Entering into a senior year internship as Tax Specialist at Anchin, Block & Anchin LLP meant receiving the culmination of my accounting degree in the form of valuable, “real world” experience.
The series of duties that I was responsible for had revolved mostly around e-Filing for Small Businesses and Self-Employed Contractors. Gosystem KX1 was the company’s program of choice for preparing the e-File and monitoring all e-File diagnostics. Although it had proven to be a fairly straight-forward process, eventually an e-File had come along that challenged both my current skill-set and the working knowledge of my supervisors.
The company I work for that represents a handful of mobile gaming companies,KX2 particularly the type that specialize in free-to-play (F2P) gaming and the microtransactions (MTX) that help produce revenue for the business. One of the particular games had gained a significant following in the European Union, and along with that came enough revenue that the European Value Added Tax (VAT) had become an issue that the company needed to address.
The liability regarding the gains by the MTX held not only an American liability component, but also a European VAT component – a component that was long overdue to be reconciled. Considering that the tax liability with the VAT is tied to the transaction, the “invoice becomes the crucial evidence for the transaction and for the tax liability” (Tait, 5). The account specialists from the company I work for KX3 that had not been adequately advising the client to be monitoring the MTX occurring with European nationals specifically, therefore, there was a significant gap in record keeping with regard to the European Union. In the United States, the sales tax varies by state and when the microtransaction occurs it is governed by the appropriate sales tax of where the transaction is taking place. Although this same concept would apply to the VAT, the oversight occurred by not having financial systems in place to handle VAT obligations and having a US-centric financial business model. Given the focus on the European Union, it was determined that the company represented did not have systems in place that could readily recognize if the customer was transacting in Germany versus California, and the growing demand for playing the game had surely gone beyond the original intentions of the game creators. As our company was properly preparing reports for the operating income of the business, we had come across a significant volume of transactions that were not properly attributed to a US postal code and therefore held the indication that the transaction happened elsewhere.
Luckily, the convenience existed that registering with one VAT-collecting nation in the EU would register the company with all 27 countries; unfortunately, the record-keeping would still be necessary to distinguish between the transactions that occurred in France from those that had occurred in GermanyKX4 . There has been an increasing effort from the EU to find VAT-dodging businesses. As we began to research the nuance of this business need, we came across the “citizen-policing effect of detecting VAT-dodging businesses” (Fooken, et al 3) that has recently grown in the EU on account of a lottery that comes by citizens referring businesses that do not give a proper receipt for a transaction. Realizing that our client was certainly not providing a proper receipt for these microtransactions in question to European citizens, we sprang into action to move the company closer to compliance. Coming to understand the tax lottery method of the European Union was fascinating to us: especially considering their public outreach on the importance of taxation. The tax lottery “…can also serve other purposes, such as serving as a communication vehicle to the citizens to stress the importance of tax payments.” (Fooken, et al 3) and on account of this lottery, we had the confidence that there were unknown elements that could have already reported our client for being possibly in violation of VAT collection procedures in the EU.
A most useful text that I was able to reference in order to understand better the nature of the VAT and how it has developed value for the European Union is the “Improving VAT Compliance – Random Awards for Tax Compliance” packet by Jonas Fooken, Thomas Hemmelgarn and Benedikt Herrmann of the European Commission. This document was an extensive read on the basics of the VAT tax and how the VAT would work to impact different economies throughout the Eurozone. Helping our client understand VAT compliance was crucial to the future of their business model in MTX, especially given that their mobile game had tremendous success in Northern European EU states. By being able to access this market and move appropriately within the market may be able to continue to grow the value of their brand and become a more dominant player in the mobile gaming industry. After weKX5 had identified the issues in VAT tax collection, the proper recommendations were made to devise an accurate record keeping system and program to identify purchasing location overseas. The swift movement on the client’s behalf had potentially avoided a disastrous result wherein the client’s product could have owed crushing fines to the EU that would have greatly stalled their growth in their most prolific market.
As digital marketplaces continue to grow, the way in which governments aim to collect taxation on products will evolve and meet the needs of the 21st century. Microtransactions were not even a thought as a source of revenue a decade ago – gaming business models were built off delivering a product to the consumer and severing business ties with the user. Now, the user experience keeps the manufacturer keyed in and accessible to sell more products to the consumer as a mode of engaging with the original, base product. KX6 ThisKX7 is only a small example of how the digital experience is evolving day-by-day. As the future of ‘cloud’ commodities continue to grow, so does the nature of how users will purchase those commodities such as with cryptocurrency. The landscape of what international business taxation will incorporate continues to change day-by-day, and experiences such as this will continue to sharpen my awareness of both known challenges and unknown challenges alike. KX8