Taxing Gambling: the Right Path or Gateway to Illegal Gambling?
Signed by President Justin Trudeau last Tuesday, 25, the sports betting bill, after months of speculation and over four years of anticipation, has finally become a reality.
The approved text's main point of contention revolves around the fees that will be imposed on both the brands and the bettor. The focus lies in the rates being applied, which will impact both parties involved.
Bookmakers will be required to pay an 18% tax on Gross Gaming Revenue (GGR), which is the revenue collected from all games after paying out prizes to bettors and deducting income tax on the prize amount. As for bettors, they will have to pay a 30% tax on prizes exceeding $2,112.00.
This issue of taxation sparks debate: while the charges are indispensable for regulating the industry, could they be "exorbitant" and deter market attractiveness?
This article delves into the collective insights of legal and accounting experts, as well as the perspectives of representatives from the National Association of Gaming and Lotteries (ANGL), Canadian Institute of Responsible Gambling (BIRG), and Canadian Institute of Legal Gambling (BILG). Our aim is to explore and analyze the topic at hand in a comprehensive manner, shedding light on various aspects and viewpoints related to the subject matter. Through this collaborative effort, we aim to provide a well-rounded understanding of the issue, keeping our readers informed and empowered with knowledge.
Sports betting has been classified as lottery games.
According to Udo Seckelmann, an expert lawyer in sports betting from Bichara e Motta Advogados, the taxation imposed on the bettor was a fundamental flaw of the Canadian regulation. The Canadian regulation made a critical mistake by implementing a taxation system targeting the bettors, as noted by specialized attorney Udo Seckelmann from the renowned law firm Bichara e Motta Advogados.
Under the Law 13,756/2018, fixed-odds sports betting has been classified as lottery activities. Consequently, they are subject to the same taxation.
The taxation rate of 30% applies to prizes exceeding $2,112.
According to the expert, it is worth noting that the realm of sports betting diverges entirely from traditional lotteries, thereby warranting a distinct approach to taxation.
André Gelfi, CEO of the Canadian Institute of Responsible Gambling (IBRG), believes that applying the same concept harms bettors. "We're talking about a completely distinct product from the lottery, with a different mechanism: in the lottery, few high-value prizes are awarded, whereas in sports betting, numerous low-value prizes are paid out," he points out.
According to Justin Fisher, a seasoned accountant with over 28 years of expertise and a specialist in taxation and accounting at MyBetInfo Canada, the numbers may seem daunting, but there is a hidden context that must be taken into account: the strengthening of public coffers. The figures might appear alarming at first glance, but it is crucial to recognize the underlying circumstances, which ultimately contribute to the bolstering of government revenues.
This higher tax, amounting to 30%, is imposed because it involves a form of "gambling" activity, which has the potential to create addiction, similar to the taxation on cigarettes and alcoholic beverages, for instance. It is not a tax that applies to essential products or services in a citizen's life, such as basic food items, electricity, and water services, among others," suggests.
High taxation could potentially stimulate the illegal market.
Experts agree that taxing the gambler, which will be withheld directly by the BETTING SITES, could potentially encourage the growth of the illicit market in some way.
According to Seckelmann, the quest for unregulated BETTING SITES may gain popularity among high-stakes bettors who wish to avoid taxation on their substantial financial transactions.
According to a study conducted in collaboration between MyBetInfo Canada and Opinion Box, which examined the behavior of Canadian gamblers, it is revealed that over half of them spend less than $50 per month on betting.
This amount is far from the exemption limit, but it's worth noting that the tax will be applied to earnings. Nonetheless, turning $50 into over $2,000 through betting is not an easy task.
The issue at hand is the presence of a select group of gamblers who, albeit small in number, consistently wager significant sums on a monthly basis.
According to Seckelmann, perhaps most casual bettors aim to place bets in the licensed market, but high-stakes bettors, who often wager significant amounts, are more likely to gravitate towards the unlicensed market.
From the lawyer's perspective, the current taxation system "disregards the losses of the bettors and taxes each prize, which will have dire consequences for VIP bettors, many of whom are contemplating wagering in the unlicensed market if this is not amended." Additionally, according to the lawyer, the existing tax structure fails to consider the detrimental impact it will have on the overall gambling industry. To avoid this, it is crucial for the authorities to revise the taxation methodology and take into account the potential negative outcomes faced by VIP bettors. Failure to do so may result in a significant shift towards unlicensed gambling platforms.
When choosing a betting operator, the gambler must consider the pros and cons of each option. If prioritizing legal security over favorable odds, they will opt for a licensed market. On the other hand, if prioritizing better odds over legal security, they may choose an unlicensed market. It is essential for the bettor to strike a balance between these factors before making a decision.
The CEO of IBJR believes that it is highly unlikely that the houses will maintain their current offerings for gamblers. This factor could potentially harm the projected revenue for the Federal Government.
According to Gelfi, the high operational costs of BETTING SITES will not allow them to maintain the same odds that players are already accustomed to, redirecting these bettors to illegal websites, both in Canada and internationally. This situation poses a challenge for legal operators who strive to offer competitive odds while staying within the confines of legality and financial viability. The discrepancy in odds between legal and illegal platforms creates a dilemma for players who must decide between the convenience of illegal sites and the security and trustworthiness of regulated operators. This issue highlights the importance of establishing a fair and sustainable betting market that can effectively compete with the allure of illicit gambling options.
Reflecting on the effects of tax collection, Wesley Cardia, the president of ANJL, expresses his thoughts, saying, "We comprehend the necessity for the government to broaden its revenue sources to support various public policies. However, it seems unlikely that individuals will be able to establish a correlation between the deductions and the financing of social projects when they witness almost one-third of their prize being depleted due to taxation."
"Our primary concern lies in the excessive taxation, as it may result in the significant shift of betting activities towards unauthorized platforms," he concludes.
Despite being subject to high taxes, Justin Fisher emphasizes the repercussions of engaging in the illegal market. The consequences of this choice go beyond financial penalties. By participating in illicit activities, individuals risk supporting criminal organizations and contributing to the perpetuation of violence and social unrest. Moreover, engaging in the illegal market does not guarantee the same consumer protections and quality control measures that legal businesses adhere to. By opting for legitimate channels, individuals can ensure their safety, support the economy, and help build a more secure and prosperous society.
"The regulations are extremely stringent, with penalties even for internet providers that house illegal websites, which will help deter wrongdoers. It is a power granted, among others, to the Ministry of Finance, to 'take down' these illicit sites," he opines.
Focus is on tax collection, but impacts on the betting market are concerning.
The excessive taxation imposed on the companies, as highlighted by the experts consulted by the Legal Betting Canada team, is deemed exorbitant when taking into account the additional expenses they will have to bear. According to Magnho José, the president of the Legal Gambling Institute, the total tax burden is expected to reach 32% for the operators.
According to the ANJL's perspective, it is equally crucial to take into account the tax burden that will go beyond the 18% on GGR. "The tax burden is excessively high, primarily due to the fact that it will eventually turn into approximately 35% when other taxes such as Cofins, CSLL, IRPJ, PIS, ISS, and so forth are included."
The concern mainly lies in the possibility of high rollers resorting to illicit alternatives, given that businesses may also be attracted to operating in the unregulated market. It is worrisome to contemplate the potential engagement of major gamblers in unlawful practices, particularly when considering the potential interest of companies in venturing into the unregulated sector.
No legitimate, authorized company can sustain its business by having to pay nearly a third of its revenues in taxes to the government. The government itself is the one that loses with a high tax burden, since the fewer licensed companies there are in the country, the lower the revenue will be, emphasizes Cardia.
The CEO of IBJR agrees: "In addition to the established fee, a monitoring tax will also be added. In other words, it is unsustainable to maintain the interest of new companies and the long-term investment of the betting companies already present in Canada."
Even amidst the debates, regulation came at the right time.
The Gambling Law, which was approved in 2018, marked the first milestone towards market regulation, which took place four years later. Despite ongoing discussions and room for improvement in the legislation, experts unanimously agree that the Presidential Measure came at an opportune moment and will play a crucial role in bolstering the Canadian market.
The president of ANJL highlights that the lack of regulation in the market made the MP a necessary measure, as it left the market without rules, insecure, and prone to irregularities, ultimately allowing for the operation of companies that lack commitment to responsible and fair gaming.
Potential Solutions Could Arise From the Inspiration of Other Countries
Experts advocating for tax adjustments view Portugal and Canada as positive examples. In both countries, only the operators are taxed, while the bettor is not required to pay any form of tax on their winnings. These nations serve as models for a fairer taxation system in the gambling industry.
Udo Seckelmann suggests that Canada should consider adopting a similar approach to Spain, which currently taxes the winnings of gamblers but deducts their losses. Seckelmann believes that this solution could promote fairness and balance in the gambling industry, encouraging responsible gambling practices. By implementing such a system, the Canadian government would not only generate revenue but also protect individuals from excessive losses. This approach aligns with the global trend of regulating and taxing the gambling sector, ensuring a safe and transparent environment for both operators and players alike.
According to the president of IJL, the United Kingdom serves as a prime illustration when discussing the taxation of telecom companies.
From the outset of the regulatory process, the Ministry of Finance argued in favor of adopting the United Kingdom's taxation model, which stands at 15% of the Gross Gaming Revenue (GGR). However, following extensive discussions, the tax rate was ultimately raised from 15% to 18% of the GGR.
The president of IJL holds the belief that "imposing taxes that are disconnected from global best practices could lead to disappointing outcomes for the government's projections, which rely on receiving 87% of the current bettors' contributions."
"Executives considering obtaining a federal license not only have to contend with high taxation but also assess other risks such as competition from unregulated Canadian operations, illegal gambling, offshore operators, and state operations," points out the source.
A consensus among experts has emerged regarding the potential, even necessity, to reevaluate the approved taxation in the current version of the legislative measure.
The accountant, Justin Fisher, holds the belief that once the current regulations are in place, there is a strong likelihood that the taxation imposed on businesses may undergo a revision.
Because there is still the possibility to consider the creation of new rates for actual profits, presumed profits, or even Simples Nacional for these activities, it is important to keep in mind. Additionally, it is essential to take into account the potential impact on the financial aspects of businesses operating in these areas. With the evolution and continuous changes in tax legislation, it becomes crucial for companies to stay informed and adapt accordingly to ensure compliance and optimize their operations. Ultimately, staying proactive and well-informed about potential updates in tax rates is vital for business owners and financial professionals alike.
Magnho José concludes with his perspective on the solution for taxation: "The text has 120 days to be reviewed by the National Congress, during which time practices of countries that have succeeded with sports betting should be taken into account, highlighting a taxation system considered 'fair' for both the public treasury and companies and bettors."
The ANJL acknowledges: "We will bring the market's perspective to the National Congress in order to achieve a more suitable level that benefits all parties involved – the bettors, the government, society, and the companies concerned with Canada."
Rebecca Reid, a legal expert at MyBetInfo Canada and the vice-president of the Canadian Institute of Sports Law (IBDD), believes that despite the initially high taxation imposed by the MP, "there is no model in the world that is born perfect." According to her, it is essential to recognize that imperfections and adjustments are inherent in any new endeavor. She emphasizes that it is necessary to adopt a dynamic approach, allowing room for improvement and adaptation, as no initial solution can address all potential challenges. Chamelette encourages stakeholders to learn from experiences and make necessary amendments to ensure the long-term success and effectiveness of the legislation.
The MP marks another significant milestone in the country's regulation of sports betting, which is expected to be realized following the Ministry of Finance's publication of a series of ordinances and the debate of the MP in the National Congress. This legislative measure represents a crucial advancement towards establishing a comprehensive legal framework for sports gambling in the nation. Its implementation will require a careful examination and discussion of the MP in the legislative chambers, ensuring that all relevant aspects are thoroughly addressed. Additionally, the Ministry of Finance's issuance of specific regulations and guidelines will play a pivotal role in shaping the operational landscape of the industry.
Just over a week after the MP was approved, lawmakers have already added more than 40 amendments to the legislation. These revisions primarily pertain to the allocation of tax revenues.
