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

SINGAPORE: Imagine standing at the cashier counter, waiting to pay for a new designer bag you have picked out at a boutique along Bond Street - the home of luxury shopping in London.

As you hand your credit card and passport to the staff, she apologetically returns the passport to you and informs you that there is no longer any tourist refund scheme, or Value Added Tax (VAT) refund in the UK.

Would you forgo the potential 20 per cent VAT refund and proceed to buy the item, bearing in mind you would also have to pay the Goods and Services Tax (GST) upon returning to your home country? Or would you walk away?

With international tourists doubling in 2022 compared to the previous year, will travellers also choose to spend their money in countries that offer maximum tax relief?

CNA takes a closer look at why analysts say tax relief for tourists is a good incentive and why people continue to shop in destinations without such schemes.

WHAT ARE TOURIST TAX REFUNDS?

A tourist refund scheme allows tourists to claw back a percentage of the amount they have paid if the purchase meets the minimum spending requirement.

In Singapore, the scheme allows tourists to claim a refund on the GST paid if they purchase more than S$100 at participating shops.

Other popular tourist destinations like Australia, France, Japan and South Korea also allow tourists to claim a refund on the tax paid on their purchases. 

In Japan, where the standard VAT is 10 per cent, tourists can claim a tax refund at certain shops with a minimum purchase amount of 5,000 yen (S$51.57). 

Countries that have tourist tax refunds take the view that if there is a VAT refund for tourists, it will boost tourism as well as tourist spending, said Professor Sum Yee Loong from the Singapore Management University.  

It thus increases tourist spending in the country as well as the profitability of shop owners, department store operators and the hospitality industry, the professor of accounting added. 

TAX RELIEF "A GOOD INCENTIVE"

Tax relief for tourists is a good incentive to elevate purchases and generate tourism revenue, said Associate Professor Lau Kong Cheen from the Singapore University of Social Sciences. 

“To a certain extent, this may make shopping in countries with no (VAT) refund less appealing. Then again, it depends on the shopping intention and the items available to those countries,” he added.

According to a 2021 survey by tax refund company Global Blue, 60 per cent of UK shoppers said they are more likely to spend in shops at the destination if they can claim back the VAT.

Prior to Brexit, the UK had offered tax refunds to tourists when it was a member of the European Union, said Assoc Prof Lau.

Tax-free shopping was abolished at the end of 2020 to increase government revenue, added Prof Sum.

According to the UK’s Association of International Retail (AIR), Britain is now the only European country that does not offer tax-free shopping to international visitors, news site euronews reported. 

Last September, former British finance minister Kwasi Kwarteng announced that Britain will bring back sales tax-free shopping for overseas visitors to boost the country’s retail sector. 

Prior to Kwarteng’s mini-budget in 2022, Bloomberg reported that retail lobby groups were pushing for the tax to be removed to boost footfall in prime parts of London that were still struggling from the impact of Brexit and COVID-19. 

The announcement by the short-lived Liz Truss government to re-introduce tax refunds for tourists received extremely favourable and positive response from the retail and hospitality industry, said Prof Sum. 

The move was later scrapped when Rishi Sunak took office.

It is also a matter of choice whether the tax authorities choose to provide tax relief for tourists, said Associate Professor Simon Poh from NUS Business School. 

“The decision is made after considering and balancing the objective of encouraging tourists to spend more (by giving maximum relief) and measuring it against the objective of maximising tourist revenue (by giving little or no relief).”

Assoc Prof Poh added that from the perspective of the tax authorities, the main costs will be the administration costs when deploying workers to process tourist tax refunds at the airports. 

“The money may be well spent if this scheme can attract more tourists into a country which contributes to its economic growth,” he said.

WHY DO PEOPLE STILL SPEND IF THERE’S NO VAT REFUND?

While some countries such as UK and the United States do not have tax refunds for tourists, there are multiple factors that appeal to tourists to do their shopping overseas - the novelty of the items, souvenirs for loved ones and affordability. 

“(There) could be certain authentic items that are only available in specific countries, such as KitKats of certain flavours only found in Japan and not in the rest of the world … and souvenirs are often 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,” said Assoc Prof Lau. 

On Jan 17, the Singapore Tourism Board said the country’s tourism receipts are estimated to reach S$13.8 billion to S$14.3 billion for 2022 - about 50 to 52 per cent of 2019 levels. 

In the first nine months of 2022, receipts came up to an estimated S$8.96 billion, with the top spenders hailing from Indonesia, India and Australia. 

Assoc Prof Lau added that the ability to purchase products at a less expensive price due to favourable exchange rates is also part of the appeal. 

According to Nikkei, duty-free sales in Japan to date in December 2022 have exceeded pre-COVID results for the same period at some stores. The country lifted the ban for individual inbound travellers in October.

The weaker yen is also driving up high-priced purchases by foreign tourists, it added.

Nikkei reported that duty-free sales in November 2022 at Takashimaya and four other high-end department stores rebounded to between 50 per cent and 90 per cent of sales in November 2019.

While favourable exchange rates may attract tourists to shop at places that do not offer tax refunds, Assoc Prof Lau said some research has shown that one of the top factors influencing shopping tourism is being able to enjoy value for money. 

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

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

For places such as the UK, favourable exchange rates may still appeal to shoppers as the pound has fallen around 13 per cent between 2021 and 2022, said Prof Sum, who also noted that the UK VAT rate is 20 per cent.

A favourable exchange rate may not appeal to shoppers of branded products from Europe, especially in France, Germany and Italy if the countries do not offer VAT refunds, he added.

WHY DO YOU HAVE TO PAY GST ON PRODUCTS BOUGHT OVERSEAS? 

One reason countries make residents pay GST upon returning home is to probably deter residents who purchase items overseas in bulk with the intention of making a profit by selling them at home, thus benefitting from the tax relief from the countries they have visited, said Assoc Prof Lau. 

Travellers shopping for goods overseas may also have to contend with first paying GST or VAT in the country they travel to, and again when the same goods are brought or imported into Singapore, to the extent that the amount is not covered by the GST relief, said Assoc Prof Poh. 

“Any GST refund that they can obtain overseas will alleviate the incidence of double taxation that they potentially face,” he added.

Some consumers may be deterred from shopping in countries with little or no tax refund, particularly for big-ticket items, said Assoc Prof Poh. 

However, the cost of such a tax refund scheme cannot be accounted for in absolute terms, said Assoc Prof Lau. 

“It depends on how much a country benefits from tourism spending versus the loss of VAT tax. It makes sense for countries that depends a lot on shopping tourism that will boost their local retail scenes such as Singapore, Japan and South Korea,” he added.