Tax risks for global digital video game platforms
Video gaming platforms need to be aware of the implications of tax jurisdictions worldwide introducing new laws that will impact their business models.
By 2020 the global digital video game market is predicted to become a USD$90 billion industry. Less than two decades ago it was an industry struggling with declining sales due to its over-reliance on physical video games. Today, thanks to advances in information technology – specifically improvements in broadband quality and the birth of the smartphone – there has been a stunning renaissance.
Today, the growth in in-game micro-transactions and downloadable content (DLC) is giving the industry another shot in the arm. Video game platforms have matured as a method of distribution and have grown as the digital game download has become the norm. Valve Corporation’s creation Steam, is one such platform, with many naming it the “iTunes of video games”. The platforms typically take a 30% cut of all sales from the game developers who use the platform to reach the massive audience it provides. For example, there are 125 million users signed up to Steam which hit a new record of 14 million concurrent users in January 2017. The appeal in using a platform, like Steam, is obvious.
In business success also brings risks and potential pitfalls. The same information technology that has led to an industry renaissance also allows video games to be accessed by anyone, from anywhere, and at any time. This creates a borderless global economy and unlimited potential for the platforms but it also brings indirect tax implications.
This is the price of success, but how many international video game platforms are aware of the implications of tax jurisdictions worldwide introducing new laws that will directly affect their business models?
A borderless industry has tax implications
This digital revolution means consumers are, literally, everywhere. Tax jurisdictions across the globe have been introducing new ways of taxing the digital economy for the best part of the last decade. The introductions have accelerated in the past two years with the European Union, South Korea, Japan, New Zealand, Russia, and Serbia all introducing such rules taxing the digital economy with Taiwan (on May 1) and Australia (July 1) set to follow suit in the months ahead.
All of these tax jurisdictions are taking their lead from OECD guidelines that were officially endorsed in Paris in April 2017.
The OECD recommendations will, in practice, generally result in the liability for the video game platform to collect and remit the tax, not the seller. This, typically, means that the platform must register with the tax jurisdiction that introduces such rules, calculate the applicable VAT/GST rate, collect it from the digital video game sales, and then remit it to the tax jurisdiction.
Piet Battiau, Head of the OECD’s Consumption Taxes Unit, speaking recently to TaxNotes.com, expanded on this recommendation: “Recommendations are not legally binding, but they reflect a strong political consensus. We will be working on more detailed implementation guidance to apply those principles to existing business models, sales delivery models, etc., to try to help governments understand and implement the guidelines consistently. The idea is to achieve consistency, and that is very much the focus we have at the moment.”
As more and more tax jurisdictions have extended or introduced such rules the digital video game platforms have seen the effort required to support a country, for example India. The platforms are now looking for a scalable and practical way to handle the plethora of countries poised to introduce the rule. Over 40 jurisdictions are in the planning phase of introducing such rules.
Unless a platform engages in the practice of geo-blocking, effectively taking the decision not to sell to a certain jurisdiction, then they will be liable for the tax due on the digital sales.
Partner with Taxamo
Taxamo, however, is one step ahead. By partnering with us we take on a platform’s digital tax liability in impacted countries, thus allowing the platform to concentrate on their core area: selling video games.
Our model is such that we become the liable party for the tax due. This means that we remove the regulatory headaches attached to modern-day international video game sales.
We also know that every business is different, we use this knowledge to create bespoke solutions for each partner.
We will tend to your global tax liabilities so you can continue to sell your services.
UPDATE - Wednesday, April 26 (7.15pm): The first version of this blog post incorrectly stated that: “The key OECD recommendation is that the video game platform should be liable for the tax, not the seller.” This is not the case and has now been corrected.
PLEASE REMEMBER THAT THIS INFORMATION HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND IS NOT PRESENTED AS SPECIFIC TAX OR LEGAL ADVICE. ALWAYS CONSULT A QUALIFIED TAX OR LEGAL ADVISOR BEFORE TAKING ANY ACTION BASED ON THIS INFORMATION. VERTEX INC. ACCEPTS NO LIABILITY FOR ANY LOSS RESULTING FROM ANY PERSON ACTING OR REFRAINING FROM ACTION AS A RESULT OF THIS INFORMATION.