The new European rules for the value added tax (VAT) of the digital goods and services will enter in force on the 1st of January 2015.
Under the new rules, VAT will be paid in the European Union based on the location of the consumers, not based on the location of the companies.
Surprisingly, little attention has been paid to the fact that these new rules will require significant changes in accounting systems and payment procedures. However, as the new rules will apply only to business-to-consumer transactions (B2C), these changes will have an effect only on the companies that are actually collecting payments from end-consumers in a value chain.
In practice this means mobile platforms, online portals and game developers providing their games directly for their players over the Internet.
Know your payers
Until now, companies based in the UK, for example, have paid the British VAT for all their revenue coming directly from consumers. From the 1st of January, they have to pay the British VAT for the consumers in the UK, French VAT for the ones in France, Finnish VAT for ones in Finland etc.
These changes will apply for all companies on Earth providing digital goods and services for consumers in the European Union, even if they are not based in Europe.
What does this mean for game developers?
The first question, of course, is who in the value chain is actually going to be responsible for paying the VAT from the business to consumer transactions?
The situation is much more complicated for any game developer providing the game directly for consumers.
Under the new regulation, it looks almost certain that if a game is provided through a platform or portal, mobile or online, it will be responsible for the VAT.
Unfortunately both platform holders and national authorities have been hesitant to confirm what kind of changes the new VAT system requires from game developers. Luckily, most of the platform holders have finally confirmed that they will take over the responsibility of collecting and paying the VAT from B2C transactions.
However, only a few member states have so far been able to introduce their national taxation guidelines on the changes. From game developers' perspective, this is becoming a more and more problematic issue, as they now have only two months left the introduce the required changes in their accounting practices.
Therefore the situation is much more complicated for any game developer providing the game directly for consumers instead of using an online portal or a mobile platform.
For example, many browser or online game developers providing microtransaction in their games will be responsible for collecting and paying the VAT from these transactions. This leads us to our second question.
In practice, this means that for each transaction they have to find a way to identify where a consumer is coming from.
In most cases, these online or mobile game developers have to collect at least two pieces of non-contradictory evidence from the consumers' country of origin and store this information in the accounting information of each transaction.
Another piece of evidence can be the geo-IP address, but obtaining the other one will be more complicated.
The other piece of evidence can be any piece of commercially relevant information. The examples of this include documentation from a payment provider, a billing address, bank details etc. However, in the end, it will up to auditors to decide what is relevant information and what is not. Unfortunately, based on national guidelines published so far, there seems to be small differences in national approaches on this question.
Plugged into MOSS?
The third big question is how the VAT is going to be paid?
The European tax authorities are going to build up a portal, called MOSS (Mini One Stop Shop), where the actors responsible for paying the VAT can report how much VAT they should pay for each member state.
In each quarter, the companies will transfer the money to the tax authorities of the country where they are registered in and, based on the MOSS report, the member state will allocate the payment to different tax authorities in Europe. Unfortunately many member states have so far failed to inform game developers about the fact that anyone willing to use the MOSS from the beginning of 2015, should register in it before the end of the year.
The fourth crucial question is what does this all mean for small indie developers under the VAT threshold?
This is a major question especially in the UK where the VAT threshold is about €95 000.
First of all, they should remember that if they publish their game through a platform or portal taking care of the VAT payments for business to consumer transactions, a transaction between the platform or portal and the developer is considered a business-to-business transaction that is under the old VAT rules designed specifically for them.
However, if they are going to provide direct transactions in their game and they want to register in MOSS (another option is to register separately in each member state they want to operate in) they have to have a VAT number.
Death, games and taxes
Beyond the accounting practices, the new VAT system is going to have a major impact on pricing practices for all developers. At the moment, the VAT rate is fixed on the VAT rate of the country they (or the portal or a platform taking care of the VAT payments) are registered in.
From the 1st of January 2015, the VAT rates their consumer have to pay are going to vary between 15% in Luxembourg and 27% in Hungary. As many games have small profit margins, the game developers have to pay much more attention on the fact where their consumers are coming from and what is the VAT rate applied for them.
Due to hard economic times, countries all over the world are examining the idea of introducing a digital VAT or sales tax.
Unfortunately, digital taxation problems will not be limited in the game developers operating in European markets. Due to hard economic times, countries all over the world are examining the idea of introducing a digital VAT or sales tax. Similar systems to one in Europe have been recently introduced, for example, in South Africa and Australia. Meanwhile more and more countries, including the USA, are currently considering one.
Therefore it is clear that the global game markets are starting to get more fragmented taxation-wise. In the long run, there is a clear need for a global VAT agreement for digital markets. In the short run, the role of the platforms, portals and service providers taking care of the VAT payments will become much more crucial for small developers operating globally.
Consequently, it is likely that at least in the short run, one of the main competitive advantages of any platform or a portal will be their ability to take care of the VAT or sales tax in different countries all over the world.
Those platforms and portals that are most developer-friendly are likely to be the first ones to have the most innovative and interesting content. Whereas those who refuse to take this administrative burden in their own hands will also be the last ones developers will submit their hit games into.
Jari-Pekka Kaleva is the COO of European Games Developer Federation (EGDF) and the Senior Policy Analyst in Neogames, the hub of the Finnish game industry.
J-P has been working with European politics on behalf of European game developers for 5+ years. Consequently, he has a good overview on how European regulation is having an effect on all game developers globally.