Fixing the VAT Refund Process Would Help Europe's Tourism Trade
(AP Photo/Bernat Armangue)
Fixing the VAT Refund Process Would Help Europe's Tourism Trade
(AP Photo/Bernat Armangue)
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A lawsuit filed in the EU last month could affect US tourists to Europe and beyond once people can begin traveling again--by allowing them to save more money when they shop abroad.

Tourists who visit Europe--as well as various countries in South America, Asia, and Africa--can get a refund of their value-added tax on goods they purchase that cost above a certain threshold. The rationale for countries to do this is that it should encourage tourists to spend more money while they are visiting their country--not just on goods but also on things like hotels and restaurants as well.

The VAT varies across the EU and ranges from 20 to 27 percent, so the savings can be sizable: someone purchasing a €500 handbag in Rome--which has a 22 percent VAT--could, in theory, save as much as €110  from her purchase.

However, the tourist does not save nearly that much because getting the refund necessitates a middleman, which currently eats up much of the refund. Two companies process nearly all VAT refunds in the EU, and they extract a sizable fee for their services.

Global Blue is the biggest VAT refund agent in the world and has over 70 percent of the EU market for this service. It largely obtained its market share by offering retailers a sweet deal: If it can be their sole VAT refund agent, it kicks back a portion of the VAT refund to the retailer. Over the years retailers have extracted ever-larger kickbacks from the duopolists, and the biggest among them receive half of the refund due tourists. This has become a key profit center for European luxury retailers, where sales to tourists make up the majority of their revenue.

This leakage means that this policy does a terrible job at encouraging tourists to spend more money: If the tourist getting the €500 handbag in Rome gets a refund of just €50, which she won’t receive until weeks after returning home, and for which she will have to fill out a paper form, queue at the airport, and then post the form in the mail, it won’t be very effective at motivating additional tourist spending. Most European tourists don’t even bother trying to get it.

A few companies are trying to change the model by putting the whole VAT refund process on a smartphone app, which would eliminate the paperwork and the need to queue at the airport while also shrinking the lag time. The boost in efficiency would also drive down the commissions significantly: the startups all charge around 10 percent of the refund.

However, the new entrants cannot get any traction in the market because of the exclusivity arrangements of the duopolists.

That may soon change: One of the new VAT refund companies recently filed a complaint to the EU Commission against Global Blue, contending that its exclusivity deals are effectively a restraint of trade that preclude competition in the market.

In the current market the VAT refund agents compete not by offering improved services or better prices for shoppers: rather, they compete against each other to obtain an exclusivity arrangement with a retailer to process its VAT refunds, and the two incumbents compete by increasing the kickbacks they offer. The outcome of this competition is completely antithetical to the intent of this policy--which is to boost tourist spending.

If the EU were to prohibit exclusivity arrangements it would see VAT refund agents compete more creatively for tourist business. This competition would be completely salutary, and would make the entire practice of VAT refunds more efficient: if tourists keep a lot more of their refund it would do more to encourage them to spend money while they’re abroad.

The EU recently announced that it would allow vaccinated U.S. tourists to visit the continent come summer, which was music to the ears of the many businesses that utterly depend on tourism. Reforming the VAT refund system so that it boosts spending would be an inexpensive way to help the industry when it desperately needs it.


Ike Brannon is President of Capital Policy Analytics, a consulting firm based in Washington, D.C.

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