Tax-free shopping – how does it work?

  • Tax-free shopping –  how does it work?
Issue 39, October 2011.

 Tax-free shopping – how does it work?
The attractiveness of shopping abroad has become more and more widespread among the citizens of Ukraine recently. Ukrainians now prefer buying goods outside the country due to several reasons: competitive prices, almost all-year-round sales, large variety of brands and collections, absence of certain brands in the local market and the opportunity to combine a vacation or business trips with shopping. However, few people in Ukraine are aware of the tax-free shopping system which works in the European Union (EU) member states. The system allows travellers to get a refund of value-added tax (so called VAT) paid in the price of the goods purchased in the foreign country upon their return from the trip. Moreover, even fewer Ukrainians use the benefits of the tax-free system in practice. Let’s have a quick glance at the tax-free shopping system and whether Ukraine offers something similar for foreign visitors who come to Lviv, for example.
What is tax-free shopping?
VAT is charged on the value of goods in more than 30 countries around the world, most of which are located in the EU (for ordinary consumers, it is not visible as the tax is included in the retail price of goods). In the European countries the price of consumer goods includes VAT that can be as high as 25%.
VAT is a form of consumption tax. In practice it means that the tax should be charged and paid in the place (country) where the goods which are subject to taxation are consumed. One of the main principles of the VAT system is that a transaction cannot be taxed twice (e.g. in two countries). As travellers who do shopping in the EU countries often bring purchased goods back to their home country, a special system of VAT refund to individuals exporting goods in their personal luggage to a destination outside the EU was designed.
How much can I save on an Ipad bought in Europe?
Foreign nationals who leave the boundaries of the internal market of the EU have the right to get back a certain proportion of the price of goods purchased within the EU, equal to the VAT paid in the price of the goods purchased whilst on holiday/business trip. For example, an Ipad purchased for EUR 1,000 in Austria where the VAT rate is 20% would be eligible for a refund of approximately EUR 167 (less commission) on leaving Europe to come back to Ukraine. Of course, Ipads are available for much less – this just shows the relatively large savings available.
In order to be eligible for such a VAT refund the person must reside outside the country in which he or she makes the purchase and have no permanent residence permit in the EU. Some countries set up time limits within which the goods must be exported. In addition, VAT is only refundable if some stipulated minimum amount is spent in one store during one day. This amount varies from country to country. 
How to get your VAT refund?
A refund can be received in cash at the customs border, in the shop where the goods were purchased during a subsequent visit or upon return to Ukraine. In order to get a refund of VAT, one has to fulfill certain conditions:
1. Goods have to be bought in stores that are part of a unified European system of tax-free shopping. Tax-free shops are usually marked with a distinguishing sign ;
 

2. A special receipt should be issued on the purchased goods subject to presentation to customs officials at departure;
3. The receipt should be stamped at the customs border which is compulsory in order to receive a VAT refund.

As a rule, refund of VAT is possible on purchases made in tax-free shops which issue tax-free receipts in compliance with standard rules. However, there is also possibility to get a VAT refund on purchases made in ordinary stores with regular VAT receipts (each country has specific rules on the refund procedure, including minimal amount of purchase, time limits and formal requirements regarding confirming documents).
There are no limitations as to the number of receipts or maximum amount of purchase subject to VAT refund. However, while applying for a VAT refund people should be ready to pay commission of on average 4-7%. Hence, in most cases the net amount of refund is the amount of VAT paid less commission.
Does the tax-free system work in Ukraine?
In theory a tax-free system works in Ukraine for tourists, however, there are few locations which perform VAT-refund operations. We are aware of only two banks in Ukraine (Privatbank, http://privatbank.ua/; VTB, http://www.vtb.com.ua/) performing such operations which, according to our information effect VAT refund payments with no issues/delays.
Travellers should also remember about complying with Ukrainian legislation and follow the rules of importing goods into Ukraine. Note that according to Ukrainian customs regulations, only goods whose total value does not exceed EUR 200 and 50 kg of weight can be brought by travellers in their personal luggage to Ukraine without customs duty and import VAT.
Western Ukrainians who live within 30Km of the Polish border benefit from a special free border control regime. For such citizens, no Schengen visas are required provided that special permits are obtained. Such permits, resembling a European style identity card with photo, cost around EUR 20 and are valid for 1-5 years (depending on the country).
For these fortunate residents of Ukraine, VAT refund will be especially beneficial as more and more big shopping malls are being opened at the border (e.g. just within Poland)
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Undoubtedly, the European tax-free shopping system is a pleasant factor when shopping. Though in theory the process of getting a VAT refund seems simple, in practice it may take some time and efforts to complete the documents properly and to find the points willing to return money without additional unnecessary questions and requests.