently or habitually lives in a country outside the EU. The visitor’s address as shown in the passport or other identity document will be taken as the place where the visitor permanently or habitually live.
Example: Thomas lives and works in Brazil but spends three months every summer in Portugal, where he has a time-share in a villa. Thomas’ permanent address is in Brazil, so he is a ‘visitor’ to the EU while in Portugal.
In some countries, the visitor may also qualify as a ‘visitor’ if he is living in a EU country for a defined period of time for a specific purpose, but his permanent home is outside the EU and he is not intending to return to the EU in the immediate future. EU citizens permanently living in non-EU countries are also eligible for the VAT refund.
Example: Paul is a Belgian citizen but lives permanently in Canada. Once a year, he returns to Belgium to visit his parents. Paul is a ‘visitor’ and can apply for a refund on the basis of his Canadian residence card.
‘Tax-free’ shopping: how is the VAT refunded?
Can’t one just pay the VAT-free price in the shop?
No. one has to pay the full VAT-inclusive price for the goods in the shop and can claim VAT refund once you have complied with the formalities and have shown the proof of export.
Process of Refund Claim in EU
- When the visitors are in the shop, they should ask the shop assistant in advance whether they provide this service.
- Also ask the shop assistant what threshold applies to the purchase in order to be eligible for a refund.
- At the check-out, the shop assistant is obliged to ask the visitor to provide proof that you he/she is a visitor to the EU. The visitor will need to show his passport or other identity document proving his residence outside the EU.
- The shop assistant will ask the visitor to fill in a form with the necessary details. The visitor may be asked to show the return ticket as proof that he is leaving the EU within the required time. The shop assistant will fill in the shop’s part of the form.
- Make sure the visitor understands exactly what he needs to do and how he receives the refund. In some cases, the shop itself will refund visitors. In other cases, the shop will use a third party to organise the refunds on its behalf.
- Make sure the visitor understand whether the shop takes an administrative fee for this service (which will be later deducted from the refunded amount) and if so, what is the fee.
- The visitor will receive an invoice for the goods. The visitor must show the invoice, the refund form, the goods and any other necessary documents to the customs officers of the last EU country they leave. The customs officers must stamp the form as proof of export. Without the stamp, the visitor will not obtain the refund.
- The visitor must then follow the steps explained in the refund document or by the shop assistant. The visitor can claim the VAT refund in bigger airports immediately, otherwise the visitor will have to send the refund form to the address given in the shop.
The precise details will depend on how that particular shop organises the refund procedure.
Example: John came from the US for a vacation in Europe. He bought a designer bag in Paris; some clothes and shoes in Milan and Budapest. In each shop, he got refund forms filed. Within a month, John leaves to US from Budapest. At the airport, he shows the purchased goods to the customs officer and gets the refund documents stamped. Some of the refund documents were provided by a refund intermediary- he finds their refund counter in the airport and gets the refund immediately. An administrative cost is deducted from the refund amount. The remaining stamped refund document he has to send back to the shop where he purchased the goods.
Will the Visitor get all the VAT refunded?
This is unlikely. In the great majority of cases, there will be an administrative charge for the service. Make sure the visitor find out how much will be charged when still in the shop.
Can someone else go to the shop for the Visitor?
No. The Visitor must be there in person in order to make a VAT-free purchase, although he is not required to pay for the goods himself.
Will the Visitor have to wait until receipt of the refund?
Not necessarily. In some larger ports and airports, the visitor may be able to obtain a refund straight away once the customs officers have stamped the form, provided the shop in which the visitor bought the goods uses this facility.
Where can the Visitor complain if he/she does not receive the refund?
The visitor can complain to the company from where he bought the goods because this company has a principal responsibility to give the refund. If, that company used an intermediary the visitor may first apply to the intermediary. The European Commission does not intervene in particular cases of VAT refund to foreign visitors.
Can the Visitor buy goods VAT-free from any shop?
No. Shops do not have to offer a VAT-free facility. Those that choose to do so must make the appropriate arrangements with the tax authorities.
How shall the Visitor know whether a shop is a VAT-free shop?
The shop will usually display a prominent sign in the window, advertising that it is a ‘tax-free’ or ‘VAT-free’ shop.
Can all goods be bought VAT-free?
No. There are some goods that do not qualify. The facility is intended for goods that could in principle be carried in personal luggage. Goods that have to be exported as freight, for example, cars and yachts are excluded. Some countries may also exclude other categories of goods.
Is there a threshold on each purchase?
To avoid administrative burdens over small-value items, there is a minimum value of EUR 175 (or the equivalent in national currency outside the euro zone) for the total purchase, but EU countries may set lower thresholds. The threshold applies to the total amount of goods bought in a certain shop. Normally, the visitor cannot cumulate purchases in different shops to reach the threshold. The visitor will receive a separate form in each shop in which they buy goods. The visitor can enquire with the national tax authorities on the thresholds applicable in a particular EU country.
How soon do the goods have to leave the EU?
The goods that the visitor buy VAT-free must leave the EU by the end of the third month after that in which it was bought.
Example: Bruce, who lives in Canada, has been on holiday in Italy for two weeks. He buys a designer suit from a VAT-free shop on 10 September. The suit must leave EU territory no later than 31 December.
Does the Visitor need to take the goods with him when he leaves the EU?
Yes. The goods must accompany the visitor when he leaves the EU. The visitor cannot buy VAT-free goods if for any reason, he cannot or does not wish to take the goods with him when leaving the EU. Moreover, the visitor has to be ready to demonstrate those goods to the customs officer who will stamp the VAT refund form.
Does the Visitor have to leave the EU straight-away from the country where he purchased the goods?
No. The visitor can buy VAT-free goods even if he is going to be visiting other EU countries before he finally returns home, as long as he actually leaves the EU with the goods within the time limit. The visitor has to get the documents stamped by a customs officer at the point of exit at the EU – not necessary in the same EU country where he bought it from.
Be careful if the Visitor leaves the EU by train!
The visitor may be able to get the VAT refund documents stamped at certain train stations . However, the visitor might need to get off the train at the last station within the EU to get this stamp. Other methods could also apply, e.g., a customs officer might be boarding the train.
This depends on the trains’ route and the internal arrangements in each EU country.
We therefore strongly advise the visitor to consult in advance with the national authorities or refund company on the arrangements applicable.
What if the Visitor did not get a stamp?
In principle, the stamped VAT refund document is obligatory for VAT refund.