Spain: The metaverse and taxation

 

The metaverse is the promised land. This is what many say. Big investments have encouraged the idea of ​​a new online place yet to be created, to be bought, to be built, where being late can cost a lot of money.

Nothing is known at the moment if the metaverse is or will be the promised land, there is little doubt, however, that the metaverse or its descendants will somehow form part of our future horizon.

The question we ask ourselves here is, will we pay taxes in the metaverse?

Metaverse concept

To answer such a question we should first address the question of what the metaverse is. In defining it itself there is a risk of being wrong when it is still a reality under construction. In general terms, there is agreement in defining the metaverse with the following features:

• Virtual and three-dimensional ecosystem
• A digital environment that results from certain technologies linked to augmented reality, virtual reality and blockchain
• Interaction between users.
• Creation of virtual spaces that enable an immersive and multisensory experience.

A new state: the metaverse

Barbados surprised the world in 2021 by announcing the construction of a digital embassy in the Metaverse. To do this, he bought a digital plot on the Decentraland platform.

Such news invites us to think if there really is a sovereign space on which digital embassies can be opened. For this we can go to the Montivideo Convention on the Rights and Duties of the States of 1933. In attention to it, in the current circumstances, the Metaverse would hardly meet all the requirements that are demanded to form a State (permanent population, determined territory, government and capacity to enter into relations with other States).

Without the existence of a state of the metaverse, the regulations and therefore taxes to be applied to activities in the metaverse will derive from the existing States in the international community.

The metaverse: outer space

There are no taxes on the moon because the moon is not part of any state. In other words, transactions carried out in lunar space would be outside, for example, the VAT application territory (from a European perspective) and therefore not subject to such tax.

There is an international treaty on the moon: Agreement that governs the activities of States on the Moon and other celestial bodies. This treaty, among other aspects, prohibits the claim of sovereignty over the celestial bodies. Few single states that have ratified it.

The question is therefore whether the metaverse can be legally equivalent with the moon, that is, outer space. With the current circumstances, it is difficult to legally sustain that the metaverse as a virtual reality meets the characteristics of the moon. Although this is an extraterrestrial reality, it continues to be a physical reality.

Taxable events

To determine if taxable events of the tax system can occur, you must study what can be done in the metaverse

• Have fun: Attend concerts, museums or exhibitions, for example, or works of art in NFT format.
• A user can go shopping in the metaverse, try on things.
• Hold meetings,
• Play: Video games online.

From this mere description, there are many taxable events that can occur in terms of indirect taxation. Taxable events are more difficult in terms of direct taxation since, on the one hand, there are currently no legal or physical persons with tax residence in the metaverse; and on the other hand, there is no tax jurisdiction in the metaverse that can tax the profits made therein.

Taxation

In the current situation, the residence of the legal person, company or natural person that acts in the metaverse will be the key element to determine taxation. Such residence is therefore configured as a connection point that legitimizes a State to subject to taxation:

• Indirect taxation. The businesses or transactions carried out by the person resident in the metaverse will be taxed according to the regulations of the State of residence or by the State in which they are physically located (depending on the regulations that are applicable) when they carry out activities in the metaverse.
• Direct taxation. The income or benefits obtained by such a person in the metaverse will be taxed in general terms and without prejudice to special cases, in the State in which the legal or physical person is a resident.

Entities in the metaverse.

To address this point, we must stop at the DAO, Decentralized Autonomous Organization.

The DAO is a self-contained organization that is based on a software program that exists self-contained on the internet. It is a pre-programmed set of rules that works autonomously and is coordinated through a distributed consensus protocol.

This is one type of autonomous organization but the future may hold many more. There are currently no autonomous legal persons in the metaverse, but we do find autonomous organizations without legal personality per se, making decisions and doing business in virtual settings. The taxation of the activities and benefits of such entities, if they exist, will depend to a large extent on the legal and economic relationships with legal or natural persons (partners, or contractual parties with whom the transactions are closed) that must be analyzed for each case or solo mode.

European digital identity and the metaverse.

With so much avatar in the metaverse and absence of physical reality, one of the problems that can arise in the metaverse is the very identity of the actors in it. This may also entail fiscal connotations if such identities may have effects before the Tax Administrations.

In this sense, there is already a proposal for a European Regulation on European digital identity that, at least for the European sphere, would solve this issue. However, it is an issue that goes beyond the limits of the European Union, and therefore requires a global solution. The international community, if applicable, through international organizations, could include working for a global solution on their agendas. In any case, the obligation or not to have a digital identity exceeds the purpose of this article.

These lines are not intended to provide concrete solutions, but to ask questions and start working on an issue that may occupy us in the coming years or decades. For now, the new reality of the metaverse does not alter the current tax regulations that refer taxation to actions, legal acts or income that natural or legal persons (located in physical tax jurisdictions) carry out. New reality, old solutions.

For now, we can browse the metaverse with some three-dimensional glasses, and reflect if it is or will be the promised land.

 

For further information, please contact:

David Elvira Benito, Lawyer

Bufete Mañá-Krier-Elvira, Barcelona

e: de@bmk.es

t:  +34 93 4878030

 

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