What is the theory behind VAT refunds?

You go to Europe, you spend over a certain amount of money, and you can get your VAT refunded to you. Why do the countries bother? Is this just to encourage foreigners to spend lots of money?

I’ve always assumed that it was to encourage to spend money. One might be afraid to go on a spending spree knowing that you had to pay a lot. Instead you get a “refund” of sorts.

Although with a VAT, isn’t a tax added on each time the good is sold. So, you’re only getting the refund on the last part of the chain, aren’t you?

I could be completely wrong.

Take with sufficient salt.

Goods exported from the EU are free of VAT. An exporter does not charge his overseas customers VAT, and claims a VAT input credit for any VAT which he himself paid when buying the goods, or the raw materials from which he made the goods.

A shopkeeper usually does not know whether his customers are resident in the EU or not (although, of course, typically they are) so he usually charges VAT to all his customers. Shopkeepers can, if they wish, have facilities for customers to order goods to be delivered to an address outside the EU, and will not charge VAT to those customers, and shopkeepers catering to the North American tourist market will often offer this service. Similarly mail-order businesses will not charge VAT on goods ordered from, and delivered outside, the EU.

The VAT refund service is the logical extension of this principle. A tourist visits the EU, buys goods over-the-counter, and then exports them when he leaves to return to his home country. He can claim back the VAT he paid on the goods exported.

BobT, you can claim back the whole amount of the VAT (less a handling charge, if you use a commercial reclaim service, as most tourists do), not just the final part.

My understanding is that it is because of the principle behind VAT and similar taxes (such as GST here in Australia), namely that they are consumption taxes. Since the goods being exported are not being “consumed” (or used) then the consumption tax should not be collected. The problem is that the tax is included in the purchase price, so a refund scheme is needed.

Of course it is impractical to refund small amounts, hence the lower limit.

I’m having a hard time finding an on-line cite to back this up, but this page has the following statement of principle relating to the Australian GST:

UDS and Lord Mondegreen have it right. VAT-style taxes are supposed to be taxes on domestic consumption, so all imports are taxed and exports zero rated. The historical reason for this as a feature of the tax is to aid harmonization between different European Economic Community (now EU) members. Taxing only domestic consumption means that trade flows are not distorted by the tax.

Tourist spending is an export. It’s important to exclude these exports from tax so as not to distort the pattern of exports a country has - you want to export according to compative advantage and differernetial tax treatment would disrupt this. It is in practice difficult to do this well, and a major disadvantage of the newish Australian GST is in its treatment of tourism and education exports. The problem is liable become more severe as the services sector grows.

No, you get the full refund. VATs tax each stage in the chain, but the full amount is collected (ie 10% of the transaction price here) every time. Firms claim an invoice credit for taxes paid on their inputs, which cancels out all the prior levels of tax except the last one.

You don’t need to go that fare to get sales tax refunds (I’m assuming you’re American)! Same applies in Canada for GST refunds.