The European countries and many more around the world charge a Value Added Tax on goods and services. Unlike the sales tax used in the U.S., which is added to the sales price, VAT is built into the prices when you spend money during your overseas travels. A number of countries will refund the VAT on items you buy and take home. With the local VAT rate, a quick calculation will show how much of the price goes to government tax collectors.
A Universal, But Hidden Tax System
VAT is a national tax system where each country -- and almost all countries use one -- sets the tax rate. The tax is included in the prices charged for goods and services. For example, the European Commission reports that the VAT rate in Germany is 20 percent. If a German retailer wants to sell a pair of shoes for 100 euros, the price will be set at 120 euros with the VAT added. When you shop overseas, you may be pleasantly surprised to not see any sales tax on your receipt. The difference with VAT is that the tax is built in rather than added on top of the cost.
Calculate Sales Price and the Rest is VAT
With the VAT rate and price on an item, you first calculate the price the seller received for the product. What's left in the price is the VAT amount. To illustrate, while in Germany, you spend 200 euros on a Bavarian hiking outfit. The seller's amount will be the price divided by one plus the VAT rate. For your shorts and suspenders cost break down the math is 200 divided by 1.20, which equals 166.67 euros. Subtract that from your cost and the VAT was 33.33 euros.
Getting Your Money Back
The basic rule for VAT refunds is that you can recover the tax on items you buy and take with you when you leave the country. You will not get a refund on services like hotels, dining out, or those Swiss spa treatments. You can apply for a refund on the collectibles and souvenirs that you plan to carry home as mementos of your international travel adventure.
Claiming Your Refund -- or Not
The process of obtaining a VAT refund on your qualified purchases takes a few steps. The most common way to go is to use a refund check system, which is available at any business promoting tax-free shopping. When you buy something, the merchant gives you a shopping check in the amount of the refund. At the airport you show your refund checks, the items purchased, and claim your payment from the tax refund system's kiosk. There is a charge for this service that reduces your refund. As an alternative, you can ask the merchant for a VAT refund form, show the goods and have the form stamped at the airport, and mail the form to the merchant when you get home. With this path you get the full VAT back as a check or credit card refund.