United States: VAT - A Hidden Treasure

In order to promote a newly launched product, a US company's sales executive visited Germany and other European countries. After spending three weeks in Europe, he returns to the US and submits his expense report in the amount of $15,000. The expenses include hotel accommodations, meals, transportation, gifts for customers, and rent for his sales expo display. Each time he spends money he is charged Value Added Tax (VAT) at the rate of 16%. Not realizing the refund possibilities of VAT, the US company records the entire amount as expenses.

VAT is Value Added Tax and is applicable to almost all the products and services sold in many industrialized countries. The United States is probably the only country in the industrialized world that does not have VAT. VAT is a general tax on consumption, and is charged based on the price of goods or service. It is applicable at each stage of the production process. As explained in a European Union Tax Document, it is:

• A general tax - applied to all economic activities of production, distribution of goods and service, unless otherwise specified;
• A consumption tax - the end result of the chain of transactions for goods or services where the final consumer pays a tax inclusive price;
• A tax proportional to the price - "Value added" means that at each stage in the production a tax is imposed upon the value added at each point. Tax is paid on the value added at each stage, but all the tax paid at the preceding stage is deducted as it has already been paid. So the registered taxpayer only pays VAT on the value he has added. VAT paid at each stage is proportional to the value added at that stage, and as such, the final price of the product is equal to the sum of values added at each point.

Unless otherwise exempted, a registered seller in a VAT imposing country must charge VAT to every consumer. Foreigners or visitors to those countries are no exceptions. However, as the foreigners are not in a position to recover VAT from the local consumers, they are sometimes entitled to a refund of certain types of VAT paid. Claiming of VAT refund is a complex process, requires proper documentation, and includes submitting an application form that is often in a foreign language.

Generally, the eligible foreigners have to attach the following with their VAT reclaim application:

1. Original invoices, and
2. Proof of being a foreigner.

The US taxpayer must obtain a certificate from IRS regarding proof of US residency. The certificate, Form 6166, is acceptable document that can be attached to the VAT reclaim applications.

The deadline for filing the refund application varies according to the country. For example, in Germany all VAT reclaim applications must be filed on or before June 30 for the claims relative to VAT paid during the preceding calendar year. The deadline is extremely important in all cases. The tax authorities do not entertain any claims filed after the deadline. It is often advisable to file the application even if some of the documents are not available. The missing documents can be provided later when they are available.

It is estimated that billions of dollars in VAT are left unclaimed each year in many countries by the foreigners because of lack of sufficient knowledge or improper documentation. The rate of VAT averages around 19%, with top rates reaching 25% in some countries. According to an estimate, US companies are paying around $1 billion in VAT each year. Out of this, only 20% is reclaimed. This certainly can be a hidden treasure for many individuals, as well as businesses.  The actual refund can take from 6 months to 2 years to receive. One needs to have sufficient knowledge about the laws and procedures, and professional assistance can prove to be extremely helpful.