GPWA Times Magazine - Issue 31 - February 2015

What’s next for “offshore” regulators: Dealing with Point of Consumption and other critical challenges By John Le Poidevin B ack in the Wild West days of Internet gaming, when large consumer markets spanned the spectrum from gray to black, the absence of regulation in the home- lands of consumers created an op- portunity for smaller jurisdictions to take the lead in licensing and regulating the nascent Internet gaming industry. From Curaçao to Malta, Vanuatu to Gibraltar, small- er territories fought to divide up an industry that was growing quickly, raising money in private equity and capital markets and needing to le- gitimize itself and its customer pro- tection practices in the eyes of the world. Some territories have fallen away, with limited regulatory rigor or substance to their licensing ac- tivities; Alderney, Gibraltar, the Isle of Man and Malta have been the European survivors to this point. In recent years, increased regula- tion, changes in the global tax envi- ronment and in particular the move to tax companies where the custom- ers are based, have provided an in- creasing challenge to the so-called “offshore” regulators and have raised the question: Are they still relevant in today’s world? The answer is yes; in reality, noth- ing has changed. Whether the “offshore” regulators are islands (Alderney and Isle of Man) or full EU member states (Malta), in com- parison with the large consumer markets, they imposed a relatively low tax burden on companies. Despite changes at the edges — for example, Gibraltar introduced a 10 percent tax rate some years ago — this essential fact remains the same. And although Point of Consumption (POC) taxes provide a challenge to both offshore regu- lators and operators, with some flexible thinking, they should be able to draw on their core strengths and reinvent themselves for the modern world. So what’s really been happening in the last few years? Moral guardians Anyone who’s seen the U.K. tele- vision program Have I Got News for You will be familiar with its Odd-One-Out round. So here’s a starter for 10: Pope Francis; Rt Hn Margaret Hodge, MP; President BarackObama; and EUCommission President José Manuel Barroso. Odd-one-out, anyone? It is of course the Pope. All the others have painted themselves as righteous guardians of your well-being, with speeches linking taxation to moral- ity and painting a picture of “evil” international companies that im- morally avoid their taxation obliga- tions. Apple, Amazon and Starbucks, watch out. The Pope of course is merely the Supreme Pontiff and leader of the Catholic Church, with at least some claim to have a voice on moral is- sues. And while he’s spoken out on issues such as poverty and exces- sive wealth, he’s remained silent on taxation so far. So when did taxation become a moral issue? And what’s any of this got to do with gaming companies? The reality is that unless you’re talking from a philosophical point of view, taxation is not and has never been a moral issue, despite what the politicians might like you to think. International legislation on taxation is scant. There is the OECD (Organization for Economic Cooperation and Development) and a plethora of rules and agree- ments, but this is primarily about tax transparency and information sharing, and is not yet de facto in- ternational legislation. National tax legislation is a matter of facts and fact patterns, not moral arguments. So when looking at taxes, some- thing is either right or wrong, and whether something is taxable or not is based on those fact patterns. Morality is a question of judgment and opinion, rather than fact. The Internet age So why the moral response from the world’s governments? First, tax legislation around the globe was never designed to ca- ter to the Internet age, where the highly-automated operations of online gaming groups could be car- ried out almost anywhere. As such, and in the absence of legislation to deal with online gaming, many groups operated beneath the ra- dar of the main tax-collecting bod- ies and jurisdictions, sometimes with minimal offshore structures and limited substance in place to protect themselves. Second, the global recession and consequent decline in tax revenues 56 What’s next for “offshore” regulators: Dealing with Point of Consumption and other critical challenges