European Gaming Lawyer magazine Spring 2014 | Page 17
groups have operated in – a low or no tax
environment – has substantially influenced
their attitudes towards taxation. Groups
became accustomed to an environment
where for many years, tax in all of its forms
was perceived as almost being optional
– even if it may not have been. This does
not imply that online gaming groups were
deliberately avoiding or illegally evading
taxation, merely that they were maximising
shareholder returns by setting themselves up
in the most tax efficient way possible.
Tax legislation around the globe had not
been designed to cater for the internet age
of many possibilities of where and how to
carry out your operations that the highly
automated nature of online gaming groups
heralded. As such, and in the absence of
legislation to deal with online gambling,
many groups operated beneath the radar
of the main tax-collecting bodies and
jurisdictions, sometimes with minimal
offshore structures and limited substance in
place to protect themselves.
Government action
The response of national governments in
the world’s major economies where internet
gambling was not illegal was initially to
use case law and interpretations of existing
legislation to attack examples where online
gaming groups were operating 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 government so far. The wider response
that we are now seeing is to effectively use
moral arguments in order to justify a rewriting of the rules and fact patterns. This
“response” by government is and will directly
impact online gaming groups in three
ways: international cooperation, requiring
enhanced substance to transactions and
point of consumption taxes.
There is international action – but it is
very slow. The somewhat catchily entitled
“Action Plan on Base Erosion and Profit
Shifting” from the OECD is a start,
heralding more international sharing of
information and cooperation in closing
down on tax avoidance that OECD
members do not approve of. Whilst this
does not amount to changing the basis
of international taxation, the current
willingness of the USA, EU and others to
join forces in combatting the sometimes
opaque structures of global corporations
will lead to a strengthening of the hand of
national governments in imposing their tax
rules on a more global basis.
At national, federal and EU levels there
has been a tightening of existing rules and
the imposition of new ones in order to
remove anomalies and focus on there being
real substance to any offshore activities.
Examples of this in the gaming world revolve
around corporation tax in Gibraltar and
Malta. Although Gibraltar corporation
tax is 10%, many groups have been able to
successfully reduce this burden to around
2.5% by shifting income from intellectual
property or loan financing into another
(untaxed) company. The EU Commission
has now moved to investigate this practice.
Similarly in Malta, companies have for
many years reduced their tax rate suffered
in Malta from 35% to just over 4% by
paying dividends out of Malta. Again, this
practice is under increasing scrutiny and is
not expected to be sustainable in the short
to medium term. As regards to VAT, the
EU is moving to tighten the rules against
structures in EU member states that have
been put in place to avoid or minimise VAT,
including the arbitrage that many global
corporations have effected by channeling
transactions from high standard-rate EU
countries into those with relatively low VAT
rates – better to be in Luxembourg with its
15% standard rate, rather than Sweden with
its 25% rate. Whilst not all activities of online
gaming companies will constitute betting
and gaming under EU law, VAT is of course
a particular issue for the gaming world given
that gaming is defined in law as an exempt
activity, rendering it impossible for a gaming
company to recover any input VAT incurred
on products and services. Of the Europeanfacing offshore gaming jurisdictions, this
tightening up on VAT avoidance primarily
impacts Malta and the Isle of Man, as
Alderney, Gibraltar and others further afield
are outside the scope of VAT.
It is the third strand of introducing point
of consumption as a basis for taxation that
is the game changer. At the heart of all of
the arguments by national governments
on taxation and morality is a perceived
unfairness that the end customers of global
corporations are located within the big
industrialised economies and that the
governments of those economies do not
get what they believe to be a fair share of
any taxes on those transactions. Angela
Merkel summed it up in a 2013 speech,
“It’s not right that giant global companies
have huge sales here (in Germany), in all of
Europe, in the United States and elsewhere
and then only pay taxes somewhere in a
tiny tax haven.” The government response
is to change the rules of the game to
tax corporations based on where their
customers are, rather than based on
where the structures and operations may
be located or where the transaction was
historically deemed to have taken place. A
good example of this is the proposed 2015
“Place of Supply of Electronic Services”
which will change the basis of taxation
within the EU to ensure that taxable B2C
supplies will be subject to VAT in the
country of the consumer –not where the
European Gaming Lawyer | Spring Issue | 2014 | 17