Why leave the value added tax behind? Give it to Global Refund!

This is a part of Standpoints (Marko Pinteric) site.


Tax-free shopping is somewhat connected to avoidance of double taxation principle. For the ware produced in one country and sold in another, this principle means that it is unnecessary to tax it twice, in both countries. Actually, it gets taxed only in the country where it was sold. There are many bilateral and multilateral Agreements between countries to apply this principle.

This principle is grossly used by importers and exporters all over the world. But in the most of European countries it can be also used by private persons - shoppers. In principle, one avoids paying tax for the product bought in the foreign country, but one still has to pay tax at customs, by entering one's home country (together with customs duty if given). However, in countries there are often by law specified limits: (1) the lowest invoice value limit to be eligible to avoid paying foreign tax and (2) the highest product(s) value per person limit to avoid paying home tax.

But of course this is much more complex in reality: Shopper must first pay both the ware and the tax, and get by seller filled tax-return form. (This special forms are exactly specified by each country separately and could be also bought at paper shops. However, this does not guarantee one that the seller will be willing to fill it.) This form must be then stamped by foreign customs to acknowledge that the ware left the country. Eventually, one also pays his own country's tax to his native customs. But to get the foreign tax back, one must go again to the shop, where ware was bought and show the stamped form. Warning! There is also a time limit (usually six months) in which the tax refund should be claimed!

Still many people decide to go shopping abroad. This is not only for the reason that the ware is cheaper there (such differences are rapidly disappearing because of free market regulations). Often you can buy the ware, which worth is high enough to be eligible to get the foreign tax back, but low enough (per person) to be eligible to avoid paying native tax. Therefore, despite some effort, you save paying taxes! And this is sometimes a respectable sum!

Calculating the exact amount of tax refund

One thing that often confuses people is the fact that they get less tax refund than they have calculated themselves. The difference originates from the fact that tax (percentage) is added to the net value of the ware, while people often calculate tax (percentage) from the gross value of the ware. For example: If the net price of the product is 1000 units and the country's tax is 20%, you pay gross price 1200 units and get 200 units back later. However, 200 represents only 17% of the gross price (1200 units), despite it does represent 20% of the net price (1000 units).

So how to calculate the tax from the gross price? Let N and B represent net and gross prices, respectively, while T and t represent tax value and tax percentage, respectively. Then B=N+T = N+t*N, or with some calculation T=(t/(1+t))B. So, the right percentage to calculate the tax value/refund is t/(1+t) (or t/(100+t) if you calculate in hundreds), which is always smaller percentage than the nominated one! To see the difference, see the table below

Nominated tax (from net)Tax refund (from gross) Nominated tax (from net)Tax refund (from gross)
10.0%09.1% 11.0%09.9%
12.0%10.7% 13.0%11.5%
14.0%12.3% 15.0%13.0%
16.0%13.8% 17.0%14.5%
18.0%15.3% 19.0%16.0%
20.0%16.7% 21.0%17.4%
22.0%18.0% 23.0%18.7%
24.0%19.4% 25.0%20.0%

Global refund "generous" commissions

For those who do not intend to return to the same country/shop in next six months, above described procedure is out of the question. And this is where companies like Global Refund came to the rescue. They make three changes to the above procedure: (1) instead of the country-dependent one gets company-dependent tax-refund form (2) company refunds tax in one's native country and deals with tax-refund form itself (3) company takes huge commission to do that.

OK, the principle of the commission is in place, because the company does have costs by sending forms, paying local employees accepting forms, refunding money etc. However, how much is this commission? Except the lump estimate, that they take only 3% to 5% of the value - that sounds fairly small commission, does it - company would not tell the exact value of the commission to the shoppers: "We regret having to inform you that our refund-tables are only handed over to our affiliated shops but not to private persons. However, if you'd like to know the refund amount for a certain purchase amount we'll gladly look it up for you."

To understand that surprising fact, maybe we should consider that small commission of only 3% to 5% of value. The commission percentage is calculated from the whole ware value, not the tax refund value! Which means that in case the country's tax values to 16% (Germany) and they take 3-5% for the commission, they will actually take 19%-31% of tax refund for themselves! This could hardly be considered reasonable, no matter of the expense for dealing with those forms.

There is a big controversy among the shoppers about calculating the exact tax refund value, because they calculate it from the gross price of the ware (see previous chapter). In my opinion, the company is using this controversy to hide their own "generous" commissions. On their site, you won't find any clear explanation how to calculate the full tax refund value. They don't want you to know how. If you ask for their commissions, they will start to explain the difference in calculating the tax from the gross and the net value. If you keep insisting, they will simply refuse to tell you.

Global Refund claims that only American travellers in Europe leave behind at least $50 million in unclaimed VAT refunds per year. Obviously, their message is "Why leave the value added tax behind? Give it to us!"

Related links

Euro-shoppers need stamina for tax refund, USA Today Travel, 2001-07-13

VAT tax list

CroatiaPDVPorez na Dodanu Vrijednost22%
FranceTVATaxe a la Valeur Ajoutee?
ItalyIVAImposta sul Valore Aggiunto?
SloveniaDDVDavek na Dodano Vrednost9/20%
United KingdomVATValue Added Tax?

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