Monday, 3 November 2008

Online money in China - 20% tax?

The ban on Chinese making money from online games was always difficult to enforce. Cash poor, time rich Chinese could build up "characters" and sell them on to cash rich, time short western players who wanted to take a short-cut to the top.

Making it legal but subject to a 20% tax will be equally hard to enforce. However, this is at least a step in the right direction. Online gaming skill could become another good Chinese export.

The idea that these taxes can be collected still demonstrates that the Chinese government has yet to come to terms with the reality of the Internet.

China U-turn on online money-making [FT]

Less than two years after “strictly forbidding” players of online computer games from making money from trade in virtual currencies, China has announced a 20 per cent tax for such income.

The apparently contradictory rulings from different arms of the Chinese state highlight the difficulties faced by governments worldwide as they seek to regulate and tax the growing economic activity centred on “massively multi-player online role-playing games”.

Tax authorities generally take the view that all income from online business should be taxable, even if profits are derived from virtual worlds.

However, the practicalities of collecting those taxes – and valuing virtual assets – continue to be elusive.

Trade in virtual items – ranging from “gold” coins to magic swords and in-game property rights – is estimated to be worth more than Rmb10bn ($1.45bn, €1.15bn, £900m) a year in China alone, according to consultancy iResearch.

The widening trade in the virtual money used within games – and their burgeoning use for other transactions – last year prompted China’s ruling Communist party and the central bank to ban trading in virtual currencies and their use for purchases of “material products”.

However, in what amounts to tacit recognition that last year’s restrictions have had little impact, the State Administration of Taxation has announced that income from the sale of virtual currency with “increased value” is taxable at the same 20 per cent rate applied to real estate and other transactions.

Beijing tax officials declined to explain how they would implement the vaguely worded ruling, with local media saying detailed regulations could be announced in the coming days. However, Chinese analysts and games players suggested that the authorities’ attempt to tax the virtual currency trade would fare no better than the previous effort to ban it.

The contradictions between last year’s order and the tax ruling showed that authorities were “not very clear about online regulation”, said one industry analyst.

“If they can successfully implement this tax in the next two years, then I will jump over Mount Everest,” sneered one contributor to a discussion of the ruling on the popular Netease portal.

Another commentator involved in the growing business of “farming” virtual money and items used in games for sale to cash-rich but time-poor players in the US, Europe and other developed countries asked rhetorically if he or she could expect to benefit from the same tax incentives as other Chinese export businesses.

“I sell virtual currency to foreigners – will I get an export tax rebate?” the commentator said.

Despite last year’s restrictions, trade in virtual currencies used in games such as “World of Warcraft” or issued by online companies such as Hong Kong-listed internet group Tencent is carried out openly on Chinese auction websites.

Tencent’s widely popular “QQ Coins”, for example, were on Sunday being offered at a rate of one to Rmb0.91.


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