Tax free shopping: Why buying items overseas without tourist VAT refunds can lead to ‘double taxation

Shopping without a tax: Why it could result in “double taxation” if you buy things overseas without getting tourist VAT refunds Singapore: Imagine waiting to pay for a brand-new designer bag you’ve chosen at a boutique on Bond Street, London’s premier luxury shopping district.

She returns the passport to you apologetically and informs you that there is no longer a tourist refund scheme or Value Added Tax (VAT) refund in the UK as you hand over your credit card and passport to the staff.

If you knew that you would also have to pay the Goods and Services Tax (GST) when you got back to your home country, would you still make the purchase despite the possibility of receiving a 20% VAT refund? Or would you abandon me?

If the number of international tourists doubles in 2022, will they also choose to spend their money in nations with the highest tax rates?

CNA investigates the reasons why tourists continue to shop in locations that do not offer such programs and the reasons why tax breaks for tourists are seen as a useful incentive.

What are refunds for tourist taxes?
If the purchase meets the minimum spending requirement, tourists can get their money back through a tourist refund scheme.

If a tourist makes a purchase in Singapore that is greater than S$100 at a participating store, they are eligible to receive a refund for the GST they paid.

Tourists in Australia, France, Japan, South Korea, and other well-known destinations can also ask for a tax refund on their purchases.

Tourists can get a tax refund in Japan, where the standard VAT rate is 10%, at certain stores with a minimum purchase of 5,000 yen (S$51.57).

According to Professor Sum Yee Loong of the Singapore Management University, countries that offer refunds for tourist taxes believe that providing tourists with a VAT refund will boost both tourism and spending by tourists.

The professor of accounting added that it also boosts the profitability of shop owners, department store owners, and the hospitality industry as well as tourist spending in the country.

TAX RELIEF IS “A GOOD INCENTIVE” According to Associate Professor Lau Kong Cheen of the Singapore University of Social Sciences, tax relief for tourists is a good incentive to increase purchases and generate tourism revenue.

“This may reduce the appeal of shopping in nations that do not offer a VAT refund to some extent. On the other hand, it depends on the purpose of the purchase and the products that are available in those countries,” he added.

Global Blue, a tax refund company, conducted a survey in 2021 and found that 60% of UK shoppers said they would spend more in stores at their destination if they could get their VAT back.

According to Assoc Prof. Lau, prior to Brexit, the United Kingdom had provided tourists with tax refunds when it was a member of the European Union.

Prof. Sum added that tax-free shopping was eliminated at the end of 2020 to boost government revenue.

The news site euronews reported that the UK’s Association of International Retail (AIR) claims that Britain is the only European nation that does not offer tax-free shopping to visitors from abroad.

Kwasi Kwarteng, a former finance minister in the United Kingdom, made the announcement in September that Britain will reinstate sales tax-free shopping for tourists from other countries to boost the retail sector.

Bloomberg reported that retail lobby groups were calling for the tax to be removed prior to Kwarteng’s mini-budget in 2022 in order to increase foot traffic in prime parts of London that were still struggling due to the effects of Brexit and COVID-19.

According to Prof. Sum, the retail and hospitality sectors gave the short-lived Liz Truss government’s announcement to reintroduce tax refunds for tourists an extremely favorable and positive response.

When Rishi Sunak became president, the move was subsequently abandoned.

According to Associate Professor Simon Poh of the NUS Business School, it is also a matter of choice whether the tax authorities choose to provide tourists with tax relief.

“The decision is made after considering and weighing the objective of encouraging tourists to spend more (by providing maximum relief) against the objective of maximizing tourist revenue (by providing little or no relief).”

Assoc Prof. Poh went on to say that, from the tax authorities’ point of view, the main costs will come from hiring employees to process tourist tax refunds at airports.

He stated, “If this scheme can attract more tourists into a country that contributes to its economic growth, the money may be well spent.”

When there is no VAT refund, why do people continue to spend?
Even though tourists are not eligible for tax refunds in some countries, such as the United Kingdom and the United States, there are a number of reasons why they choose to shop overseas, including the novelty of the products, the ability to purchase keepsakes for loved ones, and their affordability.

According to Assoc Prof. Lau, “there could be certain authentic items that are only available in specific countries,” such as KitKats in particular flavors that are only available in Japan and not the rest of the world. “Souvenirs are frequently one of the most popular reasons for tourists to make purchases – either as memorabilia for themselves or (as) gifts for their loved ones back home.”

The Singapore Tourism Board reported on January 17 that the country’s tourism revenues are expected to reach S$13.8 billion to S$14.3 billion in 2022, or roughly 50 to 52% of what they were in 2019.

Indonesia, India, and Australia were the top spenders in the first nine months of 2022, bringing in an estimated S$8.96 billion.

Prof. Assoc. Lau added that a part of the appeal is also the ability to purchase goods at lower prices due to favorable exchange rates.

Nikkei reports that at some stores, duty-free sales in Japan have exceeded results for the same period prior to COVID. In October, the country lifted the restriction on individual inbound travelers.

It added that foreign tourists’ high-priced purchases are also being pushed up by the weaker yen.

According to Nikkei, duty-free sales at Takashimaya and four other high-end department stores increased to between 50% and 90% of sales in November 2019 from 20% in November 2022.

According to Assoc Prof. Lau, some research has demonstrated that being able to enjoy value for money is one of the top factors influencing shopping tourism. This is despite the fact that favorable exchange rates may encourage tourists to shop in locations that do not provide tax refunds.

“Tourists will still buy if they see value in what they buy, even if VAT refunds are not available.

“Extending beyond this is the rarity of certain desirable products that cannot be purchased outside of particular countries, such as cultural art and craft, luxury items, and (other) items.”

Prof. Sum also mentioned that the UK’s VAT rate is 20%, so favorable exchange rates may still be appealing to consumers in countries like the UK, where the pound will fall by about 13% between 2021 and 2022.

He added that if the countries of Europe do not provide VAT refunds, then a favorable exchange rate might not be appealing to consumers of brand-name products from Europe, particularly from France, Germany, and Italy.

Why is it necessary to pay GST on imported goods?
According to Assoc Prof. Lau, one of the reasons countries require residents to pay GST when they return home is likely to discourage residents from purchasing items overseas in bulk with the intention of making a profit by selling them at home and taking advantage of the countries’ tax breaks.

According to Assoc Prof. Poh, international shoppers may also be required to pay GST or VAT in the country they are traveling to before bringing or importing the same goods into Singapore, if the amount is not covered by the GST relief.

He continued, “Any GST refund they can obtain abroad will alleviate the incidence of double taxation they may face.”

According to Assoc Prof. Poh, some consumers may be discouraged from shopping in nations that offer little or no tax refunds, particularly for large-ticket items.

However, Assoc Prof. Lau stated that absolute costs of such a tax refund program cannot be accounted for.

“It depends on how much a nation gains from spending on tourism in comparison to losing VAT tax. It makes sense for countries like Singapore, Japan, and South Korea, which rely heavily on shopping tourism, to boost their local retail scenes,” he added.

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