| Ayça AKÇAY, Lawyer |
ABSTRACT
With the acceleration of digitalisation, online games have transformed from being merely platforms played for entertainment purposes into a serious ecosystem where individuals spend time and money. Virtual items used in these games, which can sometimes be bought and sold in exchange for real money, have also brought along significant debates in terms of taxation. In particular, the question of whether these digital assets should be classified as “goods” or “services” is crucial in determining their legal status. Indeed, with the determination of this matter, the evaluation of the purchase and sale of such assets or any transaction conducted through these assets from the perspective of tax law has also become an issue. In this study, the legal status and nature of virtual items in online games have been examined, and the gaps encountered in Turkish legislation have been addressed comparatively with international practices. Consequently, this study aims to examine the necessity for tax law to transform while maintaining its currency and the regulations that need to be made regarding the aforementioned subject.
Keywords: Online Games, Virtual Item, Digital Economy, Tax Law, Concept of Goods, Concept of Services, Virtual Property, Value Added Tax, Income Tax, Digital Services Tax.
INTRODUCTION
With the acceleration of digitalisation, the gaming sector is undergoing a remarkable transformation not only in terms of entertainment but also in its economic and legal dimensions. Along with the development demonstrated by Turkey-based gaming companies in the international market, there has been a significant increase in the number of users of online games in our country. Particularly with multiplayer online games (MMORPG, FPS, Sandbox, etc.), the acquisition, transfer, and even sale of in-game assets in exchange for real money have clearly revealed that these assets possess economic value. This situation has also brought along states’ approaches to taxing these assets and their efforts to determine the legal nature of these assets. In the field, especially the development of purchase and sale activities, and even factors such as the time and money spent determining the price of these sales, have transformed the subject from being merely for entertainment purposes into an economic matter. The determination of the legal nature of these items is controversial and uncertain for many laws, including tax laws. In particular, as will be mentioned in the following sections, the legal status of these items in our country has been regulated in only one of the new tax laws, and since no parallel regulation was made, it has brought along many problems. In this study, regarding these online games where economic activities exist, due to the state’s desire to tax upon seeing the gap in terms of taxation, determinations will be made regarding the discussions on whether in-game assets will be considered goods or services, and subsequently, by giving examples from practice, determinations will be made regarding the type of taxation that will occur with the regulation of the subject by law.
I. ONLINE GAMES
1. Contents That Users Can Own or Benefit From in Games
Digital assets in games encompass elements such as in-game characters, costumes, weapons, virtual lands, and currencies, and can be bought and sold among players with real money. Thus, in-game elements have begun to be accepted as property¹ that is abstract but has economic value. However, making these abstract things subject to ownership also brings along various legal problems. Game developers can restrict the ownership rights of in-game contents through user agreements and license agreements or keep them entirely with themselves. This situation shows that the digital assets that players think they own are actually not permanent ownership but rental or usage rights². Furthermore, the transfer, sale, and trading of in-game assets on third-party platforms require complex regulations in terms of intellectual property and consumer rights. Examples of certain contents that players “own” within the game can be given as follows:
• Visual Components: Locations, artworks, structure or landscape designs, animations, and audio-visual effects;
• Narratives: Themes, concepts, stories, and plots;
• Characters: Names, likenesses, inventories, and slogans of game characters;
• Elements: Digital cards, currencies, potions, weapons, armours, wearable items, appearances, sprays, pets, mounts, etc. virtual products.
Here, especially in games that grant freedom in the area creation section, area designs and created characters require more focused discussion of their ownership since they require more effort and in-game money/real money rather than content creators giving a direct object. These tools and contents are generally referred to as items. In this virtual environment, people are learning to personalise their items and produce personal assets to the extent that the virtual environment permits, and to earn income from this virtual realm. Users, by spending both time and money for their virtual personalities that they have developed themselves, become attached to them and see them as a reflection and even an important part of their physical, real selves³. Indeed, as will be addressed in the following sections of our study, depending on whether these items used in the game are legally classified as goods or services, in addition to the above-mentioned matters, it also brings along problems in terms of tax law.
2. Ownership of Items: Goods or Services?
If in-game items are accepted as goods, they are evaluated as digital assets that are non-physical but carry material value. In this case: • Ownership rights may arise over items, • The buyer may have the right of disposal over the item (to sell, transfer, rent). As will be explained in the following sections of our study, in court decisions taken in countries such as China and the Netherlands, in-game assets have been given goods status by accepting their economic value and that they belong to the user. Indeed, with new regulations, especially in China, not offering games to minors and prohibiting the trading of items have been developed in parallel with this. Thus, players’ digital assets and developers’ position against them are legally protected. On the other hand, in-game items can also be evaluated within the scope of services. Items are not considered as a virtual asset/good as above; but due to their lack of physical existence, they are referred to as access and usage rights provided by the game provider in the digital environment. For example, when looking at the implementation of Law No. 7194 on Amending Certain Laws and the Decree Law No. 375 on Digital Services Tax, which entered into force in 2020 in our country (“DST”), it is stated that games are services provided by digital service providers. In this respect, since items in our country are provided by game creators who are digital service providers, they will be considered services. Indeed, in EULAs (“End User Licence Agreements”) presented to users by game creators before using the games, items have been addressed as services provided within the scope of licence, subject to certain rules. However, regarding the subject, apart from the aforementioned digital services tax regulation in our country, there is no clear regulation that leaves no room for doubt on whether in-game items are goods or services. The fact that these assets are goods and services is also a matter to be discussed in terms of inheritance. Inheritance; in its broadest sense, refers to all property values, private law relations, and personal rights that can pass to heirs upon a person’s death⁴. An important issue to be emphasised in determining the relationship between the digital asset and the testator is the EULAs concluded between the service provider company regarding the digital asset and the testator. If there is no provision in the contracts regarding the transfer of the digital asset or if there is no regulation preventing the transfer of the digital asset to heirs, theoretically the relevant digital asset can pass to the heirs⁵. However, generally since these contracts grant licence rights as explained above, that is, since they are of a service nature, it will be said that they cannot be left as inheritance. Gaming companies explicitly state in contracts that games and in-game contents are presented to the user only on a licence basis. For example, in the EULAs of large companies such as Peak Games and Gram Games, users have the right to use the game only for personal and non-commercial purposes; in-game assets remain in the company’s ownership. Users are prohibited from selling, copying, or modifying these contents. Companies have included disclaimer clauses to limit risks related to in-game problems, data loss, or account access.
II. DIGITAL SERVICES TAX
1. Concepts and Legal Regulation
Although the point that digitalisation has reached means an increase in international trade, a multiplication and facilitation of economic activities, it has also brought along certain difficulties. In particular, according to the first Digital Economy Report published by the United Nations Conference on Trade and Development (“UNCTAD”), 90% of the market value owned by the world’s largest digital platform companies belongs to companies originating from the United States of America and China. Technologies such as artificial intelligence, cloud computing, unmanned vehicles, smart robots, and the internet of things have come to be used by a very wide segment in every area of daily life. As a natural result of this, the relationship between digital technology and economy that began with e-commerce has shown significant progress, and the concept of digital economy has emerged⁶. The taxation of the earnings these companies obtain in return for the services they provide in different countries without having an actual workplace presents itself as a new problem brought by digitalisation⁷.
As a result of the studies carried out by the OECD, no final conclusion has been reached on which method the digital services tax will be applied, and while some decisions of a recommendatory nature were taken, in some countries, without waiting for the creation of a common taxation principle on the subject of digital services tax, the practice of taxing digital services has settled into their domestic laws. While DST entered into force in France in January 2019, Italy prepared a draft law to enter into force in 2020, and starting from 2020 in the United Kingdom, Austria, Czech Republic, and starting from this year in Poland, DST has begun to be applied at different rates. In Turkey, in order to prevent tax loss on incomes from digital platforms, DST was published in the Official Gazette dated 07.12.2019 and numbered 30971, with Articles 1 to 7, to enter into force at the beginning of the third month following the publication date, and entered into force on 1 March 2020. The subject of the tax, as stated above, is regulated in the first article of the DST, and it has been stipulated that services provided in Turkey and listed in a limited number in the relevant article will be subject to digital services tax. Accordingly:
a. All kinds of advertising services provided in the digital environment,
b. Sale of any audio, visual, or digital content in the digital environment, listening to, watching, playing this content in the digital environment, recording it on electronic devices, using it on these devices,
c. Providing and operating digital environments where users can interact with each other”
In addition to such services, in the second paragraph, “revenue obtained from intermediary services provided by digital service providers in the digital environment for the services listed in this paragraph” has also been added. Digital service providers are defined as persons providing the services in the first article; obtaining revenue, gaining certainty in terms of nature and amount; the service being provided in Turkey, the service being benefited from in Turkey, the service being carried out for persons located in Turkey, or being evaluated in Turkey. Here, certainty has been provided in the Law on the matter of evaluation, and it is the payment constituting the consideration for the service being made in Turkey, or if the payment is made abroad, it is transferred to the accounts of the payer in Turkey or the person on whose behalf the payment is made, or separated from its profit. However, it has been stated that if the advertising service provided in the digital environment is carried out for persons not located in Turkey, the service is not deemed to have been evaluated in Turkey.
2. Problems That May Be Encountered Regarding Items Within the Scope of DST
The risk of double taxation, which is a general problem within the scope of DST, also exists regarding the classification of the legal status of items as services within the scope of this Law. The income obtained by a multinational company can be taxed both by the country where its headquarters is located and by the user country where the service is provided (such as Turkey). While the Double Taxation Avoidance Agreements (“DTAA”) to which Turkey is a party aim for an income to be taxed in only one country or to be offset in the other country, since next-generation taxes such as DST remain outside the scope of these agreements, they can practically produce results contrary to the spirit of these agreements. Because DST is generally defined as an indirect tax or a special type of “turnover tax”, it is evaluated differently from taxes within the scope of the agreement such as income or corporate tax. This situation causes grey areas in international tax law. For example, a company may be obliged to pay both DST for its digital services and corporate tax in its own country on the same income, but it may not be able to offset this DST it paid from the tax in the other country. Thus, the same income is doubly taxed by two separate countries with different taxes. DST is of the nature of an indirect tax levied on revenue obtained from certain services provided in the digital environment. However, when the implementation of this tax intersects with other tax obligations such as withholding tax, VAT, and corporate tax existing within the Turkey tax system, it can also create a risk of multiple taxation within the country. The provision of one or more of the services subject to DST will be a commercial activity that is the rule. In this context, the DST taxpayer digital service provider will also be an income tax or corporate tax taxpayer according to its legal structure and form of presence in Turkey. If withholding tax is deducted first for the same service and then DST is also paid, in fact, multiple taxes have been collected under different headings on the same earnings. This situation creates a violation of the principles of justice and efficiency in taxation⁸. Moreover, even if DST can be written as an expense, the succession of such tax burdens increases companies’ costs and can deter the use of digital services. In doctrine, it has been stated that although DST is not of the same nature as other taxes, since it is of a similar nature, it will be evaluated like them and will fall within the scope of DTAA⁹. When it falls within the scope of DTAA, since it will only be taxed here if the workplace is here, the DST taxpayer will cease to be a taxpayer. Regarding items, although most are foreign companies, game developers can also be settled in Turkey. In this respect, as stated in paragraph c of the first article above, items of a service nature are the subject of DST. Indeed, for settled gaming firms, although it is not included in the relevant Law or in other laws outside of DST, if these items are considered to be of a service nature, they can also be made subject to VAT.
CONCLUSION
The fact that online games have become not only entertainment but also an economic and legal field of activity has made the need for regulation in this area increasingly visible. The buying and selling of in-game assets reveals that these assets carry a market value and therefore it needs to be determined how they will take place in the taxation system. The rapid growth of the digital gaming sector in Turkey and the increase in its competitiveness in the international market have made it impossible to ignore the tax dimension of these assets. However, the legal gaps in this area and the inadequacy of existing regulations create uncertainty in practice and also pave the way for tax losses. In particular, the uncertainty regarding whether in-game assets will be considered goods or services makes it difficult to determine taxation obligations correctly and fairly. This situation brings along financial and legal risks for both players and gaming companies. Therefore, clarifying the legal status of in-game assets and defining them in a manner compatible with tax laws is of great importance. In the legal regulations to be made, the dynamics of the digital gaming economy should be taken into account; factors such as the nature of the game, the manner in which assets are obtained, and the purpose of use should be considered. Thus, both the obligations of taxpayers can be determined clearly, and by supporting the development of the digital economy, public revenues can be secured.
¹ Abstract property, in its simplest form, is something owned by the one who thinks of and finds it (its creator).
² Andrzej Kowalski, Tomasz Nowak, “Digital Asset Ownership in the Context of Virtual Reality: Legal and Ethical Considerations”, Legal Studies in Digital Age, Vol.2 No.4 2023
³ Ayşegül Merve, İbrahim Kulular, “Copyright of Metaverse Avatars” Ankara University of Social Sciences Faculty of Law Journal, 2022, Volume:4 Issue:2 p.540-58
⁴ Hasan Altındal, Yusuf Enes Eraslan, “Digital Inheritance in Turkish Law: Some Solution Proposals Within the Framework of Problems Encountered and International Practices”, Ankara Hacı Bayram Veli University Faculty of Law Journal Vol. XXV, Y. 2021
⁵ ibid. ALTINDAL, ERASLAN
⁶ Zeynep Demirci Çakıroğlu, Abdulcelil Gazioğlu, “The Effect of Digital Economy on Tax Law: An Evaluation from the Perspective of the 1982 Constitution.” Constitutional Jurisdiction and Finance, 2021, p. 263-264
⁷ Özgür Onur Çağdaş, “Turkey’s Digital Services Tax Practices”, Nazalı Gündem, Spring/2021, Issue:11, p.89-92
⁸ Hakan Üzeltürk, “Current Developments in Tax Law”, Yeditepe University Faculty of Law Journal, 2022, Issue:19(3), p.559-612.
⁹ Lecturer Dr. Altan Rençber, “Digital Services Tax First Impressions, Problems and Issues”, Tax Problems Journal, Issue: 376, January 2020, p.27-35