The importance of VAT compliance for video game devs and publishers

A guide from Xsolla to navigating global tax regulations and VAT compliance.

Digital sales, the most common video game purchase for developers, offer a quick and convenient transaction method, but they come with additional considerations — a crucial one being tax compliance. Digital sales growth has resulted in over 100 countries regulating indirect taxes such as value-added tax (VAT). While indirect taxes align with international trends, emerging direct taxes can target specific digital sales, increasing scrutiny from tax authorities and emphasizing the importance of international businesses seeking local support.

Understanding indirect taxes, including how they differ from income tax, adhering to regulations, and knowing what can happen if you neglect tax obligations is essential to avoiding financial and legal consequences for international transactions.

What is VAT? 

Indirect taxes, like VAT in the EU, goods, and service tax (GST) in India and Australia, consumption tax (CT) in Japan, and sales tax in the US, are imposed on digital products and services in video game distribution to generate government revenue. Unlike income tax, which is calculated based on profits, VAT tax represents a percentage of the price paid by consumers. Developers and publishers will face a variety of global income tax and indirect taxes, adding to the complexity of compliance in international digital commerce.


VAT is a key component of global digital commerce due to the popularity of digital services. Even if a business isn’t registered in a country, non-compliance with tax regulations can lead to legal/financial consequences like penalties, interest, legal actions, and more. To comply, businesses selling digital goods globally must collect and remit taxes, register as digital goods suppliers, submit tax returns, and adhere to payment deadlines.

Why it’s important to meet tax requirements

Enforcement Measures & Consequences

Global tax authorities are increasing enforcement on payment providers, with the EU requiring transaction reports to a centralized database, CESOP, making digital sales more transparent for taxes. Countries like the UAE, US, Canada, UK, Ireland, Australia, India, and South Korea also have whistleblower programs to encourage compliance.

  • Naming and Shaming. Countries like South Korea and the UK publicly name non-compliant companies and individuals, which can harm the reputations of local gamers, impede third-party relationships, or potentially cause payment processors to avoid a non-compliant business.
  • Bank Account & Website Block. In countries like Mexico and Turkey, fiscal authorities block non-compliant foreign company websites until they’ve settled all liabilities. If a foreign company has a bank account in a country where it violates tax rules, local authorities can also freeze the account until tax debts and penalties are paid.
  • Criminal Penalties. Some territories impose criminal penalties for tax evasion, requiring varying degrees of intent, leading to fines or imprisonment. Even unintentional infractions in places like Thailand can result in prison sentences for lapses, like failing to register for VAT purposes.

Non-Compliance Penalties & Outcomes

Let’s explore real-world cases where video game developers and publishers faced challenges due to tax non-compliance:

Case 1: Tax Evasion Repercussions

In a prominent case, a developer known for creating titles like Street Fighter II: Hyper Fighting and Tiger Woods PGA Tour 2005 faced repercussions for tax evasion. This developer faced significant legal consequences due to their failure to fulfill tax obligations, including paying state taxes. The repercussions were not only financial but also legal. They submitted fraudulent W-2 forms, which ultimately led to their sentencing to six months in jail. Additionally, they were court-ordered to pay a substantial restitution order of over half a million dollars.

Case 2: Supreme Court Ruling on GST Evasion

The Supreme Court of India intervened in a case involving online gaming company Gameskraft Technologies. The Karnataka High Court had initially dismissed a  significant show-cause notice issued to the company. This notice raised allegations of goods and services tax (GST) evasion amounting to nearly 21,000 crores (approximately $2.5 million). The involvement of the Supreme Court in this case sheds light on the legal battles and potential financial liabilities that can result from non-compliance with tax obligations.

The Road to Compliance

VAT compliance is critical to succeeding in the global video game market. The industry will likely face stricter regulations in the future, and complying with tax-related regulations will help developers and publishers expand internationally and prevent financial or legal setbacks. Understanding compliance complexities, particularly for global operations, demands education and resources, which is why partnering with a games industry expert who understands global operations and logistics can be invaluable.

As a Merchant of Record (MOR), Xsolla can become exactly that: an experienced partner who takes care of a whole spectrum of compliance details from fraud prevention and data security to refunds, chargebacks, and tax compliance. You can download their free ebook if you’re interested in learning more about global compliance and the other benefits of a merchant of record.

You can visit the Xsolla website to explore the advantages of MOR partnerships and tools that can help you accept global payment methods and reach more players.

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