Happy Thanksgiving from GGB; Newsletter Returns December 4

FANTINI’S FINANCE: Conspicuous Consumption

The point of consumption tax recently imposed in the United Kingdom has negatively impacted revenues from iGaming companies active there. Will it spread to other countries and what are the implications for the iGaming industry?

When Betfair announced its fiscal 2015 earnings, it presented a pretty clear picture of the impact that the United Kingdom’s new point-of-consumption tax will have on online gaming operators.

Simply, EBITDA rose 32 percent but would have risen 53 percent without the 15 percent tax. In the fourth quarter, EBITDA rose just 3 percent with the new tax. BET estimated the tax reduced EBITDA by £12.3 million in the quarter to £22.7 million.

There has been considerable speculation as to how the tax implemented in December would affect operators. Until now, iGaming executives have spouted what sounded like wishful generalities, such as the tax might even help bigger companies by driving smaller operators out of business or into the arms of their larger competitors in desperate mergers.

Now, we see the bite.

The POC, as it is becoming common to call it, is just one of the tax risks that are shifting sands threatening to undermine online gaming operators, and their investors.

Other countries are deciding whether to slap their value added taxes onto gaming revenues. Yet others are adopting tax rates that operators find onerous. Still other countries face opposition from their land-based casinos over legislation that proposes lower online taxes than brick-and-mortar taxes. Politicians are responding and, as you can guess, one solution is to unify taxes at the higher rate.

The argument over taxes has spread even to the United States. One proposal in a bill to legalize online gaming in Pennsylvania would enact a 54 percent tax on gross revenues.

Taxes are trickier online than in land-based gaming.

If a jurisdiction raises its land-based taxes it will crimp operator profits and the companies might pass along some of the costs to customers through tighter games or lower comps. But, by and large, the world will operate as it did before the tax increase.

That isn’t so true in the online world. Raise the tax to a level that affects players, and there are plenty of unlicensed, foreign operators glad to poach them without giving a hoot about their taxes and regulations.

Indeed, the very reason the UK adopted its POC tax was to capture the revenue it thought it was creating when the government legalized online gaming. At that time, it was hoped the UK would become the center of online gaming and, British companies indeed jumped online and built profitable operations. But they did so by licensing in low-tax jurisdictions such as Gibraltar, Alderney, Jersey and the Isle of Man.

So Britain built the industry, but did not get the accompanying tax revenues.

The point-of-consumption tax says that if you bet in the UK, 15 percent of the money made off of you goes to the UK in taxes.

So, a crazy-quilt of taxes and regulations exists creating inefficiencies, uncertainties and investor risks.

There are two ways to address this situation: unify tax rates and regulations, and attack the ISPs that serve the unlicensed off-shore operators.

Unifying tax rates would be politically difficult to do, even in free-trade zones like the European Union. Blocking websites would create an enforcement problem that generates more political, freedom-of-the-Internet issues.

In brief, online gaming taxes are an area of legislative risk that investors need to factor into their calculations.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.