Making a video game requires talent and expertise, and the next challenge is navigating international tax regulations once your game launches. With the digital gaming market expanding, tax authorities worldwide are looking closer at digital sales, creating a complex regulatory landscape. Ignoring foreign tax rules might seem harmless in the distance, but some pitfalls may result in risks, with potential consequences described below. As a merchant of record (MoR), Xsolla handles the real-world complexities of international taxes for you. To understand the value of this service, let's look closer at what can go wrong when digital businesses fail to stay on top of foreign tax rules.

Risks and consequences of non-compliance

The reality of tax enforcement Countries have different mechanisms to ensure foreign digital sellers pay local taxes:

• Withholding tax. Game sales abroad involve payment service providers who may withhold taxes based on local regulations. For example, this is mandatory in Argentina and Colombia, but authorities in other countries can also force such withholding to ensure tax compliance.
• Website or store shutdowns. Tax non-compliance can result in authorities restricting local users from accessing your website or app, with some countries like Mexico and Turkey where tax authorities do so even without a court order. Typically, restoring access requires paying all outstanding taxes and significant penalties.
• Freezing merchant bank accounts. A bank account in a country with unpaid taxes may become inaccessible due to a freeze prompted by local tax authorities, locking your funds until you fully settle all tax debts, fines, and penalties.

Risking your reputation If you fail to follow and file taxes appropriately in the countries where you sell digital goods and services, there is more at stake than your money. The damage to your brand can have a lasting impact, affecting your relationships with your users and partners. Player distrust and frustration
Public tax disputes or appearances on tax "dodger" lists leave a damaging mark on your brand, making players wary and competitors eager to take advantage of your non-compliance as a marketing edge. Partnerships and prospects
Local partners like banks and payment processors may distance themselves from tax-non-compliant companies to avoid tarnishing their image. Public scandals further intensify reputational damage, potentially threatening international partnerships and investments. Negative impact on your business operations Damage tends to compound. Once you break a rule and word gets out, your business may face more problems than needing to pay back taxes or trying to restore your reputation. The day-to-day operations can also be affected by invasive audits and the inability to expand your business. Audit issues
Skipping taxes abroad poses challenges to passing financial audits. That may potentially scare off investors and banks who rely on financial information. Limiting business expansion
Ignoring taxes in a country, even without immediate plans to open an office there, can create a future roadblock by hindering your ability to establish a local presence later. The more countries in which you neglect tax obligations, the more doors you shut on potential international expansion. Criminal penalties for tax evasion In extreme cases, failure to pay taxes can bring fines and potential jail time for intentional tax evasion. Some countries, like Thailand, may even punish "accidental" tax mistakes. That can have lasting effects on your team member's career and your company's overall standing within the gaming community. Playing it safe with taxes pays off in the long run. When you follow tax rules, domestically or globally, you're not just avoiding trouble. You're building trust and good relationships with other companies. Being tax-compliant protects your reputation and maintains positive relationships with important partners. Paying your fair share shows everyone you're a reliable player, both in your country and worldwide.

Staying compliant

Global tax compliance can be a complex and time-consuming burden for game developers. But with Xsolla as your merchant of record, you can focus on games, not taxes. Our team of experts handles everything from automatic tax calculations and filings to clear reporting and expert support, ensuring you stay compliant wherever you operate. Ready to simplify your global tax journey? Create a free Xsolla Publisher Account and get started today, or explore our full tax blog series here to learn about the importance of taxes, how they're collected, and what Xsolla can do for your company as a merchant of record.