“Metaverse” is the latest buzzword spreading on the internet—the idea of an interconnected 3D virtual world where users will be able to work, play and socialize is exciting to many. Although the term “metaverse” was initially coined by Neal Stephenson in his 1992 novel “Snow Crash,” it sparked huge public interest after Facebook rebranded itself as “Meta” in October 2021. Soon after this, many tech companies began discussing the apparent potential that the metaverse holds for their businesses.
The metaverse has a huge potential to change the way online meetings and virtual events are conducted. Due to its highly immersive and extensible nature, the metaverse could be used to host events of any size and type, from small office meetings to large-scale conferences. In the future, we may choose to discard traditional conferencing platforms in favor of virtual environments where we will interact with other participants’ avatars.
How does value-added tax fit into this virtual reality? In view of the increasing popularity of metaverse events, a question inevitably arises whether tickets to virtual events should attract the same tax treatment as those of their physical counterparts, or whether they should be treated just like any other digital service.
Digital Service or Virtual Event?
The EU VAT legislation defines digital services (“electronically supplied services”) as services delivered over the internet or an electronic network, the nature of which renders their supply essentially automated, involving minimum human intervention and impossible in the absence of information technology.
Online events that require some substantial real-time human involvement on the organizers’ side (e.g., a virtual conference with live sessions) will be unlikely to meet this definition. An example of a virtual activity that could qualify as a digital service is an online exhibition where the organizer simply allows virtual users to enter a particular virtual location but does not interact with them in real-time. The fact that such an event would allow real-time human interaction among the event participants is irrelevant as only the involvement on the side of the supplier is taken into account for VAT purposes.
The EU VAT law contains a special rule for admission to events. As this rule was originally designed for physical events, the question arises whether it can also apply to an event taking place entirely in the metaverse. In other words, can virtual activities be considered an event for VAT purposes?
The EU VAT law does not define the term “event.” Fortunately, some guidance on this concept was provided by the Court of Justice of the European Union (CJEU). In the case Srf konsulterna (C-647/17), the CJEU ruled that “admission to events” was not equivalent to the right to enter a place, but rather, this term covers the right to participate in an activity, such as a course or seminar. In other words, an event does not require access to a specific physical location; it is participation that matters.
In her opinion concerning the same case, Advocate General Eleanor Sharpston indicated some other characteristics of events—indivisible activities planned in advance that take place over a short period of time, and that concern a predefined subject matter. This means that metaverse events may qualify as events for EU VAT purposes if they are short, uninterrupted and planned in advance.
Having established that activities in the metaverse may be regarded as either events or digital services from the VAT perspective, let’s take a closer look at the tax treatment of both categories.
Tax Treatment of Digital Services
Under the EU VAT law, digital services are taxable in the country where the customer is established, has its permanent address or usually resides. If the customer provides the seller with its VAT identification number (business-to-business, B2B, sale), the seller does not need to charge any VAT on the transaction as the reverse charge mechanism will apply. This means that the customer needs to account for VAT on the sale.
If digital services are purchased for private purposes (business-to-consumer, B2C, sale), the seller needs to establish the location of each customer to charge the correct tax rate. This could be done on the basis of several indicators, such as billing address, bank details, or IP address.
Tax Treatment of Events
The current EU VAT rules contain a special rule for admission to events which states that admission to events is taxable in the country where the event takes place. While this rule may be easy to apply in the physical world where the place of event can be pinned down to a particular geographical location, it does not seem to be well-suited to virtual reality which has no connection to any particular territory.
As event organizers can be located in multiple countries, it may not be easy to determine which of them should be considered as the place where the event takes place.
The EU realized that the fact that virtual events are taxed in the same way as physical events creates considerable legal uncertainty for event organizers, and proposed new rules that, if adopted, will need to be implemented by the member states by 2025.
Under the new rules, virtual events will no longer be deemed to be supplied in the country where the event takes place, but always in the country of the customer: they will thus be broadly aligned with the tax treatment of digital services. No tax will be charged in B2B transactions, whereas in B2C sales, event organizers will charge tax at the rate of the customer country.
The new rules are a welcome development for companies organizing virtual events. Once they take effect, it will no longer be necessary to engage in a complex exercise of determining a real-world location at which a virtual event takes place. Admission fees to virtual events will be subject to tax in the customer country, which is already a common practice for all digital services.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Aleksandra Bal is indirect tax technology & operation lead at Stripe.