VAT treatment of in-game currencies

The AG has opined that transactions in an in-game currency do not fall within the exemption in Article 135(1)(e) of the Principal VAT Directive for currency transactions. However, the AG has suggested that a teleological approach should be adopted to the second-hand goods margin scheme to allow such transactions to be taxed only on their margin where the resales of such in-game currencies take place on essentially comparable terms to those of second-hand goods: Žaidimų valiuta' MB v Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (Case C‑472/24).

Background

The case concerns a Lithuanian person who bought and sold "gold" used as a currency for purchasing various benefits within an unnamed online computer game. The person bought in-game gold from players of the game and then on-sold such in-game gold at a profit to other players. They did not charge VAT on their sales and this came to the attention of the Lithuanian tax authorities. The taxpayer appealed the resulting VAT assessment and the courts referred a number of issues to the CJEU.

Currency

The main argument was that the in-game gold was a currency falling within the scope of Article 135(1)(e) which covers "currency, bank notes and coins used as legal tender". The AG noted that technically the scope of the exemption was limited to "legal tender" and the in-game gold clearly was not legal tender. However, the AG also noted that the CJEU accepted in Hedqvist that Bitcoin could fall within the scope of this exemption even though it was not, at least at the time of the decision, legal tender. However, the AG noted that "it was common ground that the 'bitcoin' virtual currency had no other purpose than to be a means of payment and that it was accepted for that purpose by certain operators... That extension therefore covers at most those virtual currencies that are accepted, like 'bitcoin', as a contractual direct means of payment between operators and which have no other purpose than to be a means of payment".

In this case, it could not be said that in-game gold was used solely as a means of payment where a 'currency' is used only within a game. "In that case, it is not a means of payment, but merely a means within the game, that is to say, play money. The use of play money within a game, even if it acts as a currency or a means of payment there, cannot be equated to use as a means of payment between operators in legal transactions."

Multi-use voucher

The AG also considered whether the in-game gold could be treated as a multi-use voucher. The AG noted that, to be treated as a voucher, in-game gold would have to give rise to the obligation to accept it as consideration for a service. However, in-game gold itself is already an electronic service (a specific benefit in the game which can be used there and played with there). In-game gold itself is therefore already the consumable benefit and does not merely serve to procure a later consumable benefit in the form of an as yet unspecified service. The mere fact that a service (in-game gold) can be exchanged for another (such as an item like a 'magic sword') - in the present case, within the game - does not make the service that has already been supplied a voucher."

Margin scheme

Finally, the AG considered the potential application of the margin scheme in Article 311(1) and which covers "any taxable person who, in the course of his economic activity and with a view to resale, purchases, or applies for the purposes of his business, or imports, second-hand goods, works of art, collectors' items or antiques".

The AG had sympathy for the position of the trader in in-game gold in this case, pointing out that whilst the VAT system only seeks to levy VAT on the added value to transactions, that breaks down in situations where a trader primarily purchases items which have embedded VAT from non-taxable persons, as here. The trader buying 100 in in-game gold from a non-taxable person would need to sell it for more than 120 to turn a profit when taking into account VAT added to the sale price. This was exactly the situation that the margin scheme was designed to alleviate by limiting VAT to the net margin.

A significant issue for the taxpayer here, however, was that the margin scheme only covers second-hand goods and the in-game gold was clearly a service, not a good, for VAT purposes. Clearly, if the VAT Directive was interpreted literally, only the supply of second-hand goods comes within the scope of the margin scheme. However, the AG noted that it was necessary also to take into account the purpose and history of the legislation. Here, the AG noted that when the rules were put in place, it could not be foreseen that, through the internet in particular, there would emerge a secondary market for many other objects that are traded in the same way as goods but are not tangible property. In addition, the AG argued that the spirit and purpose of the margin scheme consists primarily in the implementation of the principle of neutrality. "The principle of neutrality requires, first, a level playing field for a taxable trader such that it can deduct the amount of its input transaction from the amount of its output transaction and then pay tax only on the difference. Second... double taxation through the residual VAT typically contained in second-hand goods should be avoided."

Therefore, as regards the restriction of the margin scheme to the supply of goods, neither a legally permissible objective nor a plausible reason for that legislative restriction was evident. There appeared no objective reason to differentiate between supplies of goods and services in this context. The objectives pursued by the margin scheme of preventing double taxation or a competitive disadvantage do not depend on such technical distinctions. The technical distinction between a supply of services and a supply of goods is therefore immaterial to the question whether normal taxation or the margin scheme applies, the AG argues.

Accordingly, the AG suggested that the CJEU should decide that the VAT Directive should be interpreted, in the light of technological developments, in a teleologically broader manner as covering also transferable non-tangible objects, provided that they are traded in legal transactions in the same way as tangible objects provided that such services are traded on a secondary market in a comparable way to regular second-hand goods and typically contain residual VAT. The position would be different if the in-game gold was simply earned through gameplay rather than being purchased (with VAT on the consideration).

Comment

The opinion takes a novel approach to a novel, but increasingly important, online feature. However, the teleological approach taking into account unforeseen technical developments put forward by the AG in this case might be contrasted to the similar scenario previously considered by the CJEU in relation to digital books (where the Court restricted the application of reduced rates to physical books). As such, it remains uncertain what approach the CJEU might adopt in relation to the application of the margin scheme.

In addition, it should be noted that the AG prefaces his approach on the basis that the in-game gold could be purchased (with VAT), such that the secondary market in in-game gold was comparable to the secondary market in second-hand goods. However, many games will enable players to earn in-game currency through play as well as allowing the direct purchase of such currencies. Where the in-game gold is obtainable by both means, how should it be determined if the secondary market is sufficiently comparable?