GPWA Times Magazine - Issue 18 - October 2011

The answer depends upon what constitutes “success,”which in turndepends upon from whose perspective you look at it. In the new regulation that has been intro- duced already or is being proposed, there are several common elements that influ- ence the type of iGaming market that will develop and the opportunities for affiliates. Restricted numbers of licences The draft Greek legislation for online gambling includes provision for about 50 licenses, while Senator Correa’s SB40 bill for Internet poker in California has been amended to allow just five licensed opera- tors in the state. Belgium’s new regulations tied online licenses to existing land- based operations. Restricting licenses in this manner works for govern- ment because it can protect existing gambling vested interests, such as state mo- nopolies or influential tax contributors. It also works for those private companies that are fortunate enough to win one of the licenses. Of course, those firms that miss out are left with the dilemma as to whether or not to continue taking bets from that market. It all depends on how large a percentage of their overall revenues that market contributes. In a restricted license en- vironment an auction often takes place to determine the winners. In California, SB40 wants upfront payments of U.S. $50 million from each of the five licensees. This again works in governments’ favor because operators often overbid in their eagerness to get into a “crucial” market. It often turns out to be a less crucial market a few years down the line when the auc- tion winners are still paying off their li- cense fees and not making any profits. In return for these licenses, however, the operators do expect the government to take action against non-licensed firms that continue to target the market. Recognition of other licenses The concept of global trade across bor- ders does not seem to apply to online gambling if the legal cases fought in the European Court of Justice and World Trade Organization are any indication. Being able to hold one license in a low-tax jurisdiction and from there target many different markets was the ideal setup for companies. But it did mean that govern- ments lost tax revenues offshore and as a result very few governments entertained the idea of mutual recognition of licens- es. One of the few to do so was the U.K., which created a “white list” of approved jurisdictions from where firms were still permitted to advertise in the U.K. The list included the likes of Malta, Alderney, Gibraltar, Isle of Man and Tasmania, as well as EU member states. The U.K.’s white list model for recogniz- ing existing licenses should have been the prevailing model. Having seen, how- ever, that other countries in Europe were favoring the more restrictive, high-tax domestic model, the U.K. too has an- nounced that it is scrapping the white list. Every company that wishes to adver- tise online gambling in the U.K. and take business from U.K. players will have to hold a U.K. gambling license. By implica- tion, although it has not been confirmed at the time of this writing, the operators will also be liable for the 15 percent gross- profits tax on U.K. revenues. Tax mechanism The tax rate and the mechanism applied are central to the viability of an online gambling market. A tax on turnover ru- ins the online gambling business model, which was founded on a low-tax, high- payout setup. A turnover tax also ruins the viability of certain products, such as betting exchanges and casinos. In 2005, when the U.K. unveiled its new Gambling Act, operators said that the pro- posed taxof 15percent ongrossprofits (gross win) was too high. Today, 15 percent of gross profits looks positively generous compared with the turnover taxes licens- ees have to contend with in France, or the 20 to 30 per- cent tax on gross profits in the likes of Denmark and Greece. Germany has stated an initial tax rateof 16.6percent of turn- over in its draft proposals. In response to higher taxa- tion, operators have to in- crease their gross win mar- gin or rake to cover the taxes. This, in turn, influences con- sumer behavior. Consumers realize they are losing their money more quickly and in response perhaps lower their stakes to make their funds last longer or play less fre- quently. Their other option, of course, is to seek out off- shore firms not encumbered with the same tax rates. Many of the governments introduc- ing new Internet gambling regulation have done so because they are in need of new sources of funds. This was cer- tainly the case with Italy back in 2006 and it is a similar situation for Greece, Spain and California today. A need for funds seemingly outweighs any critical thought as to how consumers will react and change their behavior in response to the higher taxes. Government monopolies are often used to operating in high-tax environments precisely because one of their primary roles is to raise funds for government. State lotteries, therefore, are well placed to succeed in the new high-tax online “The advent of Internet gambling was many governments’ worst nightmare because of the cross-border access to gambling it offered customers.” 27 Playing by Taxing Rules