Swedish tax authorities cash in on the virtual economy

27 October 2009

Hampus Åkerstedt, Henrik Nilsson

The Swedish tax authority “Skatteverket” is coming to the end of a three-year tax investigation project into the E-Commerce Sector. The E-Commerce project is proclaimed as a great success so far. Skatteverket has to date issued formal decisions finding an additional SEK 670 million (EUR 63.4 million/£55 million) in undeclared income as a result of its cyberspace tax audits.

A special Skatteverket team of 60 people has focused on poker and other online gambling sites as well as on regular trading sites. Goods and services have often been found to be sold by businesses operating without filing tax returns, or significantly underreporting turnover, and neglecting to collect and account for value added tax.

Along with websites for the sale and purchase of conventional goods, Skatteverket has taken a groundbreaking interest in the “virtual economy”. For example, Skatteverket estimates that 180 Swedish businesses and individuals are trading in “virtual real estate”: stand-alone domain names perceived to be commercially attractive in their own right or as websites providing revenue, from hosting link farms or from use in search engine optimisation schemes.

Whilst estimates of undeclared income from virtual real estate have not been released, Skatteverket also studied the trading of avatars used in the popular online game World of Warcraft. Skatteverket calculated that during the 14 month period studied, 7,100 advertisers placed 12,000 ads selling avatars with a combined asking price of SEK 662 million on the major trading sites. Skatteverket’s report does not show if these ads were connected to Swedish residents or if this is the world market. Skatteverket officials concede that sellers will often have to lower their initial asking price, but maintain that given that the value of the avatar trade is significant, it is remarkable that not a single Swedish tax return has declared income deriving from these sales.

It is not known to what extent Skatteverket has penetrated the virtual economies inside many of the popular online games such as World of Warcraft. Many of these multiplayer online games feature currency-like means of exchange, facilitating a wide range of pecuniary and sometimes commercial interaction between players. Trading in various tools and attributes for game avatars is common practice, and creation and development of real estate-like property is an important part of many online environments such as Second Life.