Jeffrey Owens & Nathalia Oliveira Costa (Vienna University of Economics & Business), The Tax Treatment of the Metaverse Economy and the Potential for a New Offshore Tax Haven, 176 Tax Notes Fed. 657 (Aug. 1, 2022):
In this article, Owens and Oliveira Costa consider how the development of the metaverse, cryptocurrencies, and non-fungible tokens could fundamentally change established tax concepts and the way tax compliance functions.
The metaverse, with its unimaginable potential, will continue to be the subject of a complex and wide-ranging discussion. Virtual worlds are still part of our physical world and, as such, they must be subject to laws, taxes, and rules. This article merely scratches the surface of some of the metaverse’s tax challenges, and there are more questions than answers.
Going forward, the first step governments should take to enhance compliance is to understand for themselves these new concepts and the metaverse’s new economy. Most importantly, governments need to engage in a principle-based dialogue with stakeholders to find common ground on tax principles and the Web3 mindset (including self-sovereign identity and the right to privacy in an open, transparent, inclusive, and verifiable environment with self-forming communities). Early movers are more likely to be able to set these rules, and that is why governments must act soon to build a governance framework in partnership with the private sector. The OECD recently released a public consultation document on these issues.
Authorities should make it easier for taxpayers to comply with tax law requirements by using blockchain to regulate blockchain — that is, embedding and automating tax compliance into the system (and following the principles of an invisible tax administration or tax by design) as an efficient manner to take advantage of the digital evolution. Artificial intelligence tools, such as machine learning, can be implemented to crunch big data and perform risk assessments to assist tax administrations to be more efficient, cut down on costs, and make better use of their limited human resources.
However, one cannot ignore the existence of intermediaries that create a peer-to-peer connection environment (such as eBay), in which users can connect to one another directly to exchange digital assets. It is possible to transact in the digital economy without an intermediary. Therefore, governments must understand the way the economy works and come up with solutions for different scenarios.
The metaverse and NFTs could fundamentally change established tax concepts and the way tax compliance functions. Although this presents an enormous challenge for tax authorities, if they embrace this change, they can automate the collection of tax with real-time compliance measures, minimize the need for audits, and reduce tax fraud.
If states do not dive deep into the issues of metaverse taxation and create global rules to regulate and tax this environment in a cooperative fashion, there is a risk that courts will feel obliged to make decisions on the matter, turning it into a confusing and litigious topic. An unregulated digital universe means a free pass for businesses to take advantage of an unregulated economy. If that were to happen, the metaverse might become the next offshore tax haven.