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VAT on my VACation…

September 29, 2010

I had taken a trip with my kids to London, Paris and Rome when they were in high school or maybe Junior high (how time flies). I think Chelsey was 14 and Lace was almost 12. It was a huge family trip for us that we had planned for a few years. We used a tour company and felt secure that we would be taken care of and we would then just concentrate on having fun. We quickly found that teenagers are not always the best travelers nor do they really want to see the sights…they’d rather shop…and shop and shop! Anywhere in Europe where we bought “goods” we were charged a VAT Tax.

Quick explanation on how a “Value Added Tax” (VAT Tax) works:

It’s basically a consumption tax like a retail tax. But it’s collected from every business along the production chain, with each business getting a rebate for the tax paid at the previous stage. For example, take the sale of bread. The farmer is selling a quantity of wheat at $300, plus a 10% VAT; the miller pays $330 to the farmer; the miller incurs $400 in costs to grind the wheat, so the 10% VAT adds $40; the baker incurs another $300 in costs, resulting in $30 of VAT, so the final cost of bread to consumers becomes $1,100 – $1,000 for the loaves and $100 for the VAT. To be clear the loaf of bread is not $1,100, just the cost to produce the loaves (plural)…the point being that the VAT will increase your cost somehow.

Some have suggested that the USA establish a National Sales Tax just like the VAT to reduce our increasing deficit. We clearly have a flawed income tax system with lots of preferential treatment and high taxes on corporate income. If we consider a VAT to help reduce the deficit we will need to retain the income tax we currently have and the VAT could help reduce existing income tax rates or to increase exemptions so that fewer taxpayers file income tax returns. Hmmm, that sounds good. Some suggest that adding the VAT will stifle spending; certainly a possibility, but, so would raising income tax rates and eliminating credits and various write-offs. We need to do something and the VAT has helped other countries. Hey they have been around a lot longer than us…

Okay, so back to the travel story…

We shop and shop with the girls and I don’t worry because the sales people and airport people are all telling me that you keep your receipts and you fill out a form when you get home and the London, Paris and Rome tax entities will send me a check for the VAT I paid.

What they didn’t tell me was the form was several pages and required detail receipt descriptions etc; and after my secretary spent a day completing the paperwork and another day fussing with me about how much I spoil my children, it turned out that I could not get a refund of the VAT, because this was not a business trip.  Who knew! There is always a catch. The girls did stop whining and enjoyed the shopping!

At Gunwel we are here to help you sort out your vacation plans and give you pointers on what to do with your receipts. Give us a call at 212-979-6830 or stop by for a free consultation. Our website www.gunwel.com has our contact info. See you soon!

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