Magento – ‘Refund Online’ missing on Credit Memos for Paypal Express Checkout

We ended up coding a module to rewrite the core IPN Model which suppresses the automatic creation of Credit Memos when a Paypal Refund is issued. Instead, it adds an Order Comment with the Paypal Transaction ID (for reconciliation) and raises an Admin Notification that the administrator should manually create an Offline Credit Memo to correlate with the monies refunded at Paypal. This allows the administrator to mark the appropriate Order Items as Refunded, apply alterations to the amount (Adjustment Fees, etc). This is now working happily in production and can be reviewed in our Github repo.

By default, the community edition of Magento has refunds disabled in the Paygate Models. In order to enable them you need to create a custom Model and overwrite a protected variable.