GPWA Times Magazine - Issue 31 - February 2015

in the developed world have forced gov- ernments to look for new ways to increase their revenue share and reduce their fiscal deficits. But while the public protestations about tax and morality are designed to change the agenda and make tax avoid- ance “morally repugnant,” the actual response of governments has been to go back to rules, facts and fact patterns in their attempt to increase tax revenues. This matters in the world of online gaming, where being regulated in a low- or no-tax environment has substantially influenced attitudes toward taxation. Groups became accustomed to an environment where for many years, taxation in all forms was perceived as almost being optional, focus- ing on maximizing shareholder returns in tax-efficient structures and welcomed with open arms by Alderney, the Isle of Man and other places that offered them gaming legislation, regulatory regimes and a skilled workforce. Government action The response of national governments in the world’s major economies where Internet gambling was not illegal was ini- tially to use case law and interpretations of existing legislation to attack examples where online gaming groups were oper- ating at the edges of the existing rules — or beyond — to examine the fact patterns on the ground and see if they stood up to scrutiny. But this could only take gov- ernment so far. The wider response has been to use moral arguments to justify a rewriting of the rules. This “response” by government directly impacts online gam- ing groups and their offshore regulators in three ways: international cooperation, enhanced substance and POC taxes. International action is painfully slow. The OECD’s somewhat catchily entitled “Action Plan on Base Erosion and Profit Shifting” heralds more international shar- ing of information and cooperation in clamping down on tax avoidance not ap- proved of by OECD members. The current willingness of the USA, EU and others to join forces in combating tax-driven struc- tures and tightening up rules about where companies base their operations means more substance in terms of operational infrastructure, and credible “boots on the ground” will be required if you want to be seen as operating offshore. Some change is inevitable and I expect the EU, and in particular the U.K., to lead the way, but when push comes to shove, it remains to be seen whether there will be credible in- ternational action in this area or if the big boys will all start doing the sums as to who has the most to gain/lose from a tighten- ing up of the rules. U.S. corporations in particular are likely to put huge pressures on state and federal government to avoid any tightening up of the tax structures that have traditionally been available to them; there's a reason that Delaware, which of- fers very low costs for corporations, has about as many incorporated companies as people living in the state. At national, federal and EU levels there has been a tightening of existing rules, removal of anomalies and a focus on real substance to offshore activities. For ex- ample, although the corporate tax rate in Gibraltar is 10 percent, many groups reduced this burden to around 2.5 per- cent by shifting income from intellectual property or loan financing into another (untaxed) company. The EU Commission has now moved to prevent this practice. The EU is also tightening rules that were put in place in many EU member states to avoid or minimize value-added taxes (VAT), including the arbitrage that many global corporations have effected by channeling transactions from high stan- dard-rate EU countries into those with relatively low VAT rates: Better to be in Luxembourg with its 15 percent stan- Although POC provides a challenge to both offshore regulators and operators, with some flexible thinking they should be able to draw on their core strengths and reinvent themselves for the modern world.” 58 What’s next for “offshore” regulators: Dealing with Point of Consumption and other critical challenges