Investigative think tank TaxWatch UK has described Video Game Tax (VGTR) relief as "corporate welfare for multinational companies," after it highlight further tax avoidance strategies among British developers.
In particular, the organisation uncovered how Rocksteady Studios leverages VGTR to help shift profits to its parent company, Warner Bros. Interactive Entertainment.
VGTR allows developers to claim up to 20% of production costs of a game, while loss-making companies can claim tax credits worth 25% of their total losses.
According to publicly available tax records, Rocksteady has been making a pre-tax loss for every year between 2014 and 2017, despite creating the highly successful Batman Arkham games. Arkham Knight alone sold five million copies in its first three months, and was the fastest-selling game of 2015.
The anomaly is explained by Rocksteady not actually receiving profits from its games, but rather payments from Warner Bros. based on production costs. The accounts show this payment is not enough to cover all costs, leaving Rocksteady as a loss-making company.
As TaxWatch UK highlights, these losses allow Rocksteady to claim almost £10 million in VGTR as credit, nudging into post-tax profit, while not paying any corporation tax.
"The result of this is that Rocksteady is being subsidised by the British taxpayer to produce highly lucrative games for its American parent company," reads the report. "The company pays no tax on the profits derived from the production of those games in the UK."
TaxWatch UK also highlighted Sega, an organisation which claims to "not take part in tax avoidance schemes." Breaking down the Japanese firm's involvement through subsidiary Creative Assembly, TaxWatch UK found that Sega was able to completely wipe out its corporation tax bill.
While Sega appears to "not have a particularly aggressive approach" to profit shifting, it is able to increase its post-tax profit through VGTR.
According to Creative Assembly's 2018 tax bill, the company was able to wipe it corporate tax liabilities through VGTR, thereby increasing its post-tax profit by £3.2 million.
"The two companies which we have studied here demonstrate that the VGTR scheme is almost bound to ensure that the UK games industry will not pay corporation tax -- regardless of how successful the industry becomes," the report concludes.
"In the case of Sega, the company does not appear to be engaged in any obvious profit shifting, however, video games tax relief still manages to wipe out the taxable profit of the company.
"Add in profit shifting and games companies can even claim money back. It is implausible that the games produced by Rocksteady are loss making, and the losses in the Rocksteady accounts appear to be the result of profit shifting by the company. The perversity of the VGTR regime is that it rewards this aggressive behaviour with more subsidy."
Speaking with GamesIndustry.biz, TaxWatch UK researcher Alex Dunnagan also criticised the recent renewal of VGTR until at least 2023, saying it did not undergo appropriate scrutiny. The total relief is already more than three times the projected £35 million annual bill, and the scheme is expected to have cost over £500 million by 2023.
This report comes just one week after it was revealed that WarnerMedia, Sony, and Sega, have claimed nearly half of all VGTR since the scheme was introduced in 2014.
GamesIndustry.biz has reached out to Warner Bros. and Sega for comment.