Tax impasse: How to help the launch of the gaming industry
Having legalized the sphere of gambling, the state acknowledged the emergence of another subject of economic activity, the gaming industry that is.
According to experts, this area should create thousands of jobs, attract foreign investment and bring the state budget of UAH 5 billion per year.
However, this is possible on one condition: if the tax burden on the newly-minted business is balanced.
More than three months have passed since the adoption of the law “On state regulation of activities for the organization and conduct of gambling”, but the tax issue remains a stumbling block.
For the gaming sphere in Ukraine to be launched, the MPs proposed a tax bill 2713-D. The document presupposes a number of changes to the Tax Code so that a new sphere of the economy has a chance to be launched.
However, the government has published a series of critical remarks with no alternatives or room for discussion.
The debate about the future of the industry is stumped again. The bill remains in limbo, and the industry may end up under pressure. Where is the truth? And is there a way out of this tax collision?
What’s wrong with taxation of the industry
If no changes are made to the Tax Code, the total tax burden on the gambling business will amount to more than 75%.
The player placing the bet must pay a personal income tax (PIT) in the amount of 19.5%. An operator who bought a license for UAH 141-240 million pays a tax on gross gaming revenue (GGR) and an income tax – 18% each. An employee of the institution pays a single social contribution (SSC) in the amount of 22%.
By the way, prior to the introduction of the state online monitoring system, there is a triple payment of the license cost for betting (UAH 450 million), online casino (UAH 90 million) and individual payment for a slot machine.
It is also important to keep in mind that gambling margins are different. If casinos and slot machine halls can receive net income at the level of 10-15%, then the betting margin is 5-7%.
This is due to the fact that the outcome of bets depends not only on luck, but also on skills of players. This means that they can “take” money from the business.
In other words, a low-margin gambling business does not have the resources to a transparent and legal launch. The state, with its tax policy, pushes business owners to look for workarounds for development. Yet, tax liberalization has been announced in the power corridors for the past several years as one of the anti-corruption strategies.
Changes to the Tax Code: pros and cons
MPs argue that the tax bill will help the gambling business avoid a start-up collapse and balance the fiscal burden.
According to the project, organizers of gambling are required to pay income tax at the rate of 18%, SSCs remain at 22%. In terms of changes, the legislator proposes to reduce the rate of GGR.
The gambling tax on bookmaking may reach 5%, online casinos and online poker – 10%, casinos and slot machine halls – 12.5%. The project also protects players and proposes to abolish the payment of PIT. But why?
The average player’s check in the country is not high, based on the lottery games. If it is taxed, national operators will no longer be competitive. Players will go to international offshore sites where their winnings will not be taxed.
However, the government found counterarguments. The Ministry of Finance and the State Tax Service insist that the abolition of the personal income tax must not be allowed. In their opinion, this leads to a precedent of inequality: the rights of players in the country will be protected more than the rights of other individuals.
In the view of the legislator, the given counterargument does not take into account the specifics of the player’s taxation: there is a high probability of loss, profit is not guaranteed, and the player’s gain is not pure income.
The Ministry of Finance also fears that the reduced GGR will decrease budgets of communities. Relatively speaking, if a gambling hall is open in the regional center, then the local budget may not receive the funds it needs because of the State Fund. This warning had been taken into account by the legislator earlier.
The final provisions of the law on gambling stipulate that 50% of tax goes to local budgets, and 50% to the State Fund for the development of sports, culture and medicine. That is, when the GGR tax is reduced, the parity of tax distribution is observed.
There are two ways
Speaking of successful international experience, expensive licenses imply relatively lower tax rates. One key tax is also introduced: either income tax or GGR tax.
For example, the average GGR rate in Europe is 15%, assuming it is set after the market is back on its feet. In Belarus, a 4×4 tax has been introduced: the tax on player’s winnings and the tax from the operator are 4% each.
In Hungary, the GGR rate is 15%. You can open a casino with a capital of 180 thousand euros, and there is no license fee. In most countries, winnings are exempted from personal income tax, that is, the authorities try to balance the financial burden on new segments of the economy.
Let’s consider one of the most successful examples of industry tax liberalization. Following legalization of the gambling market in 2011, Estonia introduced compulsory licensing worth 48 thousand euros.
You can get a license online in a few days. The gaming business also pays 5% tax on gross gaming revenue (GGR). The country’s fiscal policy made no provision for additional taxation of the player, gambling operators or their employees.
In addition, not all foreign operators can obtain a license: this is only available to companies located in the country. Foreign sites that are not licensed are immediately blocked. As a result, there is a significant supplement to the budget and transparency of the system.
There are also less encouraging cases. In Poland, the budget loses hundreds of millions, only 9% of the market has licenses. The main reason for the industry’s collapse at the launch is the high cost of the license along with high taxes. Sales tax and player income tax amount to 12%.
The players decided they needed to look for more favorable conditions for themselves; thus they went to offshore operators and did not return. Today, about 90% of the total turnover of the gambling industry occurs in foreign grey zones. The gambling industry did not bring the expected economic benefits to Poland.
Time to bring the positions
Ukraine is in no rush to liberalize its tax policy so far, although the country is more than ever interested in the development of local business segments, partnership with international investors, and replenishment of the state budget.
It is no coincidence that Volodymyr Zelensky declared an ambitious goal: to enter the top 10 of the Ease Doing Business index during his cadence.
To prevent manipulation and speculation: the business is ready to pay taxes and acquire licenses for legal activities. Moreover, the business is willing to discuss trade-offs and work together on concepts. It will be difficult to achieve one hundred percent consensus, but it is necessary to strive for it.
For example, if we are talking about the mandatory introduction of PIT, then perhaps the amount of the minimum winnings should be established, from which no tax will be charged. This is one of the options that will ensure that business does not lose the average player and does take into account the position of the state.
I am certain there are many more alternatives.
Business, acting as the engine of progress of our society, continues to believe that civilized cooperation is possible even regarding matters of taxes and fees. After all, a new comprehensive government policy after a decade of grey zones and corruption deserves effective implementation.
Vadym Misiura, PR director of Parimatch
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