Tax
Esports: What’s in the Tax?
The emergence of the metaverse has highlighted how the lines separating the digital and virtual spheres are becoming less distinct. Virtual reality tech pioneers are now realizing the growing demand for intricate virtual environments. A key element of this shift is the flourishing commerce of virtual items, exclusive to online role-playing platforms.
Tax Implications for Virtual Items
The German Federal Fiscal Court (Bundesfinanzhof, BFH) recently delved into the issue of whether the sale of virtual items should be subject to sales tax. Their conclusion was clear: Transactions within the virtual environment remain exempt from sales tax until such a time when virtual currency is converted into actual money.
The Financial Landscape of the Virtual Economy
Digital platforms typically have their own financial systems and transactional procedures. Some platforms even offer a unique opportunity for players to convert their virtual achievements into actual cash, marking a prosperous venture. To give a clearer picture, the revenue from such virtual transactions in Germany alone amounted to an impressive EUR 3 billion in 2020.
BFH’s Perspective on Digital Taxation
In a landmark case, the BFH was tasked with determining if a gamer’s transaction involving the virtual property was a taxable event under the German Turnover Tax Act (Umsatzsteuergesetz, UStG) (BFH, 18 November 2021, Case No. V R 38/19). While the Fiscal Court (Finanzgericht, FG, Judgment of 13 August 2019, Case No. 8 K 1565/18) of Cologne had earlier sided with this notion, the BFH set a boundary, distinguishing in-game virtual transactions from real-world financial activities.
At the heart of this case was a gamer who rented out virtual plots to fellow players in exchange for the game’s digital currency. Interestingly, the game’s administrator even facilitated a “rental contract” for such transactions. Yet, this virtual rental was defined in the game’s terms as a restricted license, symbolized by a digital token. The gamer later traded this virtual currency for tangible money.
The Debate Over Economic Value in the Virtual World
The FG Cologne viewed the virtual plot rental as a taxable advantage. However, the BFH countered that a transaction should offer a tangible economic benefit for a transaction to be taxable. While renting out virtual plots might enhance the gaming journey, it doesn’t provide a concrete economic advantage. In-game activities in exchange for digital currency are categorized as non-taxable.
Yet, the narrative shifts when in-game currency is exchanged for tangible money. The BFH drew parallels to scenarios where sports event organizers charge for equipment usage. In this context, trading digital currency becomes a taxable service.
Emerging Concerns and Implications
The BFH’s pronouncement has spurred discussions. While the distinction between digital and tangible services seems straightforward, there are nuances. For instance, if digital rights like cryptocurrencies can lead to taxable outcomes, why should in-game currencies be any different? The sustainability of the BFH’s clear division between these realms remains to be tested.
Gamers should be cognizant that tangible profits stemming from in-game activities could be taxable. Moreover, regular monetary gains from virtual gaming might also bear income tax implications. As highlighted by the BFH’s stance on the taxability of online poker profits (BFH, Judgment, 25 February 2021, Case No. III R 67/18), the broader context plays a crucial role. Sporadic profits from selling virtual assets might not be taxable, but consistent revenue might be.
Author
Tax
Indian Government Forms Ministerial Group to Tackle Esports Regulations
This article delves into India’s efforts to establish a dedicated group of ministers tasked with overseeing the regulations of the country’s gaming industry, particularly focusing on esports and esports betting.
Introduction to the New Oversight Committee
The Indian government is taking a proactive step towards regulating the gaming industry by considering the establishment of a dedicated group of ministers (GoM). This initiative comes in response to the gaming sector’s exponential growth and the pressing need for a robust regulatory framework to ensure integrity, fairness, and ethical standards.
Composition of the Oversight Committee
The proposed GoM is expected to include key government figures such as Home Minister Amit Shah, Finance Minister Nirmala Sitharaman, IT Minister Ashwini Vaishnaw, and Information and Broadcasting Minister Anurag Thakur. Their combined expertise will be pivotal in addressing the multifaceted challenges and opportunities within the gaming industry.
Objectives and Responsibilities
The primary aim of the GoM will be to conduct a thorough analysis of the current regulations governing esports and the burgeoning field of esports betting. The Ministry of Electronics and Information Technology (MeitY) will remain the principal body regulating online gaming, with support from senior officials from the Departments of Revenue, Income Tax, and the Department for Promotion of Industry and Internal Trade (DPIIT).
Industry Engagement and Self-Regulation
Despite the move towards governmental oversight, there is ongoing dialogue with key industry stakeholders and various gaming organizations. These entities are advocating for the creation of a self-regulatory organization (SRO). However, the GoM will still oversee critical concerns such as taxation and anti-money laundering measures within the gaming industry.
Taxation and Anti-Money Laundering Proposals
One of the significant proposals under consideration is the imposition of a 28% Goods and Services Tax (GST) on esports online betting. To combat money laundering, the industry has suggested automatic blocking of gaming accounts upon reaching a certain threshold, stringent regulations to prevent Foreign Exchange Management Act violations, and the establishment of a detailed database of players.
Balancing Growth and Regulation
As the government and industry stakeholders navigate the complexities of esports betting and taxation, the need for a balanced approach is clear. The ongoing discussions aim to find a middle ground that promotes economic growth while ensuring responsible and ethical industry practices.
Additional Insights from The Economic Times
According to The Economic Times, the Centre is likely to set up the GoM to look into the regulatory framework for the gaming industry. The GoM’s formation is in response to various issues, including GST demands and concerns raised by enforcement agencies over potential money laundering, tax evasion, and data inadequacies. The government has also called for the formation of an SRO within three months, adhering to guidelines prescribed by MeitY. Industry bodies have submitted draft proposals for the SRO, emphasizing the inclusion of civil society members to mitigate the negative impacts of online gaming, particularly on schoolchildren.
Conclusion
The formation of the GoM marks a significant step towards establishing a more structured and secure gaming environment in India. The collaborative efforts between the government and industry players are crucial in shaping a regulatory landscape that protects players and fosters sustainable industry growth.
Image by: wirestock
Author
Tax
Senators Promote Tax Benefits for Taiwanese Artists and Athletes
Senators Catherine Cortez and Marsha Blackburn are pushing for a bill that offers tax incentives to Taiwanese artists and athletes, from musicians to esports players, to eliminate double taxation.
Senators Catherine Cortez and Marsha Blackburn, representing cities with important music and entertainment industries, have proposed a bill to support Taiwanese artists and athletes (including esports players) by providing them with favorable tax treatment.
The Senate Finance Committee agreed to add a section to its legislation to eliminate double taxation for Taiwanese businesses, investors, and workers, especially entertainers and athletes. This change in legislation would exempt Taiwanese musicians, artists, and athletes from paying taxes in the US if they earn USD 30,000 or less, nevertheless, this benefit depends on Taiwan offering the same benefit to U.S. entertainers and athletes.
Senator Catherine Cortez advocates for Nevada’s tourism and entertainment industries, which include Las Vegas. She aims to prevent overtaxing artists and entertainers with double taxation, and her support for the bill seeks to help the entertainment and music industries.
The bill provides Taiwan with tax treaty-like benefits. However, it still requires the resolution of jurisdictional disputes with the Foreign Relations Panel.
In the Finance Committee’s opinion, this is a beneficial bill that is seen as an alternative to a formal treaty to avoid overhanging the US tax code. In addition to reflecting their commitment to their home-state interests, like the states of Nevada and Tennessee. The bill has the support of both parties and seeks to strengthen ties between the US and Taiwan.
Current Regulation
As of now, if you are a nonresident athlete or entertainer performing independent personal services in the US, you generally pay US income tax on income generated in the US. This includes compensation for performances, endorsements, the sale of merchandise, and royalty or other income closely related to the event.
You are also required to file a US federal income tax return to report and pay any US tax. Generally, if you are a non-resident athlete or entertainer performing independent personal services or participating in events in the United States, you are subject to the following special tax:1
- Payments to NRA athletes and entertainers are subject to special withholding rules. Refer to Artists and Athletes (Income Code 20) in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
- A Central Withholding Agreement (CWA) is a tool that can help reduce withholding for NRA athletes and entertainers who plan to work in the United States. A CWA provides for the correct amount of withholding based upon net income.
- Prior to filing a U.S. tax return, foreign athletes and entertainers must determine their U.S. Tax Residency Status
- A Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) must be furnished on tax returns, statements, and other tax related documents. In general, only non-citizens, who have permission to work from the Department of Homeland Security, can apply for a Social Security number. Other NRAs must apply for an Individual Taxpayer Identification Number (ITIN)
- https://www.irs.gov/individuals/international-taxpayers/taxation-of-foreign-athletes-and-entertainers ↩︎
Image:Shutterstock
Author
Tax
Taxing the Virtual Arena: The Swiss Approach to Esports Athletes
eSports, the competitive realm of computer and video gaming, has seen a surge in popularity in Switzerland. Games like Counter-Strike, Fortnite, Call of Duty, and Fifa have amassed a significant following. While the number of gamers in Switzerland is substantial, the number of professional players and organizations is still relatively low compared to the global scene. However, the professionalization of eSports is on the horizon in Switzerland. Notable entities like FC Basel have already established eSports teams, UPC has launched an eSports news platform, and Swisscom runs a “Hero League” with over 6,000 participating gamers. The tax implications for these players and organizations are the focus of this article.
Esports Athletes Residing in Switzerland
The gaming community in Switzerland is thriving and continues to grow. However, merely playing video games doesn’t qualify one as an esports athlete. The defining factor is participation in specialized competitions, either individually or as a team.
Self-Employed Activity
Income Tax
If an esports athlete isn’t employed by an eSports organization and earns income from gaming (prizes, bonuses, other compensations), it’s essential to determine if they are liable for income tax due to self-employed activity. This is typically the case if the player has a profit motive, operates professionally and systematically, organizes their activities independently, and intends to pursue esports long-term. If gaming provides a significant portion of their livelihood, it’s likely considered a profession rather than a hobby. As a result, the income from gaming is subject to income tax and social contributions. However, if the player only incurs losses from gaming, it’s generally considered a hobby, exempting them from additional tax or social contribution obligations. One advantage of being recognized as self-employed is the ability to deduct expenses such as equipment, travel, accommodation, and entry fees from taxable income. Furthermore, losses from previous years can be claimed for tax purposes for up to seven ea
Value Added Tax (VAT)
If gaming transitions from a hobby to a profession, it might trigger VAT obligations. If an eSports athlete consistently earns income under a specific name (e.g., a nickname), they might be considered a business entity for VAT purposes. If their annual revenue exceeds CHF 100,000 from taxable services, they must register for VAT. Determining the location of the service provided by the eSports athlete can be challenging, especially for VAT purposes.
Employed Activity
Employment by a Swiss esports Organization
If an eSports athlete is employed by a Swiss organization (e.g., FC Basel), the organization, as the employer, is responsible for social insurance contributions. Esports athletes residing in Switzerland and employed by such organizations are taxed on their global income.
Employment by a Foreign Esports Organization
Given the nascent stage of esports in Switzerland, it’s plausible for a Swiss-residing esports athlete to be employed by a foreign eSports organization. In such cases, the athlete is subject to the Swiss social contribution system and is categorized as ANOBAG (employee without a contributory employer). ANOBAGs are unique concerning Swiss social contributions. If the foreign employer doesn’t handle these contributions, the ANOBAG is responsible for paying them in full. They must also register with the AHV compensation fund in their Swiss place of residence.
Participation in Foreign Esports Events
If esports athletes participate in foreign events (virtually or physically) and earn starting or prize money, they are generally taxable in Switzerland based on the global income principle. However, there’s some ambiguity regarding the taxation of such income from an international perspective.
Esports Event Organizers
Withholding Tax
For event organizers, determining whether esports athletes qualify as “athletes” for withholding tax purposes is crucial. If they do, organizers must deduct withholding tax for payments to participants residing abroad.
VAT
It’s essential to determine whether eSports events are considered sports events or cultural services for VAT purposes. Currently, the Federal Tax Administration doesn’t officially recognize esports as either sport or cultural performance. Therefore, ticket prices and entry fees might be subject to VAT if the event organizer is VAT-liable.
Conclusion
In essence, the general principles of Swiss tax law apply to the taxation of Swiss esports athletes and event organizers. However, due to the ambiguous classification of esports and its interpretation from a national and international tax perspective, several questions remain unanswered, especially concerning VAT, withholding tax, and international tax law. These issues will need resolution in the future.
Austria’s Evolving Legal Landscape on Loot Boxes and In-Game Purchases
CMS Advises on Inaugural Esports World Cup in Riyadh
Introducing Valentin de Roany: Project Coordinator for Esports Tournaments and Legal Databases at Esports Legal News
Russia’s Controversial Esports Law: Bypassing Game Publishers in Licensing Agreements
Yearly Wrap Up & 5 Trending Esports Legal Topics For 2024
