Ireland’s Digital Gaming Tax Credit is likely to be effective from 2022. Ken Hardy, Damien Flanagan; & Stephen Brennan examine schemes in other jurisdictions and explore Ireland’s options as an up-and-coming hub for Digital Gaming.

While we wait for the Minister of Finance to issue the Commencement Order for Ireland’s new Digital Gaming Tax Credit (“DGTC”), which was first mentioned in the 2021 Budget Speech (in October 2020) by Minister Donohoe and likely to be effective from 2022, we examine similar schemes in other jurisdictions and explore Ireland’s implementation options as an up-and-coming hub for Digital Gaming.

The likely availability of a DGTC may come as a surprise to some.  With an ambition to be a significant hub for the Digital Gaming industry, Ireland provides an attractive combination of world class research institutions, large technical talent pool and artistic talent. A strong track record of hosting some of the world’s largest tech companies gives Ireland further points on an already impressive report card.

But what is Digital Gaming, what will Ireland’s version of a DGTC look like? And how have DGTCs been implemented elsewhere? 

What is Digital Gaming?

Digital Gaming (“DG”) describes using PCs, consoles, or portable devices to play software-based games. The field of DG covers a wide array of different game types and delivery methods. Traditionally Digital Games were almost exclusively sold as playable entertainment products, but over the years, as the field developed and technology advanced, DG has become ubiquitous in a range of industries, from digital marketing to gambling.

The global digital gaming market generated approximately $120 billion in revenue in 2020. The most recent figures suggest that Ireland is currently generating less than 1% of European digital gaming products, while the UK produces over 35%.

Background – The DGTC

DGTCs are tax-based incentives targeted at a creative industry and designed to encourage growth of the DG sector. Such credits have been in existence for a number of years in countries like France, Germany, Canada and the UK. While the core principle of the credit is to encourage economic growth in the sector, the specific implementation, level of incentivisation and qualifying criteria vary from jurisdiction to jurisdiction.

In this article we will take a deep-dive into some of the most well-established Gaming Tax Credit regimes, exploring their similarities and differences, highlighting the elements of each credit that work particularly well and perhaps exposing some shortcomings.

We will also look at how Ireland might fit in to this landscape; will Ireland follow the same approach as that of our neighbouring countries? Or will Ireland be more creative; pioneering a new approach to incentivising the DG sector? 

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France: Tax Credit for Video Games (“TCVG”)

History

The French Tax Credit for Video Games (“TCVG”) aims to support innovative and creative projects, contributing to the implementation of ambitious projects in France that offer new career opportunities.

The TCVG was introduced with effect from January 2008.  It was improved in December 2014 with a widening of the eligibility criteria, resulting in a more competitive incentives scheme. In August 2017, a second review of the credit was carried out and the rate cap was raised from 20% to 30%, and the annual maximum threshold was doubled from €3 million to €6 million.

Incentive

The TCVG consists of a 30% credit rate on eligible expenses with a maximum threshold of €6 million per project. 

France: Tax credit for video games

Figure 1: France, High Level Summary

Qualifying Company Criteria

To avail of the TCVG the claimant company must be subject to corporation tax. 

Qualifying Video Game Criteria

To qualify for the TCVG, a game is rated against a cultural test which assesses the cultural aspects of the game including originality, innovation, narration, and distribution of expenses. These are examined to ensure that the game can be considered culturally significant.

The project must cost, in development alone, more than €100,000 and the game should be for commercialisation.

Finally, the game cannot include any form of inappropriate or violent imagery.

Qualifying Expenditure

  • Certain property related expenses.
  • Remuneration of artists that have participated to the creation of the game and salaries of personnel directly related to the creation of video games along with administrative and technical personnel.
  • Some functional expenses together with some outsourcing costs to European organisations with a limit of €2 million per game title.

Refund Type

The TCVG is deducted from taxes due by the business. Any remaining non-deducted TCVG can be offset against taxes owed for the subsequent three years, and is immediately refundable for Small-and-Medium Enterprises.

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Germany: Development Tax Credits for the Games Industry

History

The original incarnation of the German DGTC was motivated by the need to compete with other countries supporting digital game development, combined with recognition of the Digital Games industry as an economic and cultural asset.

Incentive

  • Funding is staggered from a minimum of 25% to a maximum of 50%.
  • In the case of prototypes, the maximum share of funding is 50%.
  • For productions, development costs of between €100,000 and €2 million are funded at a maximum of 50%.
  • Development costs of between €2 million and €8 million are funded on a degressive scale, from 50% to 25%.
  • Development costs of over €8 million are funded at a maximum of 25%.
  • Projects with development costs of more than €40 million are separately assessed.
Germany: Development Tax Credit for the Games Industry

Figure 2: Germany, High Level Summary

Qualifying Company Criteria

To qualify for the credit, the headquarters or business premises of the game company must be in Germany. Furthermore, the entity must be a legal corporate structure such as GmbH or UG.

Qualifying Video Game Criteria

Projects must pass a cultural test which seeks to establish the cultural significance of the game. Additionally, to qualify, the security of the project’s overall financing must be proven.  The project must also enable one or more of the following; more games produced from Germany, more jobs in the games industry, an increase in sales of German-produced games on the domestic market. Finally, proof of the necessity of the credit must be presented, e.g. only by means of the credit can the game reach new market segments and target groups.

Qualifying Expenditure

  • Prototype development
  • Production expenditure 

Refund Type

25% of wages and salaries, together with tax-exempt social insurance contributions, will be offset against the annual tax liability, with any unused credit available for a refund.  

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Ontario Canada: Ontario Interactive Digital Media Tax Credit

History

Originally introduced in 1998 with an exceptionally broad eligibility criteria in order to encourage rapid growth within the Digital Media industry in Ontario, the Ontario Interactive Digital Media Tax Credit (“OIDMTC”) grew in cost by over 40% between 2003-04 and 2014-15. A review was undertaken in 2015 to modernise support to the industry. 

Incentive

  • 40% of labour and marketing & distribution expenses for companies that develop, own and market their products. These expenses are capped at $100,000 per game titles.
  • 35% of labour costs for game titles.
  • No limits on eligible Ontario labour expenditures, nor are there limits on per project or annual corporate expenditure.
Ontario Canada: Ontario Interactive Digital Media Tax Credit

Figure 3: Ontario, High Level Summary

Qualifying Company Criteria

Companies must be incorporated in Canada, with an office in Ontario where the Interactive Digital Media (“IDM”) products are developed. The OIDMTC is offered to the company that has developed/made the product. 

Qualifying Video Game Criteria

To claim the OIDMTC, the primary purpose of the game must be to entertain users or educate children under the age of 12 through the presentation of information in at least two of the following three forms: text, sound, images. 

Figure 4: Venn Diagram showing the use of gaming from an education standpoint

Figure 4: Venn Diagram showing the use of gaming from an education standpoint

Amendments made to the credit in 2015 introduced exclusions for development of certain products, including most websites, with the exception of websites that contain digital games, content related to film or TV IP, VR/AR and/or educational products for children.

In addition to the above, the product being claimed must not be used primarily to present or promote the company or their products and services, nor to sell the products or services of those companies.  Furthermore, products must have a revenue generating stream, such as third-party advertising, in-app purchases, or fees for use.

Refund Type

The OIDMTC can only be used to reduce the Ontario corporate income tax payable.

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United Kingdom: Video Game Tax Relief (“VGTR”)

History

The VGTR tax incentive system was introduced in April 2014 and has had a steadily rising number of applications each year, with the most recent figures as of 2019-2020 indicating that there were 150 British video games completed with a total expenditure of £355 million. These games come from a variety of developers, from small indie games developed by independent studios to triple A title productions developed by some of the largest companies in the industry. The VGTR system was also the first to introduce the cultural test, a test that aims to establish whether a video game can be considered ‘culturally significant’ based on a set of criteria. The concept of a cultural test has been reused by several other countries for the purposes of evaluating the suitability of games for the credit.

While exact figures are not available on the success of the UK credit, Games Investor Consulting predicted that the introduction of the credit led to the creation of 2,800 studio jobs, increased investment of £331 million, increased tax receipts of £456 million and added an additional £1.1 billion to the UK GDP between 2016 and 2020.

Incentive

  • The Video Game Development Company (“VGDC”) can claim a tax credit equal to 25% of the core expenditure which is “used or consumed” in the EEA, up to a cap of 80% of total core expenditure.
United Kingdom: Video Game Tax  Relief (“VGTR”)

Figure 5: UK, High Level Summary

Qualifying Company Conditions

To qualify for the VGTC, the VGDC must pay Corporate Tax in the UK and it must be the company most actively engaged in designing, producing, testing, planning and negotiating contracts.

Qualifying Video Game Conditions

To receive the VGTC the video game must pass the cultural test and be considered a British video game. Additionally, at least 25% of the core expenditure must be incurred in the EEA. Finally, the game must be intended to be supplied to the general public. Games created solely for advertising purposes or gambling real money are non-qualifying.

Qualifying Expenditure

  • Designing, producing and testing related activity
  • Staffing expenditure included if the staff are qualifying (i.e. resident of UK or EEA state). 

DGTCs Comparison: Potential Drawbacks

Having considered the principal DG credit regimes currently in operation, we set out below the important factors that we believe should be considered when developing Ireland’s DGTC.

The Cultural Test: Friend or Foe?

The Cultural Test is a key factor of many DG Credit systems and is the primary test for identifying qualifying vs non-qualifying products. It is important to note that the approval of Video Game Tax Credit regimes must be carried out by the European commission. The cultural test helps to satisfy the argument that video games are cultural products (similar to film) and so merit support.

The Cultural Test as it is implemented in the UK must be carried out by a third party (in this case, the British Film Institute (BFI)). In Ireland, we have no dedicated video game review board so the task of qualifying projects based on their cultural significance will have to fall on either an existing institution within a tangential industry, or to a newly created video game review panel.  In any event it is likely that accreditation systems will need to be put in place. 

Per Title Claim Basis: Who is Missing Out?

The DG Credit schemes described above are based upon a ‘per-title’ claim basis. That is, one claim can be made per year on a particular game title. As the DG industry has evolved, the infrastructure and systems that are critical to the industry and required to enable modern features like online play or AR/VR incur significant spend and yet, are unrecognised by some of the existing DG tax incentive regimes.

In Ireland, there are companies investing heavily into AR/VR hardware systems development, gaming engine development and low latency online infrastructure development. These technologies are critical to the success of the Digital Gaming industry and yet fly under the radar of the traditional format of digital gaming credits. While some of this work might be captured by other tax incentives (i.e. the R&D tax credit), the introduction of a Digital Gaming credit which specifically captures this work would remove any ambiguity surrounding the qualification of this work and streamline the process of claiming.

 A DG Credit system that recognised the effort required in designing products like Anti-Cheat systems, online streaming platforms or 3D gaming engines would be attractive to many technology companies.

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What will the Irish DGTC look like?

On the one hand, Ireland could follow other jurisdictions that have implemented a DGTC. If this was the case, we might expect a scheme similar, but perhaps more attractive, to the UK credit. 

Classic Model

Incentive

  • >20% - 30% of total core expenditure as a tax credit against CT
  • > €1m equivalent per game subcontractor core expenditure.

Qualifying Conditions

  • % of core expenditure must be spent in Ireland or another EEA state.
  • List of Qualifying Activities (development etc). The eligibility/cultural significance of a game could be verified by an appropriate body like the Irish Film Institute (IFI).

Cultural Test

There are two potential options for the cultural test:

  • Selection or creation of a third-party certification board and adoption of a cultural test to qualify titles as culturally significant.
    OR
  • Removal of certain aspects of the cultural test resulting in reduced overheads, while still ensuring that the game is predominantly developed in Ireland/EEA.

A New Approach

Alternatively, Ireland has the opportunity to be more innovative and use the new DGTC to attract sub-sectors of the Gaming Industry that fall between the cracks of some of the existing  regimes. A key differentiator could be in the way claimable activities are defined. In a traditional VGTC format,  credit is granted on a ‘per title’ basis, meaning that each game title is claimable. For example, if a video game developer develops three games, all three games would be claimed separately on condition that they meet the cultural test and other qualifying criteria. However, the ‘per-title’ claim system overlooks many sectors of the DG industry, for instance, work on the development of critical supporting systems, like low latency servers, gaming hardware and Anti-Cheat systems are not claimable. Rather than a ‘per title’ basis, pivoting to a ‘per project’ basis would be significantly more attractive to a larger number of companies involved with DG, making Ireland a more attractive hub for DG in general.

Per-Project basis

Incentive

  • >20% - 30% of total core expenditure as a tax credit against CT.

Qualifying Conditions

  • Certain percentage of core expenditure must be incurred in Ireland/EEA.
  • Project must contribute to the improvement/development of the DG Industry as defined in a list of “Qualifying Activities”. 

What remains?

In this article we have discussed the characteristics of some of the more notable DG Credit Regimes around the world. We have also explored how these may inform the type of GDTC that Ireland could consider introducing. 

Unlike many other technology centric industries, the DG sector is extremely broad including creative designers, artists, musicians, and engineers to name a few. By extension, a DG tax incentive can encourage growth across these fields, leading to the creation of new, high paying roles in industries (particularly creative) where such roles can be hard to find. The DGTC has the potential to offer a significantly positive impact on Ireland’s creative economy, similar to what has transpired in other jurisdictions. The only question that remains is how we choose to implement it. Do we play just to take part, or do we play to win?

This article originally appeared in the Irish Tax Review and is reproduced here with their kind permission.

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