The world is going through an upsetting and unprecedented situation, with all of us being impacted by Covid-19 pandemic. The lockdowns and self-isolation have led to a significant increase in consumer engagement with online games. People are spending more time gaming than ever, and the gaming market has seen unprecedented levels of engagement in the first half of 2020.
Who would have thought that global gaming would become a behemoth generating revenues in excess of $152 billion in 2019? Out of this, digital gaming revenues form more than 90% of the total gaming revenue. There are online gaming tournaments with potential prize winnings in excess of $100 million, and as reports suggest, some of them are much larger than the actual physical playoffs. Interestingly, in 2020, the Middle East and Africa region will grow the fastest year on year, up 14.5% from 2019 while accounting for 14% of players worldwide.
Before talking about the tax implications, let’s discuss the broad constituents of the gaming industry ecosystem.
Game developers: game developers are inventors of the games. They take the game designer’s ideas, drawings and rules, and then turn them into playable games through codes.
Game publishers: publishers are responsible for marketing, sales, and PR of the game. Developers often choose to self-publish the video games they create, while some large publishers have developers working for them.
E-Distributors/retailers: these are the organizations which sell the games/game accessories to the end-users. Platforms such as Google Play, iOS, Steam are the best examples of distributors.
Hardware/software developers: hardware/software developers provide necessary tools, such as consoles, graphic cards, etc., to run the games. Some most common examples are Sony, Nvidia, Intel, Discord, etc.
Gaming arena: these are dedicated gaming centers where players assemble and play tournaments, camps, etc.
Players/broadcasters: The players are the end-users of the gaming industry. Professional gamers often create their own dedicated teams for professional tournaments, esports, etc. Professional gamers earn revenue from sponsorships, marketing, selling of games/ in-app purchases, etc. The broadcasters (i.e. gamers), earn revenue on the number of viewers on their streams, paid subscriptions, donations, influencer marketing, etc.
Streaming platforms: professional gamers/broadcasters stream their content and live games on dedicated streaming platforms. Popular examples are Twitch, YouTube Gaming, Mixer, etc.
E-Gaming and VAT
The online gaming ecosystem broadly has three stakeholders: game developer, publisher/distributor/operator (i.e. e-gaming platform) and the players. The e-gaming servers could potentially be located in one part of the world and the players in a completely different geographical location. In this context, how publishers and e-gaming operators manage their worldwide tax (including VAT) obligations is a matter of interest.
For example, the e-gaming operator could be based in the United Arab Emirates (UAE) and the players based outside the UAE. Typically, in such online transactions, two fundamental questions need answers: where should the revenues be taxed (place of supply) and how much should be taxed (value of supply)?
Online transactions in the UAE (including the supply of games) are classified as “electronic services” subject to VAT to the extent such services are used and enjoyed in the UAE, regardless of the place of contract or payment or location of the e-gaming operator. Similar provisions are applicable in the VAT laws of Saudi Arabia and Bahrain.
Identification of the correct place of “use and enjoyment” of digitally supplied electronic services is challenging and, consequently, governments in the majority of countries have started putting specific legal provisions in place to tax these transactions.
Tax authorities globally are moving to legislate and tax online revenues in the country of consumption (i.e. location of the residence of the customer) rather than the country of the service provider. Although there are no detailed provisions in the UAE VAT law to identify the place of consumption, some parameters used (by the EU and Saudi Arabia) to determine it include the IP address or billing address of the customer, home country bank account details, credit card used by the customer to transact online, or the country code of the mobile SIM card which is used to register for the game. If any of these locations are in the UAE, there is a high probability that the Federal Tax Authority (FTA) would require VAT to be paid in the UAE on the revenues generated.
Interestingly, unlike generic import transactions in the UAE requiring customers to discharge VAT liability under reverse charge mechanism, the obligation to pay VAT on electronic services where the customers (i.e. players) are individuals, should be on the e-gaming operator. This would oblige the e-gaming operator to register and account for VAT in the UAE. However, if the player is a VAT-registered taxpayer, the obligation to pay VAT shifts to them instead of the e-gaming operator. A similar approach is taken by other Gulf Cooperation Council states, EU countries and many other countries including India, Russia, Australia, Malaysia.
If a UAE-based e-gaming company allows a UAE-based customer to download a game in the U.K., the UAE may be considered as the actual place of use and enjoyment (and not the U.K.) even though the game is downloaded and played in the U.K. If an individual customer located in the U.K. plays an online game, the UAE-based gaming operator may be required to register for VAT in the U.K. and discharge U.K. VAT (subject to U.K. VAT regulations). However, if the customer is a U.K. VAT-registered taxpayer, the obligation to pay VAT is on the U.K. taxpayer under the reverse charge mechanism (subject to U.K. VAT regulations).
Each e-gaming operator needs to identify the actual “use and enjoy” parameters and assess its VAT obligations in all countries where it has customers. This entire process could be quite onerous considering different VAT legislation of each country and, therefore, significant challenges in identifying the correct place of use and enjoyment coupled with managing the B2C and B2B conditions of the sheer number of people playing games online and their geographical spread.
Since the obligation to pay VAT could be in a number of countries, other issues to be managed by e-gaming operators include real-time compliant local VAT/GST invoicing, country-by-country registration, applying correct country tax rates, periodic filing in each country, managing foreign exchange rates, an update of the IT system according to updates in the tax laws of the respective countries, storing transaction-based data in servers to support audits, etc.
After identifying the “Where,” i.e. the place where VAT needs to be paid, the next challenge is “What,” i.e. the amount on which VAT should be paid. E-gaming operators have varied forms of revenue depending upon their business model but typically generate revenues from four streams: online sale of games, advertisements, subscriptions from players, sale of in-game products (such as in-game virtual currencies, upgrade of characters and tools), and commissions from the winnings of online gaming tournaments.
- With regard to professional gamers, they need to be mindful about their different revenue streams and identify the tax implications thereon. Typically, these include:
- Subscriptions: the players/broadcasters need to identify the geographical location of the subscribers and check the tax implications in those countries. For a broadcaster located in the UAE providing subscription services to subscribers outside the UAE, it would not be subject to tax in the UAE. Since the nature of the transaction is B2C, the place of supply of subscription services would be the location of subscribers and thus, the broadcaster may need to obtain registration in subscribers’ countries.
- Donations and sponsorships: players need to ascertain if the donations could be linked to any supply made by them (i.e. treated as a consideration against a taxable supply). Further, the players receiving sponsorships need to check the location of the sponsor to identify “place of supply” and accordingly, ascertain the VAT implications.
For the gaming arenas physically located in the UAE, the e-services are provided to customers located in the UAE. Thus, the “place of supply” of subscription fee/tournaments fee, etc. would be in the UAE and consequently, subject to VAT.
Talking about the streaming platforms, they typically earn revenue from advertisements and channel subscriptions. For advertisement services, the platforms need to identify the location of the recipient most closely connected to the services provided and identify their “place of supply.” The UAE VAT law recently clarified the rules related to zero-rating of services, and it would be critical for streaming platforms to carefully assess the conditions for zero-rating. Regarding the subscription fee, for a streaming platform located in the UAE, the VAT implications would depend upon the geographical location of the customers. If the customers are located outside the UAE, the place of supply shall be outside the UAE, and thus, outside the scope of UAE VAT. On the other hand, if the customers are in the UAE, the services shall be subject to the standard rate of tax.
Challenges and Planning
The biggest challenge global e-gaming operators are currently facing with the tax authorities is the amount to be subject to VAT for MMOs (Massively Multiplayer Online games), which involves multiple players ranging from hundreds to thousands of players playing games online. In a few MMOs, the players deposit money in a fund/escrow using the e-gaming operator’s platform and the winnings are distributed later to the tournament winners. The challenge is whether the entire amount collected by the e-gaming operator is subject to VAT, or VAT is payable on the net amount after deducting the e-gaming operator’s commission.
Depending on how the VAT legislation defines the term “consideration,” the e-gaming operators should carefully assess and compute the tax amount in the respective countries. Determining whether payment of money in a fund/escrow should be considered a deposit and not a transaction in money would play a key role. Ideally, contribution to a fund should not be treated as a consideration for the supply of services and thus, not subject to VAT.
Secondly, identifying whether the receipt of any contribution from the players is towards any supply made by the e-gaming operator. The e-gaming operators only facilitate the players to contribute and earn a margin from the contribution received and distributed among players after deducting the operator’s commission. The supply, therefore, is only to the extent of the commission charged from the players and should not be the entire contribution received. It will also be important to determine how the e-gaming operators account for such amounts in their books of accounts.
Other issues that could potentially be a matter of discussion include free player life, coins, bonus plays, and other promotional offers as part of the games. Matters requiring a careful review include whether they attract the VAT deeming provisions along with their eligibility to recover input VAT.
Some EU countries have published sufficient guidance on the above issues, specifically for the e-gaming operators. However, the UAE and other Middle East countries still need more clarity on such aspects.
The Organization for Economic Co-operation and Development (OECD) has been actively working with various countries on matters relating to the taxation of digital transactions globally. In addition to VAT, the tax heads of e-gaming operators and publishers should also be mindful of managing their corporate tax and transfer pricing obligations globally.
Nimish Goel is a Partner and Parth Sharma is a Senior Associate at WTS Dhruva Consultants, United Arab Emirates
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.