Did you know that you can receive a refund of up to 20% of the VAT on merchandise bought for use in your business? (Depending on the country of course) In case you’ve purchased items for personal use, it is possible to recover VAT as well, but only the business proportion of it.
How the VAT system works
All countries have unique laws and policies which dictate the standard Value Added Tax. European Union countries, for example, have Value Added Taxes on goods and services ranging from 5% to 15%. However, each member country has the freedom to set their own rates. These taxes differ from product to product and depending on the merchant as well.
Nonetheless, there is a basic understanding of how the government solicits VAT on every product that adds value, from the point of production to consumption within the supply chain. When the consumer purchases a product, all the previous buyers are compensated for the VAT they’ve spent.
Picture this, Country A has a 10% Value added Tax. Jill’s paper mill buys raw materials for a total price of $1.10, inclusive of a 10% VAT ($0.10). This means that $0.10 is payable to the government of Country A.
Jill’s paper mill sells printable paper rolls to Jack’s printing firm for $5.50, including a VAT of $0.50. Nonetheless, Jill renders 40 cents to the government, which apparently is the value-added tax at this stage in the supply chain. Since the paper mill’s gross margin is $4, note that the 40 cents equal the government’s payable 10% value-added tax.
Jack’s printing firm sells books to Jim’s book store for $22, including a 10% VAT of $2. This essentially means that Jim’s bookstore renders $1.60 to government A. This amount also equals the 10% payable tax of the book store’s gross margin.
But how do you recover VAT?
- Minimum Threshold
There are several factors considered before you are deemed eligible for a sales tax refund. First and foremost, your purchases have to reach the minimum threshold. In Turkey, for example, consumers have to make purchases above 118 lire (approximately $22) to become eligible for VAT recovery.
- Prepare Paperwork and Purchases
When buying items or merchandise for personal use, it is important to buy them from retailers participating in the tax refund system. This is because refund processes vary from place to place and some merchants may not have enrolled into a VAT refund scheme.
- Submit for Approval
Some retailers assist customers in speeding up the VAT refund process. Such retailers have a tax free label displayed on their storefront. Also, some consumers might consider seeking third-party agencies that provide immediate tax returns, at a fee. In case you are a business, consider using a tax preparation program to file calculate and recover VAT.
Nonetheless, it is important to note that even after filling and submitting all the required documents, sometimes reimbursement might not be possible. However, regardless of the complications, VAT registration is paramount if you want to recover VAT.