What Is a VAT Tax?

The VAT or valued-added tax is a consumption tax levied on goods and services in countries that belong to the European Union. It's considered a consumption tax, because the ultimate consumer actually pays it. Producers, distributors and service-providers only collect the VAT tax and pass it on to the revenue department of the state.

VAT Basics

The European Union created the VAT in 1967 as a replacement for the many levels of taxation existing at the time in the original member countries, according to the European Commission. Most countries levied taxes at various stages of production, and the total tax rate on the final product or service was sometimes obscured.

By contrast, the VAT is a fixed percentage of the final price, so the total amount of the tax is clearly visible. Portions are still collected on various stages of production, but the total is a known percentage.

The VAT applies only to goods or services that are used within the European community. Goods and services aren't taxed when they move between different states in the EU or when they go out of the EU. Business travelers and tourists pay the tax up front, but they may qualify for refunds. An equivalent tax on imports keeps EU products on an equal footing with products from outside.

VAT Terms and Rates

A business under a particular monetary threshold doesn't have to collect or pay VAT taxes, but the threshold depends on the country. The EU requires every member state to charge at least 15 percent for most goods and services, and a special list qualifies for a reduced minimum of 5 percent, according to the European Commission. The actual tax rates vary and are subject to change. According to travel expert Rick Steves, VAT levels typically range between 15 and 25 percent, depending on the country.

Getting Refunds

Business travelers in Europe qualify for VAT refunds averaging 20 percent of many typical business expenses, according to the website for VAT It, a company that helps businesses navigate the refund process. Some of these refundable expenses include hotel bills, restaurant bills and transportation. The paperwork is cumbersome and involved, so many companies don't collect what they're owed.

Although they can't get VAT refunds on basic travel expenses, tourists qualify for a VAT refund on purchases, according to Rick Steves. In most countries, you must buy a certain euro amount of goods at the same shop to qualify, and the amount depends on the country. Getting the refund as a tourist is also a hassle, Steves reports. You must meet all these requirements:

  • Use a vendor that offers the refund.
  • Present your passport at the time of sale.
  • Ask the vendor to provide a refund form.
  • Have the vendor send in the form for you and remove the charge, or request your refund at a VAT refund agency near a major tourist area.
  • Alternately, you can request your refund at airport customs when you leave the EU.