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Tax penalties primed to halt online gaming community’s winning streak

Posted on February 28th, 2011

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Even the online gaming industry is not immune to globalization and the tenets of competitive advantage, but the open-market concept is starting to re-shape the dynamics. Online gaming giants SportingBet, Party-Gaming, William Hill and Ladbrokes have long capitalized on their position of operating from offshore tax havens to channel generous tax breaks into advertisement and marketing capital that serves gamblers from all over the world. Countries and territories like Malta, Gibraltar, the Isle of Man and the Channel Islands have given these companies a definite competitive advantage that is beyond reach by those operating out of the British Mainland.

These companies do not pay more than 1% of tax compared to those operating in Great Britain which are taxed up to 15%. As a result, these companies dazzle and shine, proclaim and promise, through bright neon lights, television advertisements, athlete endorsements, and the likes. But things are about to turn for the worse, or the better, depending on which side of the fence you are standing on. In a matter of weeks, the Department of Culture, Media, and Sport is expected to announce results on the long-awaited consultation process that aims to regulate remote online gaming. Remote refers to the use of the internet, phones, or fax to place and manage bets. If the results come out as expected, the happy days of nearly tax-free and totally legal operations enjoyed by offshore gaming giants is taking a final curtain call.

British authorities are expected to mirror other European countries and announce the need for online gaming companies to also get a British-license on top of their licensing agreements with their host countries. The previous policy, borne out of the notion that since these countries are operating out of countries with already strict licensing regulations then it is also expected that they are compliant with international gambling policies, is at odds with the counter-argument that if they want to reach-out to British customers then they should be licensed by British institutions as well. The additional licensing requirements will most likely require offshore companies to pay the same taxation rate as those operating out of Britain. While this is not yet clear or established, the consensus is that it is most likely going to happen sooner or later. “People are assuming that the licensing regulation will lead to changes in taxation,’ said one industry source.

“It’s the thin end of a taxation wedge. At the moment, offshore gambling operators pay next to nothing in tax, which is why they went offshore in the first place. But there is an expectation that the rate could be put up to match the 15 per cent which UK-based operators currently pay. We’d be amazed if the Treasury wasn’t already looking at this.” Remarks Ian Burke, the Chief Executive Officer of Rank Group operating out of the Channel Islands, “Many European markets are moving to regulating and taxing online gaming and it’s inevitable that the UK government will look at changing the offshore tax regime.” The new taxation regime is expected to pose a serious threat to the business of small players. According to Clive Hawkswood, CEO of Remote Gaming Association, “Any changes would hit the companies hard. Some online casinos have a payout rate of 97% so there is no room to withstand such a jump in tax. To survive, they would have to cut back dramatically on marketing, which has been lucrative for the media and sports industries.”

However, not every seems to agree with the assessment. What is bad news for some is good news for others. Many major operators such as Rank and William Hill say they are happy to pay more tax, but only if the entire industry does the same. Burke cited the example of roulette, one of the classic casino games, which was taxed at anything between zero percent and 50 percent, depending on where the game was played. Gross profits from roulette attract no tax online, but a small casino would have to pay 15% while Rank’s flagship Victoria casino in London, which has greater revenues, would attract the top rate of 50%.