Taxation in the metaverse is a complex and emerging topic. Can VAT legislation keep up with the fast-paced digital world? Does holding virtual events or selling goods and services have tax implications? Considering how VAT and the metaverse may interact might be key to staying ahead of the curve in 2022.
The launch of Web 3.0 paved the way for the metaverse to evolve. It’s now a place full of virtual worlds where we can meet friends, hold meetings and shop. It even has technology giants like Microsoft reconsidering their strategies. However, questions are beginning to emerge about the commercial potential of the metaverse. Questions like; will digital consumers pay tax on purchases from virtual stores? Will the admission to events held in the metaverse be subject to the same VAT treatment as physical events? Given its increasing popularity, we want to consider how VAT fits into the metaverse. Plus, whether standard tax treatment can be applied to virtual reality.
What is the Metaverse?
The metaverse is an immersive virtual world populated by avatars. Here, individuals can interact with one another and trade in virtual and non-virtual goods and services. The metaverse exists through blockchain technology. That’s why it’s the proposed hub for the future of digital asset creation and sales. We’re certain that its popularity will extend to ecommerce in the coming years, making the consideration of what is taxable in the metaverse increasingly important.
More events are being held in the metaverse. Take Fortnite’s live concerts or Decentraland’s digital art gallery. Plus, there are growing numbers of sales taking place there, like NFT transfers. Conversations about the taxation of these commercial activities become even more important. Consumers are venturing into the metaverse to find goods and services. Which means that governments and business need to get clued up on how VAT may apply.
Are events held in the Metaverse taxable?
Throughout the pandemic and since, digital events have been popularised by ecommerce businesses. Enabling attendee access to an online portal with just a few clicks is significantly easier than organising an entire in-person event. The rules of virtual events, however, can be complex from a VAT perspective. If you have attendees from the UK or EU, you may have a VAT obligation in each of these countries. This may make the Union One Stop Shop scheme necessary for virtual event organisers, to avoid mile-high piles of VAT return admin.
This principle may also apply to events, conferences and online courses held in the metaverse. As these events are still technically held digitally, and if entrance is paid for by customers (B2C), then VAT would need to be charged depending on the rate of VAT where the attendee is located. The Union-OSS and Non-Union OSS schemes (for non-EU businesses) could make cross-border sales of digital services simpler here too.
If selling admission B2B, customers can provide their VAT number. The organiser would not need to charge VAT as the reverse charge mechanism would apply.
Are sales of goods in the metaverse taxable?
Gartner, a technology research firm, states 30% of the world’s companies will be selling goods/services in the metaverse by 2026. They predict a future where digital reality will enhance B2C interactions. This will impact how businesses conduct themselves in general. Ecommerce brands could soon feel the same pressure brick-and-mortar brands did. Will virtual storefronts soon surpass ecommerce sellers with their virtual goods?
Across the globe, the taxability of these virtual goods is yet to be determined. VAT best practices are beginning to emerge. Take Second Life, the virtual reality gaming platform. Referred to as the original metaverse, they announced after March 31, 2022, they will charge sales tax on purchases made on the platform. This will apply to purchases made within their digital world. Additionally, Second Life stated they will charge tax according to the user’s physical location.
This sets a precedent for the taxation of goods within the metaverse. Governments are beginning to update taxation rules for digital products and services. Doing so on the basis of the significant technological advancements of recent years. We are sure to hear more on this topic in the coming months.
The future of virtual taxation
As these virtual worlds develop and businesses see opportunities to advance alongside them, taxation will likely follow. We are only scratching the surface of the tax liabilities that are sure to arise. Commercial activity in the metaverse may have significant implications for international businesses.
In an attempt to modernise VAT collection in the digital economy, EU Finance Ministers agreed at the end of 2021 on updating the place of supply rule for VAT on online events. Under the proposed changes, virtual events would be charged under the general place of supply rule for B2B supplies of events. When the admission to a virtual event is granted to a private individual, VAT would then be due where the consumer usually resides. The new rules will have to be applied from 1 January 2025 which means that event organisers will have to review their VAT obligations from then.
Staying clued up is essential. It can be overwhelming keeping track of VAT legislation changes. At SimplyVAT.com we’ll keep you updated on the latest compliance announcements when they arrive.