The Sneaky Little European Tax That's Robbing U.S. Businesses Blind

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Duty free shop at the airportAirports are usually boring places, packed with chain eateries and plastered with inoffensive decoration. Yet, within even the most modest international airport, there is a place of wonder, a veritable Aladdin's cave of bargains: the Duty Free Shop. Tempting those lucky few who are traveling out of the country, it offers cut-rate prices on a vast array of luxury items. The reason for the discount is simple: Duty-free purchasers don't have to pay many of the taxes that ordinary consumers are stuck with.

Once they get to their destination, international travelers are often treated to an even wider array of discounts, as many tourist-oriented shops use tax refunds as a selling point. By showing their international customers how to apply for their tax refunds at the airport, these stores are able to offer what amounts to an almost-instant rebate.

However, while individual tourists may get help navigating the confusing world of tax refunds, international businesses are often left on their own. In fact, according to a recent study by the OECD Centre for Tax Policy and Administration, almost 72% of companies that spend money overseas have had a difficult time getting refunds on their value-added tax (VAT). In fact, 21% aren't able to reclaim any of their VAT.

This adds up to an impressive amount of money: In the European Union, the average VAT is roughly 20%, and they have risen sharply since the beginning of the Great Recession. According to Michelle Lang, the VAT director at Taxback.com, "78% of EU member states have increased their VAT since 2008." Today, in fact, VAT accounts for 30% to 40% of total revenues in most EU countries, with outlier France deriving a whopping 51.3% of total revenues from value-added taxes.

Under the circumstances, EU member countries are not inclined to make refunds easy. Each has its own set of confusing, Byzantine VAT rules that make it hard to seek refunds. For Americans, who often aren't prepared to deal with VAT, the bureaucratic red tape and accounting costs are often more trouble than they're worth. On the other hand, the 20% increase in the bottom line can discourage investment in Europe.

While it's hard to pick the best country for being cooperative with businesses on VAT, Lang notes that the worst one is definitely Italy. "Most countries take four to six months to process and return VAT," Lang notes. "In Italy, it can easily take a year and a half." For companies that must wait to get their money back, Italy's 20% VAT tax is essentially an interest-free loan that they extend to the Mediterranean country. For those that give up on retrieving the money, it's a gift to government in Rome. A great deal for Italy in the short term, the outrageous VAT delay may ultimately have the effect of discouraging international investment -- especially for companies whose budgets are already stretched tight.


Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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CanuckinCT

wrong. businesses that are operating in VAT countries easily get their VAT back as a credit - known as an Input tax credit (ITC)> Individuals travelling to VAT countries may be able to obtain a refund of VAT on goods exported, or when they purchase goods in duty free zones / shops they pay the VAT at a rate of 0%. Where is the great difficulty in that?

July 06 2011 at 5:21 PM Report abuse rate up rate down Reply
laferiabil

The real value of the Euro Dollar is about 92 cents The europeans pay for thier oil in dollars and they manipulate the value of the dollar to keep the fuel costs stable. Germanys dautch mark was valued at about 47 cents when they converted to the Euro most German business converted one to one. The value was initially set at 92 cents per euro and was pretty stable for a year. Then the European common market found the could manulipate the value of the Euro and we would not defend the dollar. In some ways the high Euro is beneficial to us because it makes our exports cheaper and european impots higher ($24 a pound for french Roquefort) In truth the Euro has very weak underpinnings. Greece, Portugal.and Ireland are in dire financial straights. France is not far behind them and when Greece defaults the house comes down. If the US fails to raise the debt ceiling and defaults it will take the Euro Dollar with it and probably the british pound. China's Yuan will become a dominant currency and may even replace the dollar as a world currency. Only the multinational Corporations will survive and in truth they will profit from a US. default

July 06 2011 at 3:11 PM Report abuse rate up rate down Reply
EGON

Actually, purchasing anything "Duty Free" at airports borders on stupid. Their prices are significantly padded to make up for the much higher rents and general costs for that location. Secondly, you can buy the same items cheaper in mom and pop stores anywhere while still be eligible to receive VAT refunds. If you decide to ship the stuff back home your VAT taxes can be waived on the spot. I've done this many times, including automobiles.

July 06 2011 at 12:01 PM Report abuse rate up rate down Reply
jfsny14626

EUROPEAN TAX how important is this ? Mr Obamas stimulus Cost to taxpayers of $278,000 per job I would think that story is more important.
That information was given out on July 3 the DAY BEFORE FOURTH OF JULY WEEK END I WONDER HOW MANY PEOPLE SEEN THAT ON CABLE NEWS? Thanks Mr Barick Hussan Obama you really know what your doing... I cant wait until 2012.

July 06 2011 at 11:44 AM Report abuse rate up rate down Reply
mr427bballer

there all greedy pricks, always trying to find more ways to make easy money with out public notice.

July 06 2011 at 11:39 AM Report abuse rate up rate down Reply
frankerin

Are you suggesting European governments are thieves?. Shame Shame. We are not supposed to see that and never comment on it Our allies would be mad. Obama will apologize on his next trip or the wife will when she goes shopping.

July 06 2011 at 11:37 AM Report abuse rate up rate down Reply
dwroes

I haave found that if you have the things shipped to the U.S. instead of taking them in baggage, you don't pay VAT. I have purchased over $4000.00 in copper cookware and other things from DeHillerins in Paris and always have the things shipped. Just don't exceed the $350.00 customs allowance each time!

July 06 2011 at 11:35 AM Report abuse rate up rate down Reply
jfsny14626

"stimulus Cost to taxpayers of $278,000 per job," . "In other words, the government could simply have cut a $100,000 check to everyone whose employment was allegedly made possible by the 'stimulus,' and taxpayers would have come out $427 billion ahead." Thank Mr Barick Hussan Obama you really know what your doing... I cant wait untill 2012.

July 06 2011 at 11:27 AM Report abuse rate up rate down Reply
1 reply to jfsny14626's comment
whamhammer

Actually, if you use the spending multiplier for the Government to "inject" money in to the economy;

Lets argue the average person spends 95% of thier take home pay.

1/(1-.95)---------1/.05 = 20 ----- $278,000/20 = $13,900

$14,000 would have done the job just as well.

July 06 2011 at 11:41 AM Report abuse rate up rate down Reply
Vlado

as long we will take it and pay they will be collecting with smile on they face, very simple Stop flying for a year and do not buy anything at airport and you will see change really fast.

July 06 2011 at 11:18 AM Report abuse rate up rate down Reply
qapla5

Why do people think they're due a refund on any tax they pay overseas? This just sounds like a way that smart countries are able to get these US companies that manage to skip paying their fair share of taxes in the US to pay their fair share in other countries where they do business. And for those of you who constantly whine about how bad our income tax system is, the VAT is no different from the "flat tax" that Steve Forbes and many GOPers have been praising for the last several decades.

July 06 2011 at 10:59 AM Report abuse -2 rate up rate down Reply
3 replies to qapla5's comment