Tax issues become more complex when entering the metaverse
More and more companies are moving, or considering moving, to be present in a metaverse. As metaverses grow, they blend online multiplayer games, cryptocurrency, NFTs, and virtual reality into a new, immersive digital experience for their users.
While metaverses initially seemed to attract companies already well established in the digital space, a significant number of retail companies and fashion brands are gradually turning to the metaverse. They see new sales opportunities for digital and physical “goods” as well as new interactive advertising opportunities, such as collaborations with gaming platforms creating personalized experiences.
Whether it’s fashion brands that sell digital accessories or clothing to dress up your avatar (sometimes even creating both a digital and physical product), automotive brands that facilitate your personalized online mode of transportation, or even your favorite artists performing online, there’s always a tax angle. Indirect taxes such as VAT and sales tax will be at the forefront of these developments, but potential direct tax consequences should also be carefully considered from the outset.
In this article, we aim to provide a non-exhaustive overview of some high-level tax aspects to consider when expanding into the Metaverse ecosystem.
Retail brands typically sell physical goods to their customers; however, digital goods such as NFTs, skins and avatar accessories may, for EU VAT purposes, be considered a supply of electronic services, which may bring a different set of VAT rules. on the table.
Companies should therefore consider that physical wholesale operations can morph into digital retail operations in a metaverse. For example, instead of having an international wholesale channel to local physical stores in a country where only local VAT rates are charged, identifying the physical location of all your virtual customers becomes important. This is because each sale potentially triggers the obligation at head office level to remit VAT to the respective jurisdiction in which that customer is located.
Additionally, new business concepts such as metaverse-based virtual marketplaces will have to deal with tax legislation that is not yet updated for these developments. Therefore, undesirable consequences such as the risk of VAT accumulation may occur if transactions between private users take place on these platforms. This can happen, for example, when (re)selling unique “used” digital goods, a concept that was simply not possible before the introduction of NFTs.
The current Deemed Reseller VAT rules (as set out in Article 9a of EU VAT Implementing Regulation 2011/282) still appear to apply/extend to resales of digital goods where they have already been sold to private users and are resold through these virtual marketplaces. At present, the accumulation cannot be avoided by using the rules of the margin scheme for the sale of second-hand goods, because Article 316(1) of the VAT Directive stipulates that the margin scheme does not does not apply to the sale of services, and therefore not to digital products.
A business operating in a metaverse environment should be aware that its actions may also have direct tax consequences. For example, a business that buys or rents virtual real estate in a metaverse in exchange for cryptocurrency may realize a taxable gain on its cryptocurrency, depending on the tax laws of the jurisdiction in which the business is tax resident. If a company decides to develop its own NFTs and sell them in a metaverse, such as a fashion company selling unique branded clothing that can be worn by an avatar, any gain made on an increase in the value of the relevant NFT may also be imposed. with the cryptocurrencies that the company receives in return.
The question arises when these gains are taxable. Is it at the time of the virtual transaction? Or when the cryptocurrency is converted into euros or dollars? It may even be that a certain capital gain is taxed annually, based on the value at a certain time of the year or on the average value over the year. When a taxable event may occur depends entirely on the tax residency of the entity.
In practice, where to create the business entity that will operate in a metaverse should be carefully considered and determined before the start of the business in order to avoid lengthy exit tax discussions with the tax authorities.
The entity may not only be taxed where it is tax resident. A portion of the profits may also be taxed in the jurisdictions where the employees operate, depending on where the promoters and employees operate. Careful consideration should be given to the type of activities employees perform overseas for the entity.
It’s also important to consider the transfer pricing aspects of selling bundled products, such as selling real-world clothing that an NFT is attached to that an avatar in a metaverse can use. In these cases, the actual sale of the item may be made by a US tax resident company, for example, while the company developing the NFT is UAE tax resident. In these cases, it is necessary to determine the amount of profit to be attributed to the United States tax resident company and the amount to be attributed to the United Arab Emirates tax resident company.
Of course, the sale of combined products also potentially has a significant indirect tax impact, not only from the point of view of the place of supply, but also whether it is a single supply or multiple supplies.
As digital developments always move much faster than tax laws, more questions can be raised than answered regarding transactions within the metaverse ecosystem and the rise and fall of funds. in the “real” world. While the lack of legal clarity can be challenging in the short term, it also creates opportunities to work proactively with tax authorities and be at the forefront of doing business in the metaverse environment.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Roger van de Berg is Legal Director of the Indirect Tax Group of Baker McKenzie in Amsterdam and specializes in VAT and other indirect taxes.
Henrik Stipdonck is a lawyer with the tax practice group of Baker McKenzie in Amsterdam and a member of the firm’s US think tank. He focuses on Dutch and international tax law.
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