Michael Ellen is Principal Consultant at MGE Advisors.
Higher gaming tax rates have a clear and adverse impact on the effectiveness of the regulatory regime, as measured by the percentage of players that is channelled toward licensed operators.
The challenge faced by the Netherlands government, in legislating for its significant remote gambling sector, is one faced by many jurisdictions both in Europe and elsewhere. In a parallel situation, Mexico’s Congress considered a new bill in 2015, the Responsible Games and Raffles Act, intended to bring clarity and order to the piece-meal and ambiguous mix of state/ federal regulations that were then (and still are) in place. A recent web traffic analysis by Regulus Partners indicated that in Mexico’s case this market is significant (c$500m GGY per annum), and 90% unregulated. Not unlike the Netherlands, the Mexican government had settled on a relatively high proposed rate of duty, as part of the negotiating process to get the measure approved.
The challenge in addressing such a problem, for any government, is to agree on priorities as between the various vested interests already represented in the issue, before progressing to a solution. Critically the catalyst in this progress is more often fiscal than regulatory – the prospect of raising tax revenues without causing pain to voters has overwhelming appeal to politicians. Protection, of the population (from criminality and abuse), or even of existing licensees (from illegal competition), routinely comes second. So identifying a simple linkage between the two motivational forces – by which greater tax revenues necessarily flow from effective regulation – is conceptually of great value.
A recent study by Prof Haucap, Dusseldorf Institute of Commerce and Economics, has identified UK as the leading remote gambling jurisdiction in terms of its success at channelling its resident players into regulated sites. Put another way, UK is one of the most effective jurisdictions in deterring black market operation. It is also right at the bottom end of the scale for remote gaming duty; and this duty rate has remained unchanged in UK’s recent budget. So is there a link?
The following charts list, firstly, the range of gaming duty rates imposed on the remote sector by fourteen jurisdictions that have introduced regulated remote gambling*. The duty rates are expressed within three bands, from which it is clear that the highest band is most favoured (by 6 of the 14 i.e. by more than 40% of the sample).
However, the channelling impact of this choice can be seen, equally clearly, by averaging the sum of the published channelling rates for the jurisdictions in each tax rate band, projected onto the same chart.
The pressures are opposing; the jurisdictions with GGR-based rates of tax at or below 20% (Dk, It, UK, Col, and Swe prospectively) are also the most successful (or ambitious, in Sweden’s case) – within this peer group – at excluding illegal operators.
Obviously, there are other influential factors to consider here. Prof Haucap also identified tricky registration processes, limitations on the range of regulated offerings and on the number of licences as being relevant factors in national channelling success. To this list I would add the quantum of resources given to the regulator.
The recent tide of remote regulation has rarely been primarily motivated to channel players into regulated markets; it has more frequently (often explicitly) originated in tax-raising. This political decision on tax-raising needs to be fully informed by the regulatory (and political) objective to control and regulate gambling activity. The failure to make this connection, or the predominance of the fiscal pressure, has a clear and adverse impact not only on the quantum of tax revenues actually raised but also on the effectiveness of the regulatory regime. Conversely, the establishment of commercially realistic duty rates, that enable white-market operators to compete effectively with unlicensed competition, is likely (when added to the other components of effective regulation) to capture a significantly great market and hence to raise more tax.
Sharing this message with political decision-makers for the failed regulatory regimes – such as Germany, Greece, Portugal and Poland (all appearing in the chart’s lowest channelling band) – would be a valuable mission. Persuading those considering new legislation in emerging regimes – such as Mexico and the Netherlands – is more; it is essential to their success.
*14 jurisdictions – Cz, DK, Fr, GDR, Gr, It, Pol, Esp, UK, Nl, Sw, Rom, Por, Col. Where duty is imposed on a turnover basis (Fr, Gdr, Pol) the rates applied are taken (basis on industry-standard player RTP rates).to equate to the highest GGR band.