July 7, 2021
Taxation of Esports
In recent years we have seen a revolution within the esports ecosystem. This has led to a substantial increase in events, gamers and, more importantly, revenue being generated by both the gamers and the event organisers and publishers. As the industry grows, taxation becomes an important discussion, particularly in view of the complexities surrounding esports when it comes to taxing rights and sources of income.
Whilst most tax issues relating to esports are similar to the ones relating to the more ‘traditional’ sports, complexities arise in view of the more mobile aspect of esports, whereby gamers could participate in events, but also carry out their work from anywhere in the world. There are two sides to the coin – we need to look at taxation of esports both from a gamer’s perspective and also from the perspective of the taxation of income arising from e-sports events, which could be more complex.
Taxation of Gamers
Gamers could earn income from a number of different sources, including tournament winnings, sponsorships and in some cases, also salaries. Most of the tax issues we discussed relating to mobile athletes of the more ‘traditional’ sports, such as golfers, tennis players and motorsports drivers, apply to gamers too.
In most cases, gamers do not earn substantial tournament winnings when playing in their living room, but during physical events typically taking place at a given location, giving that jurisdiction taxing rights over the winnings generated from the tournament. The source country typically imposes its taxing rights through the imposition of a withholding tax , on which double tax relief could be claimed by the gamer in his/ her country of residence.
There is nothing different to the tax treatment of employment income for gamers as opposed to the employment income of any other individual. One needs to understand where the gamer is carrying out his/her work from and look at the specific tax treaty to understand which country has taxing rights over such income. What is important to look out for, is to understand whether the income being received by the games is actually employment income or is being received as a contractor. This distinction could change the obligations of the team paying the gamer, which could be deemed an employer with the various tax and social security deductions which come with such a role. Certain jurisdictions classify tournament winnings as salary, which would require the organisers to deduct payroll taxes, prior to paying the prize money.
Taxation of league operators
Taxation at the level of league or event organisers can be a complex topic. Firstly, it is important to note that for a company (which is the legal form which league operators operate through) to be taxed in another jurisdiction, apart from its jurisdiction of residence, there must be a nexus between the two countries. When large events are organised bringing in a number of gamers and spectators to that same location, the nexus is clear. However, the nexus, which could lead to a taxable permanent establishment (‘PE’), could take various forms, such as a ‘home office’ and in certain jurisdictions, also the location of the servers.
In recent years, as a result of the discussion around taxation of the digital economy, a number of countries have unilaterally introduced the concept of a digital PE or a digital services tax in their domestic legislation, which could have an impact for any operators carrying out some form of digital business there. The global discussions around this topic have now evolved into a minimum global tax rate of 15%, and a profit allocation to market countries for large multinationals, both of which could have an impact on esports event and league organisers and also publishers. This global tax agreement should also result in the removal of the digital services tax and the digital PE by the countries which unilaterally introduced these concepts.
Taxation of intellectual property (‘IP’) is another important consideration to be made, as it is one of the most important assets of league operators. We have seen the introduction of Patent Box regimes in a number of countries to lure such business, whilst at the same time a ‘crackdown’ by the OECD through its BEPS Action Plan on aggressive tax planning when it comes to intangibles.
What is certain is that anyone involved in esports must be aware of the existence of the tax complexities when earning income from this sport and ensure that they are properly advised in order to avoid any nasty surprises!
For any further information on how Seed can help, please contact Nicky Gouder on [email protected].