Global tax systems have traditionally struggled with the online gaming industry, writes Irena Scullion, Indirect Tax specialist in EY’s Betting and Gaming team – but companies should be mindful that national and transnational policies are rapidly changing.
As the betting & gaming sector becomes ever more global in its nature, the question of how the digital economy should be taxed is becoming increasingly targeted by policy makers. This, along with the increasing political will to impose stricter requirements regarding responsible gambling and anti-money laundering requirements, is raising the stakes for the industry as a whole – evidenced by the recent fines imposed on several casino operators by the UK Gambling Commission for various compliance misdemeanours.
For an industry rooted in advanced technology, it is perhaps not surprising that the taxation system has struggled to recognise, and therefore tax, online gaming. However, the tax environment is rapidly becoming more sophisticated, leading to rapid tax policy changes that businesses would be well advised to predict and to consider.
There are three areas that should be top of mind today. First, it’s important not to forget the ever-changing duty landscape. Recent examples of this has been the introduction of free plays to UK Remote Gaming Duty – a point of consumption tax. This has highlighted the difficulties faced by the tax authorities in understanding of regulated gaming and how marketing spend works.
The second major area is the taxation of profits made through the digital economy – this could have huge financial implications for the sector as it could lead to a significant increase in the number of jurisdictions that have a right to tax the profits arising from online betting & gaming activity. The G20 and the Organisation of Economic Cooperation and Development (“OECD”) are building on their project on Base Erosion and Profit Shifting (“BEPS”) to consider where and why profits should be attributed and taxed. This is high on the political agenda, with challenges to the traditional approaches to transfer pricing and the “armslength” basis for profit attribution. This is particularly relevant to an industry that, often for regulatory purposes, operates in lower tax jurisdictions.
Finally, and related to the OECD’s work, is the growth in number of Digital Services Taxes, which are pre-empting the outcome of the OECD’s work. These build from a framework developed by the European Commission which proposed a three percent turnover tax on services such as advertising on search engines and social networks, the sale of collected data and the facilitation revenues of the interaction between users to exchange goods and services. While this has been widely reported as a tax aimed at certain large technology conglomerates, current draft legislation suggests that the impact will be potentially wider reaching than first planned.
In conclusion, whilst the global betting and gaming industry shows strong signs of growth and is here to stay, the tax environment is changing rapidly. New markets are opening up with the US and countries in South America and Africa all introducing their own regulations to not only legalise services, but also to protect consumers from societal issues such as addiction. These countries are all looking at the developments in digital taxation and, with differences in culture and interpretation, it’ll be interesting to see the disparities in the implementation of tax legislation globally. At the moment, we look to be facing, more likely, a patchwork of different taxes rather than a coherent system. In such an environment, it will be important to predict, preempt and react.