Taxes and investments planned for the gambling industry.
Several countries have recently implemented new taxes on gambling.
This article discusses what happens in other parts of the world in the industry when the State has long-term policies, or simply moves forward with its fiscal voracity without considering the consequences.
Regarding this last point, we can cite a recent case of the regressivity of taxes on the overall performance of the industry, as in the case of Panama, where since 2015 a new tax of 5,5% for bingo, casinos, slot machines and sports betting is levied on cash withdrawals for casino customers, whether winning or losing, and which is intended to finance an increase in the pension system. According to an article published by the Panamanian newspaper La Estrella ( 1 ) the economic fiscal consequences are:
According to data from the Comptroller General of the Republic, from January to October 2016, gambling tables, slot machines, and sports betting saw a reduction of 9,5% (a total of US$192 million).
– During this period, bets fell by US$128,7 million on slot machines (-7,3%), a drop of US$60 million on table games (-26,1%), and a drop of US$3,3 million in sporting event venues (-11,4%).
– The employment level in the gambling industry has been affected. According to estimates from the Association of Gambling Administrators (ASAJA), due to the new tax, approximately 1.300 jobs, equivalent to about 20% of employees working in this sector of the economy, were lost.
The crisis in the gaming industry is also affecting the hotel industry, which ended 2015 with an average occupancy rate of 50%, with prices similar to those of 2011.
Taxes on gambling in Asia
Macau, the former Portuguese colony neighboring Hong Kong, occupies a small peninsula and two islands off the southern coast of China. Called the Las Vegas of the East, its gambling industry is the mainstay of the economy. Gambling taxes generated over 78% (US$9.11 billion) of the total tax revenue of the Macau Special Administrative Region (MSAR) in the first 11 months of 2016. The state levies a 39% corporate tax on gambling.
Characteristics of the gambling industry in Macau:
– Monopoly on gambling throughout China . Macau is the only city in greater China where casino gambling is legal.
– High demand from Chinese players . Of the total visitors who entered from January to November 2016, 66% (18,6 million) were from mainland China and 21% (5,8 million) were from Hong Kong ( 2 )
Chinese VIP players in Macau are key to the local economy, accounting for approximately two-thirds of the revenue in the world's largest gambling center.
– Oligopoly market structure . Businessman Stanley Ho and his family historically maintained a monopoly, with Sociedade de Jogos de Macau SA (SJM) being the sole licensee for casinos. In 2002, the Macau government began issuing more licenses, and the monopoly was broken. Even so, of the 38 casinos operating in Macau, 20 belong to SJM.
These factors provided economic justification for Macau's current tax regime, where the government relied on high casino tax revenue to address gambling-related social problems and promote local development.
The market was growing steadily until the Chinese government in 2014 began investigating Macau as part of an anti-money laundering campaign, which scared off VIP gamblers, causing a sharp drop in casino revenue that continued until the third quarter of 2016.
The drop in gross casino revenue was (-34,5%), and the drop in state tax revenue was (-27%). There are some signs of recovery in the last quarter of 2016. However, operators are far from recovering the revenues achieved in 2014.
The importance of VIP players to Macau has diminished, with the high-stakes betting market contributing around 53% to gaming revenue in 2016, a far cry from its peak of 73% in 2011.
Macau VIP and Mass Gaming 2005-2016
Casino operators have shifted their focus to casual players and tourists by opening resorts with features more favorable to these massive market segments in an attempt to recover from the decline in VIP players. This represented a paradigm shift in the business. But it's not the only threat.
Other nearby destinations in the region charge lower taxes for operators and players and have fewer restrictions on VIP gaming.
The Chinese have begun to move to gambling in other places with fewer controls, such as South Korea, Vietnam, Cambodia, Malaysia, Singapore, Vladivostok in Russia, and the opening of gambling in Japan in the near future.
Fiscal policy is very important as a regulator of development. This issue is a challenge for the local government in the coming years: reducing taxation to keep the casino industry competitive and attractive for new investments. Furthermore, it must make the budget less dependent on revenue generated by the special tax on gambling, which currently represents almost 78% of total revenue.
The Las Vegas business model
In Las Vegas, Nevada, companies pay only 6,75% of the GGR (gross gaming revenue), which is defined as the difference between the total wagereds and payouts made by the casino as prizes.
According to the Nevada Resort Association, during fiscal year 2014, over $2 billion in taxes and fees were paid by hotel-casinos and operators to the state of Nevada. This included significant contributions to Nevada's three largest revenue streams: sales tax, property tax, and gaming tax. Nevada's hotel-casinos account for nearly $1,4 billion, or approximately 45% of the State General Fund's revenues – more than any other industry.
More than a third of all funding for Nevada's public schools comes from the gaming industry, collected through the hotel/motel room tax, which is levied at a rate of up to 13%.
It is estimated that approximately 33% of sales tax is paid by the gaming industry, its employees, and tourists, thus reducing the tax burden on the average Nevada resident.
Perhaps the most important dynamic is the change in the total revenue mix of the Las Vegas Strip over the last decade. Historically, it was focused on gambling with 58% of casino category revenue in 1990. In 2015, gaming-related market revenue accounted for only 35% of the total (US$5.842 billion), while 65% of revenue (US$10.900 billion) corresponds to services: hotels, restaurants and others. ( 3 )
This situation occurs as a result of market evolution over the last ten years in a tourist destination with a renewed supply of investments in hotels, entertainment, shops and restaurants. Revenue from services unrelated to gaming on the Las Vegas Strip has 150 rooms and hotel revenues have grown above 100% in the last 20 years, where the hotel category is the most important source of revenue unrelated to gaming. In 2015, hospitality accounted for 27% of total revenue. Gastronomy represented 23% and other services (shopping and entertainment) 15%. ( 4 )
The diversification of services has created many jobs. According to the Las Vegas Convention and Visitors Authority (in its 2015 report), 41% of the workforce in southern Nevada is related to tourism (368 jobs), with an average annual hotel occupancy rate of 89%. In 2015, of the total visitors, the tourist segment accounted for 59%, while casino gamblers were 19%, convention or corporate event attendees 9%, and those purchasing group packages represented 13%.
The reasons for Las Vegas' success as a destination
In the period from 2000 to 2015, the hotel-casino industry grew by 64%. To explain this situation, one only needs to analyze taxes. The tax burden is relatively low compared to other US states and also compared to other Asian countries. Nevada legalized gambling in 1931. Currently, it operates 271 casinos. The tax rate has only undergone marginal changes since 1955, when Governor Russell raised it from 2,5% to 5,5% for large casinos. The last change was in 2003, when it has remained at 6,75% ever since. Unlike other states such as California, Nevada does not have corporate or personal income tax, nor is there a sales tax on food.
Tax contributions from the tourism and gaming industries allow Nevada residents and businesses to have the lowest tax burden in the United States.
The hospitality and service industry was born as an appendage to gambling in Nevada and has evolved to generate 48% of the hotel-casino industry’s tax revenue today ( 5 ). A virtuous circle has found the right balance in state policies to promote growth without altering taxes.
The success of this destination over time as an example for world tourism shows that appropriate government policies are an incentive to invest in services unrelated to gambling (hotels, restaurants and entertainment), stimulating tourism and sustainable economic development.
The gambling industry in our region
In South America, Brazil expects significant investments following the approval of the gaming law, part of the so-called Agenda Brasil, an initiative to boost the economy. This project could generate US$6 billion in taxes and create approximately 600 direct jobs in the gaming market, in addition to the indirect jobs currently needed to reduce unemployment. It represents a great opportunity for the country, provided the regulatory framework and taxes are predictable over time. During the 3rd Brazilian Gaming Congress (BgC), held in November in São Paulo, some international operators proposed using successful regulatory and tax framework models such as those of Nevada, the United Kingdom, or Australia, thus providing predictability for investors. Taxes are between 10% and 20% of gross gaming revenue (GGR), defined as the difference between total bets and payments made by casinos as prizes.
At the event, we commented that it would be a big mistake to tax the player's winnings (betting turnover tax), since most gambling jurisdictions in the world do not use this model. This position was shared by other speakers. In Argentina, the enormous fiscal deficit led the government to want to correct this distortion with new taxes on various activities. As a result, they were taxed with an increase in gambling revenues from 35% to 41,5%. Online gambling will also pay 0,75% and 2,5%. Argentina leads the global and regional ranking of tax burden according to the 2015-2016 report of the World Economic Forum.
This cost in Argentina creates barriers to productivity growth, discourages investment income, and a higher tax burden. Prices drive higher costs and deepen the recession due to low consumption. Therefore, the Argentine state must rethink financing strategies before punishing its inefficiency in the productive and service sectors, as has been demonstrated globally in other cases where the state, accompanied by active investment policies, diversifies into more and better services for consumers without modifying taxes.
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(*) Federico Lannes is a member of the Institute of Internal Auditors of Argentina. He was a speaker on the panel about taxes during the Brazilian Gaming Congress – 3rd edition, held in São Paulo, Brazil.
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References:
(1) Source: http://laestrella.com.pa/economia/2016-para-juegos-suerte-azar/23978555.
(2) Source: Macau statistical information system http://www.dsec.gov.mo/home_enus.aspx.
(3) Source: Calculations based on data from UNLV (University of Nevada, Las Vegas, Center for Gaming Research 2015 report)
(4) Source: Calculations based on data from UNLV (University of Nevada, Las Vegas, Center for Gaming Research, 2015 report)
(5) Source: Nevada Resort Association http://www.nevadaresorts.org/benefits/taxes.php.
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