Don’t ditch EU VAT compliance in race to become the next Twitch

Amazon’s $1 billion purchase of Twitch in late August shows just how lucrative the gaming industry can be, but what if the ‘next Twitch’ failed to reach its potential through ignorance of new EU VAT rules?

The new rules - agreed to by all 28 EU member states - alter how VAT is to be applied to the supply of broadcasting, telecommunication and electronic services in the EU. Among the electronic services affected are the supply of games via the internet, be it online gaming or the download of games to smartphones, tablets, PCs, smart TVs and set-top boxes.

What is actually changing?

The new rules change how VAT is applied to the supply of electronic services to customers in the EU.  From January 1, 2015, online gaming companies will charge VAT based on where their end customer (non-taxable person) is located. At present, VAT on these electronic services is charged based on where the supplier is located.

For example, from January 1, 2015, a German online gaming company with customers in the UK, Germany, and France will have to charge UK, German, and French VAT on their sales.

To charge the correct rate of VAT this online gaming company must collect two pieces of non-conflicting evidence to prove what EU country their customer, the gamer, is located. It is the responsibility of the company to prove the location of their customer.

To do this the 2015 EU VAT rules outline the following as acceptable pieces of evidence:

●The customer’s IP address

●Their credit card details

●Their bank details

●A mobile phone SIM card code

●A fixed landline number

●Other commercially relevant information

What happens on January 1, 2015?

On this date the new EU VAT Directive becomes law. Games that are supplied via the internet will then come under the scope of the new rules. Online gaming companies need to have their VAT compliance solution in place by this date.

Specifically, merchant checkout pages will need to be optimised in order to collect the necessary information required for compliance with the new rules.

This means systems should be able to:

●Identify EU and non-EU transactions

●Collect two pieces of non-conflicting evidence

●Differentiate between B2B and B2C sales, only B2C sales are affected

●Apply the correct VAT rate, depending on location of end customer

In addition, the business may be audited by any of the 28 states in the EU at any time within 10 years of a transaction. This means the business needs to store all the relevant transaction data that they used to determine the EU country of each of their customers for 10 years.

How the electronic service is supplied is critical.

The key word in the VAT Directive is ‘supply’. The nature of the supply of a service dictates how it should be dealt with from a taxation perspective. Whether you are a multinational online gaming company or an individual game developer the same rules apply if you supply B2C games to a customer in the EU.

There is no minimum threshold so it will not matter if you have €5m, or €5,000 worth of sales, you must still register for VAT. This will be painful for numerous small-to-medium gaming companies and game developers operating solo, as many don’t current register for VAT.

The impact for the new VAT rules on pricing, profitability, integration with ERP and accounting systems are all areas that gaming developers and platforms need to start looking at now to ensure they are ready to process compliantly come January 1.