So your game is ready to take over the world, but have you thought about taxes? Our Tax and Finance Manager Irina Cherkashina has outlined everything you need to know about VAT and Sales Tax on digital content before going global to avoid fees, bans and even prison sentences.
The influence of globalization on the economy has extended to the realm of taxation. With the rapid growth of the digital services market, a new tax has emerged targeting digital service providers who operate outside the country; often referred to as the 'Google tax'.
The reason behind its introduction is quite straightforward: it's an attempt to make multinational internet giants contribute taxes in the countries where their customers are based. Prior to the enforcement of this tax, companies like Google used a completely legal tactic to avoid taxes by registering their main entities in countries known for their low or nonexistent income tax rates.
Authorities are framing the implementation of this law as a move to create a fair playing field for both local and foreign companies that provide online services to local customers.
Who does this law apply to? It targets digital companies that earn revenue in countries where they don't maintain a physical presence. The Organization for Economic Co-Operation and Development (OECD) has even introduced the concept of a "significant economic presence" for non-residents who engage in economic activities within the country using digital technologies and generate income.
In the videogame industry, the implementation of this tax has notably affected B2C companies. Now, when these companies sell a game or in-game digital content to individuals in countries that have adopted the 'Google tax', they are required to deduct and remit VAT to the government.
The tax imposed on digital goods varies from country to country. In Europe, VAT is applied. Canada applies GST, the United States charges sales tax, and Japan adds a consumption tax. At first glance, these taxes are similar, but there is a fundamental difference in each kind. And, of course, there are differences in the legislative regulation of registration, reporting, and tax payment processes in every individual jurisdiction.
Besides VAT, some countries impose additional taxes on the activities of non-resident electronic service providers, such as a digital service tax, withholding tax, or income tax. On top of game developers needing to deal with VAT registration, filing reports on time, and paying VAT, they also need to determine whether they have to apply these additional taxes to their activities.
This situation means that game developers find themselves caught in a complex endeavor to avoid falling into tax-related pitfalls. The repercussions for such a misstep can be quite severe – ranging from being banned in specific countries and facing monetary penalties to potential imprisonment, especially in nations like the United States.
What should a developer with global ambitions be prepared for? First, you need to understand that each country has its own procedures and requirements for VAT registration and reporting. For example, in the EU, there is a One Stop Shop (OSS) scheme for simultaneous VAT registration in all member states. In other words, developers don't need to register in each individual EU country. If the developer is not an EU resident, they must first appoint an intermediary fiscal representative in order to obtain a VAT number in an EU country.
After that, they can do a single simultaneous registration in all EU countries. Reporting is also submitted centrally once a quarter. Payment is made to one common account, from where it is then distributed to the countries where the actual sales happened. This may be one of the easiest VAT registration processes, considering that it covers all member countries.
Elsewhere, things get much more complicated. In some countries (e.g., Switzerland or Japan), the law obliges a non-resident company to appoint a local tax representative who performs VAT registration and submits reports on its behalf. For developers, this translates into additional costs for representation, filing VAT reports, and legal support in communication with the state tax authorities of a particular country.
These costs are permanent and reduce the profit from game sales in these jurisdictions quite heavily.
In other countries, such as Canada, it is not necessary to have a local tax representative, but there is another difficulty: in addition to the federal GST tax, some provinces have their own similar tax, which is also applied to game sales. For example, in the Canadian province of Saskatchewan, sales to local individuals are subject to an additional QST at a rate of 6%.
For developers, this means completing another registration process, filing reports with the Saskatchewan tax office, and paying this tax separately. The developer must also bear in mind that the federal tax in Canada has a registration threshold of 30,000 Canadian Dollars, while Saskatchewan requires registration and QST collection from the very first transaction.
Aside from accurately calculating and reporting the tax, developers also need to ensure timely payment, which can become intricate in certain countries. For instance, if you intend to sell your games in Mexico, you'll not only have to comply with the requirement of having a local address (a legal Mexican domicile) and a local representative (a legal tax representative), but you'll also need to establish a system for tax payments. There are three potential approaches for this:
Naturally, each of these methods also incurs additional financial costs, particularly if the company is a non-resident.
While the US serves as an enticing market for developers and publishers, it also presents one of the most intricate taxation landscapes. Unlike many other places, the US doesn't have a Value Added Tax (VAT); instead, it employs sales taxes, which aren't federal but rather vary from state to state. Each state functions as a distinct jurisdiction, featuring its own set of rules for registration, taxation, thresholds, and deadlines for report submission and tax payment. Remarkably, there are over 13,000 sales tax jurisdictions in total.
Various states define taxable items in distinct ways, necessitating sellers to grasp the applicable regulations for their specific products. This is particularly challenging for products like online video games, which often defy the traditional state sales tax definitions that typically pertain to "tangible physical property." Online games, being intangible, pose a unique challenge due to their nature of not being physically held. The approach varies: some states endeavor to apply tangible property tax rules to online games because they can be perceived even without touch, while others exempt them due to their intangible nature. Moreover, certain states adhere to uniform rules for all product types.
The most perplexing aspect for game business owners is the lack of definitions, guidelines, or regulations provided by some states for taxing intangible products. Delving into this matter demands varied resources from video game companies across different sectors, particularly those of financial nature.
To illustrate, consider the taxation disparity for selling a character skin in a browser game between the state of Oklahoma and the state of Arizona: In Oklahoma, sales tax is applicable to software only when on physical media, so virtual goods remain untaxed. On the other hand, Arizona applies not only a state tax rate but also county and city rates. Should the purchase occur in Thatcher, for instance, the sales tax encompasses 5.6% for the state, 1% for Graham County, and 2.5% for the City of Thatcher, culminating in a total tax rate of 9.1%.
In essence, tax rates don't solely differ at the state level but also extend to smaller jurisdictions. These rates might even diverge within the same city, and specialized software is necessary to determine and calculate the applicable tax.
Before you start selling your products in any country, you need to understand every nuance of local taxation.
Those are just the first questions to ask, and many more will follow.
Tax legislation around the world is constantly evolving. The rates change, and additional taxes and requirements are introduced regularly. Failure to comply with tax laws can result in a developer getting their game blocked in a particular country at a minimum or facing a prison sentence for tax evasion in the most severe circumstances.
These risks, constant monitoring, and additional costs associated with tax law compliance can be avoided by using the services of 1D3, which sells developers' games on its own behalf and takes full responsibility for collecting and paying VAT in different countries around the world. We know the markets, local regulations and have all the technical capabilities to automate paying VAT or sales tax in every country you might wish to enter. Get in touch with us to learn more!