Moves by the French Tennis Federation to ban online gaming companies Betfair, bwin and Ladbrokes from accepting bets on this year's Roland Garros French Open highlight what should already be the obvious dangers of regulating in ignorance.
A news report this week in Finland's Helsingin Sanomat newspaper has sent rumours of an online gaming ban flying. Gaming Intelligence Group spoke to Finland's Ministry of Social Affairs and Health as well as the author of the white paper which sparked the news, to find out what really lies ahead for the industry in Finland.
Online skill games are gaining in popularity with consumers and media brands alike. Whether it's Yahoo, MSN or AOL, most major online brands offer skill games to their customers.
At the close of 2007 many industry observers set about naming their choice of online gaming companies whose achievements during the year had singled them out from the competition. For investors, the run-away winner would undoubtedly have to be Betsson, the Swedish online gaming operator whose performance resulted in its share value increasing by more than 380% during the year.
The online gaming industry has witnessed a number of acquisitions in the last few years, mostly centred around larger operators acquiring their smaller rivals. We should now expect to see an increase in M&A activity as the market seeks to consolidate.
Yesterday, December 12th, marked the deadline for submission of comments on the proposed UIGEA implementation rules. With emotions running high on both sides of the argument, many of the responses submitted have followed the format promoted by one or another camp. Here we examine one of the more reasoned responses, from the Center for Regulatory Effectiveness.
Tomorrow it will be 270 days since the Unlawful Internet Gambling Enforcement Act was signed into law by the President of the United States, and the deadline by which the Secretary of the Federal Reserve System, in consultation with the Attorney General, must set down regulations to identify and block restricted online gambling transactions.
In recent weeks we have witnessed a decline in global stock markets, partly due to concerns about the sub-prime market, as well as concerns about a general economic downturn. If an economic downturn is ahead of us as generally predicted, investors may be able to find some security in gaming stocks.
State owned gaming companies are paying part of their profit to public interest groups. These contributions are now being effected in some markets by an increased number of private operators, and the public interest groups are starting to cry foul.
The online gaming industry, despite its rapid growth, is still in its infancy and as with any new industry it will take time for the lawmakers to catch up, leaving the market relatively unregulated in the meantime.
This is especially true when it comes to the issue of taxation, as the internet allows for the profits of online gaming companies to be moved to countries that have the most favourable tax regime. Even when the jurisdiction where an online company earns income stipulates that the revenue or profit should be taxed in that state, it is very hard to actually control and measure the flow of money.
Many online gaming companies have taken advantage of this situation by operating and acquiring licenses from places like Malta, Gibraltar, Antigua & Barbuda, Costa Rica and Alderney which all have very favourable tax regimes. This approach gives them a competitive edge over their competitors that do not implement any kind of tax planning.
As previously discussed by Gaming Intelligence Group in the article €˜Online Gaming and European Community Law', it is likely that some kind of licensing system will be introduced within the European Union that will enable countries to tax the profits that emanate from within their borders.
As the total value of the online gaming industry continues to increase, European tax authorities have started projects in order to measure the flow of money to the industry in order to be able to tax the companies that conduct business within their jurisdiction. One such project, which uses a web spider called Xenon to find evidence of tax evasion, is already in use by authorities in the Netherlands, Austria, Denmark, Sweden and the United Kingdom. In France, the government has recently begun considering the liberalisation of the country's gambling regulations, with the proviso that income derived from French citizens must be declared and taxed, with early suggestions of a 30% tax rate, and most recently, Spanish tax authorities have launched an investigation into foreign gaming companies targeting their citizens from offshore jurisdictions.
No industry can avoid paying taxes forever, therefore it is inevitable that some form of licensing or tax system will be implemented within the EU, and such a move will have a big impact on the tax rate of some of the leading online gaming companies.
The table below demonstrates the potential impact of a scenario in which all European jurisdictions introduce a tax on online gaming revenue.
|Profit before tax||-592.2||35.0***||-77.4****||93.6*****||28.1******||13.3|
|Effective tax rate||8.9%||26.1%||--||2.1%||4.2%||23.3%|
|Adjusted tax rate**||30%||26.1%||24%||30%||30%||30%|
|Tax using adj. tax rate||177.7||-9.1||--||-28.1||-8.4||-4.0|
|Adjusted net profit||-414.6||25.9||--||65.5||19.6||9.3|
|Difference in net profit||125.0||0||--||-26.1||-7.2||-0.9|
|% change in net profit||-23.2%||0%||--||-28.5%||-27.0%||-8.7%|
* All figures taken from latest respective annual reports
** Several European countries are to lower their tax rates which implies it is likely that the adjusted tax rate will be somewhat lower than 30% depending on from where the revenue is generated
*** Excluding exceptional items (FY ended 30 April 2006)
**** Continuing operations
***** FY ended July 31 2006 before goodwill amortisation
****** Adjusted for disposal of associated company, tax adjusted to 4.2% due to domiciliation to Malta
As bwin made an impairment of Goodwill for the acquisition of Ongame AB, the figures are not representative for the continuing operations. Through the loss of the US market the majority of the business is now in Europe, which implies that a tax charge of around 30% could be applicable.
The company is based in the UK with an effective tax rate of 26.1%. If the company generates profit abroad that is taxed to a lower rate than in the UK, the profit might be taxed up to the UK tax rate of 30% (28% in 2008) if the profit is transferred back to the UK. If a licensing system is introduced this will have little or positive effect on Betfair.
PartyGaming is currently making a loss in its continuing operations but the majority of the business is in the EMEA region (mostly Europe) and Americas except the US. For the European market we could assume that the tax rate will go up to around 30% but the overall tax rate will be lower due to taxation of the profit from MEA and Americas in Gibraltar. An assumption could be 24%.
We could expect the tax rate to end up at around 30% as the business is conducted almost exclusively in Europe and Australia (30% tax rate). We have assumed that Australia will introduce some sort of measure to be able to tax online gaming companies too. If not the tax rate might go down to below 20%.
Unibet was UK based until 1 November 2006 when it undertook a domiciliation to Malta. The Annual Report implies that no profit from abroad was brought back to the UK which meant that the company did not pay income tax up to 30% in the UK but instead booked a deferred tax on this potential liability. The deferred tax was likely released in 2006 as the company undertook a domiciliation to Malta, avoiding the potential tax on future transfer of profits to the UK. This could explain the positive taxation in 2006. The tax rate for Unibet is projected to go up to 30% as the biggest markets are the Nordic countries and southern Europe.
Most of 888's revenue is derived from the UK and Europe, with the UK being the single largest market. The company is based in Gibraltar and therefore benefits from a favourable tax regime there, however the company is liable for taxes in Israel on its subsidiaries. Any taxes in the EU would be in addition to Israeli taxes, dependent on any double taxation treaties. It is therefore estimated that the tax liability would not surpass 30%.
The current situation is beneficial to online gaming companies that take advantage of the tax planning opportunities that exist. These opportunities are unlikely to last more than several more years, resulting in an increase in tax liability at some point in the near future, resulting in as high as a 28% decrease in net profit. If nothing is done to counter this, it could affect the valuation of such companies as the going tax rate is one factor considered when calculating a cash flow valuation of a business.
To counter, or at least reduce this effect, the industry must begin planning from now. Firstly it must ensure that it can get out of the current structure without any adverse tax effects, or that leaving things as is will not have any negative implications. An important factor here is of course to have an ongoing dialogue with gaming commissions and jurisdictions in order to find a solution that suits both parties. Secondly the industry must look for new ways to manage its tax planning. Here it is also important to begin early to look at possible ways forward together with a competent international tax advisor.
As demonstrated this week by PartyGaming's profit warning, many online gaming operators in the industry are facing increasing problems maximising their profitability as a result of mounting costs, particularly in relation to customer acquisitions.