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.

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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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