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