Online gaming boom: the $100 billion industry and its tax liabilities

Tue Nov 8, 2016

Last month the League of Legends World Championship 2016 was won by a South Korean team, SK Telecom T1. The win netted the six team members a share of the $2 million-plus first prize: $338,000 each to be precise. Back in 1980 the first Atari Space Invaders Championship was held in New York when players competed (merely) for the highest scores. Just so you know: Bill Heineman of Whittier, California, won that competition with a score of 165,200.

Online gaming

Today gaming is big business, especially in the digital form. According to research from Newzoo online gaming will generate $99.6 billion in revenues in 2016, up 8.5% compared to 2015.

In early November 2016 the online gaming giant Activision Blizzard Inc. beat third quarter 2016 estimates reporting total revenue income as $1.57 billion, up 58% (from $990 million) in 2015. One of the contributing factors to this boost in Activision Blizzard’s revenue numbers was the launch of the Overwatch game. In the space of one month the game had already attracted 20 million players. Activision Blizzard had the biggest quarterly online player community in its history, with 42 million monthly active users. As we dig further into Activision Blizzard’s third quarter revenue we find that digital channel revenues were $1.34 billion, up a whopping 114% from the previous year.

In 2014, according to the Entertainment Software Association (ESA) annual report 155 million people in the U.S. (or nearly half the population) played video games. In the same year U.S. consumers spent $23 billion on the games industry. In the U.K. consumer spending on games such as League of Legends, World of Warcraft and Grand Theft Auto will top £3 billion in 2016.

All of these figures illustrate how popular, and lucrative, online gaming has become. And when a hobby becomes a job the taxman is never far away.

The crux of the issue in the modern world of online gaming is who pays the taxman? In a February 2016 missive KPMG’s Maltese branch distilled the issue of sales tax – value added tax (or VAT) in the European Union (EU) – and online gaming into ‘who is doing what for how much and when and where are they doing it’. Why KPMG Malta? Well, a high proportion of international online gaming companies have set up headquarters in the Mediterranean island.

The tax implications for online gaming

Since January 2015 international online gaming platforms have had to deal with the EU VAT rules on the B2C supply of digital services: legislation that specifically included online gaming.

In the explanatory notes of the rules introduced in the EU in 2015 the “supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events” were pointedly referred to as being within scope of the legislation. This means that the suppliers of such B2C services need to know where their end consumer is located so as to apply the correct VAT rate to a sale. However, the rules also mean that international online gaming platforms (if performing the B2C supply) must also store transaction data for ten years and remit the VAT collected to the relevant tax authority.

This taxation approach is a worldwide trend. Since the EU introduced the 2015 rules more tax jurisdictions have followed suit. The architecture of new rules in South Korea (since October 2015), New Zealand (introduced in October this year), and from January 1, 2017, in Russia mean similar compliance requirements for those affected. Add in the fact that Australia is set to introduce similar legislative amendments on July 1, 2017, and you get the point that this is a worldwide trend.

As a result online gaming platforms are now liable to collect VAT and (depending on their customer’s location) Goods and Services Tax (GST) on behalf of the game developer. This is the irrefutable presumption that applies to digital sales in the EU, South Korea, New Zealand, Russia (as of January 1, 2017) and in Australia from July 1, 2017.

Need for a standardized taxation approach

Across the globe there is an increasing need to standardize the architecture of these rules that bring online platforms under the umbrella of VAT/GST collection and remittance. This was touched upon by the European Games Developers Association (EGDA) policy paper on how to build an EU digital single market.

Point 5 of the policy paper stated that: “Any proposal for new regulation should focus more on building a system where relevant industry and civil society stakeholders, national authorities and the European Commission co-operate to solve the constantly emerging challenges in its implementation. A good way to do this is to benchmark the best practices from the cooperation of national tax authorities on how they keep the VAT framework of the digital single market area up to date.”

Next steps for international online gaming platforms

Issues for international online gaming platforms when attempting to predict and comply with the swathe of new rules are multilayered.

The obstacles to compliance range from threshold calculation, invoicing, transaction data storage time limits, and VAT/GST rate calculation. The fact that the requirements for all of the above vary from jurisdiction to jurisdiction muddies the waters where compliance is concerned.

Let’s take threshold calculation. Well, in the EU – and in Russia from January 1, 2017 – this problem does not exist as there is no threshold included in the legislation. All suppliers of B2C digital services to consumers in the EU must collect and remit VAT to the relevant tax authority.

In New Zealand, however, a threshold of NZD$60,000 over a 12-month period is in place. For an online gaming platform this threshold is calculated on the total amount of sales from the platform, not on a per-developer basis. The platform, remember, is performing the business-to-consumer (B2C) sale and is therefore liable for the tax due, in this case New Zealand GST.

In reality online gaming platforms will likely be above the threshold in all jurisdictions that extend VAT/GST place of consumption rules to cover the supply of online games to consumers.

The tax principle of rules targeting online gaming platforms

The principle of these new rules is the same worldwide, be they VAT or GST applications. That principle is that taxation on the supply of digital services is to be applied based on the place of consumption.

However, the implementation of these rules varies from one jurisdiction to another. In reality these platforms need to be able to do the following to achieve global VAT/GST compliance:

  • Determine in real time which rate to apply in case of conflict of customer location
  • Issue compliant invoices for each country in real-time
  • Use the correct fx rate for any conversion
  • Save the data and documentation to support audit for years (e.g 10 years in EU)
  • Update their system when a new country is introducing the rules or a country is changing their rate
  • Find a tax advisor specialised in electronic services to provide them with an explanation of how the rules works whenever a country is introducing these rules
  • Find a technology tax advisor to confirm that the system they have put in place works as it should and comply with the advice received

How Taxamo helps

Taxamo provides practical information regarding new digital VAT/GST laws that make it easier to determine an appropriate solution and partner required for the business at a reduced cost. Taxamo also coordinates with local tax advisors when needed in order to gain practical insight in what is required for businesses regarding their VAT/GST liabilities.

In addition Taxamo now offers the added benefit of assuming the VAT/GST liability for all sales in supported regions by acting as an interface, thereby becoming part of the supply. For VAT/GST purposes the digital business will be deemed to sell the product to Taxamo Assure, who will then simultaneously sell to the end customer. This will be recognised with back-to-back invoices. Taxamo Assure will calculate, collect, report on and remit VAT/GST on global digital sales thereby reducing risks and costs to the digital merchant.

Rest assured when it comes to online gaming and the tax landscape, with Taxamo you are covered.

Note: Taxamo content is created for guidance only, please consult your local tax advisor.

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