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Online Gaming in Gibraltar – looming obstacles

Sponsored post: Gibraltar’s gambling industry employs one in 15 people and fuels the local economy through their role as consumers as well as in its own right. In this article KPMG puts the economy of the Rock into context.

Gibraltar’s online gaming presence began in 1989 when British betting operators began online gambling in Gibraltar, taking bets over the telephone and availing themselves of Gibraltar’s low level of taxes and betting duty. From these modest beginnings began a phenomenal industry for Gibraltar.

The list of Gibraltar licenceholders includes highly familiar household names from the world of sports betting (Ladbrokes, Victor Chandler, William Hill, Stan James and Gala Coral) and international players who have built their reputations entirely in the online world (Bwin- Party, 32Red, Betfred, 888, Betfair etc). The industry provides significant employment and financial benefit to the Rock, not least in bringing diversity and growth to its economy.

The number of licence holders has grown significantly over the past year under the new political administration – the four latest additions outlined by Phil Brear, the Gambling Commissioner for the Gibraltar Government, at the KPMG eGaming Summit in April 2013 amounted to a 20% increase;

“One was the reconfiguration of the Gala Coral Group, we also opened the Bally Technologies offices, likewise with Shuffle Master, and finally the introduction of Amaya through their acquisition of Ongame. Each is very different and each is underpinned by a commitment to Gibraltar’s values.”

A cloud on the horizon

The approaching challenge for Gibraltar and the eGaming industry as a whole is the UK Government’s plans to protect UK consumers by requiring companies who wish to serve the UK market to be licensed in the UK (with the small matter of also being liable for UK tax at a rate of 15% at the point of consumption). This has encountered increasingly strong resistance over the last year, particularly in Gibraltar.

That resistance met with recent support from KPMG and the Remote Gambling Association in the form of their report ‘An economic review of the proposed change in UK legislation for online gambling taxation’ on 16 September 2013 (2). The report, which was produced by KPMG’s Simon Trussler, Bill Robinson and Adam Rivers spells out the dangers of the UK’s proposals;

“There is a serious risk of the Government’s proposals failing to establish a viable market for UK licensed operators with the consequent danger that the Government’s following stated goals will not be achieved: i) protecting UK consumers; ii) levelling the playing field for existing UK based operators; and iii) increasing public revenues. This is because the current proposals for changing the tax regime could well unintentionally distort prices and products on offer in the UK market and, in doing so, result in the creation of a larger black market than the Government has anticipated.

“A number of operators believe that they will be unable to absorb the tax and will be forced to pass the additional cost on to their consumers. Given how price sensitive many customers are this will result, the industry believes, in a large number of customers switching to offshore, duty-avoiding, providers who are able to continue to offer lower priced, more attractive products.”

Whilst the possibility of legal challenges remain, KPMG’s report operates on the assumption that the UK Government intends to press ahead with this measure and therefore focuses not on opposing the fact of it, but rather on making two main recommendations, based on objective economic analysis, for achieving the Government’s stated goals in a way that will also benefit the tax payer, consumers and the industry:

  • Any tax on UK online gambling activity should be on a gross profits basis and not, as appears currently to be suggested in the consultation documents, on gross gaming revenues. This will require gross profits to be defined. In particular, the bonuses and free plays that are a central part of the marketing strategies of online companies and which consumers expect to have should be excluded from tax calculations.
  • Whatever the tax structure chosen, in order to meet the Government’s fiscal and social objectives the tax rate should not be set at an excessive level. The prudent approach, in terms of the economics of the situation, would be to start with a tax rate of no higher than 10 percent and adapt it over time as the Government gains sufficient experience of this new regime to gauge the revenue-maximising level of tax.

Finally, and this is key, the report also considers that there is a need for effective enforcement measures to be introduced against those operators who do not comply with the new legislation once it is introduced.

Both the then-minister for Gaming, The Hon Gilbert Licudi, and the Gambling Commissioner made it clear at the KPMG e-gaming Summit in April 2013 that they expect the growth in Gibraltar licenceholders to continue, with the minister stating;

“It is my expectation that several further licences will be granted over the course of this year for operators that are considered fit to join the selection of incumbent licensees, of which Gibraltar is justly proud.” Brear concurred: “we have no fewer than ten companies in different stages of discussions for licensing. Some of these may not complete, although I suspect that around half will over the next 12 months and I expect that, by this time next year, we’ll have at least 30 B2B and B2C licences – all readily, if not instantly, recognisable names in remote gambling.”

Operator Performance

Whilst much of the public commentary can imply that the news around the online gaming sector is negative, in current performance terms nothing can be further from the truth. William Hill Online continues to go from strength to strength and online bingo operators Tombola and Jackpot Joy continue to produce stellar results. One of the biggest events since April was of course Bet365’s results announcement – operating profits up over 50% to almost £180m, wagers hitting £20bn (up 57%) and all of this achieved from a purely online presence licensed in Gibraltar.

Global Performance

A recent report commissioned by Gibraltar licensee Odobo and researched by H2 Gambling Capital (‘Opportunities for game developers in regulated real-money online gambling’, March 2013) outlined the size of the global regulated online gambling market as follows;

‘Regulated real-money online gambling (RMG), excluding lottery and skill-based games, already generates almost $30bn in gross win internationally, with the UK and Europe accounting for 54% of the market. Recent legislation passed in several US states supports licensing for online gambling and, according to H2, means that by 2017 the US may already represent up to 30% of the global online gaming market and generate gross win just over $7.4bn, this will continue to grow annually.’ H2 also estimated the pace of convergence between real-money gambling and social casino gambling which, when combined, generated just over $30bn in 2012 and are, they estimated, forecast to grow to over $40bn by 2015. So, plenty to play for...

No rest in sight

As this brief overview of both Gibraltar’s online gaming market, and the wider global picture, makes clear, this is a sector which experiences constant change and challenge – little wonder that Gibraltar’s Hon Gilbert Licudi QC, closed his address at the KPMG eGaming Summit in April 2013 with these words: “You don’t need me to tell you that in this industry, no-one in the private sector, and certainly no Government, can ever relax.”

With the recent reshuffle of the Cabinet and the appointment of Minister Albert Isola as the new Minister for Gambling and Lotteries, I feel sure that he and his colleagues are equally committed to seeing the sector continue to develop, diversify and grow – and that they too, will not relax for a moment.

Archie Watt is Head of eGaming, at KPMG Gibraltar & Isle of Man

Photo: Getty
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Gibraltar - impact of Brexit

Last week our editor took a general overview of some of the scenarios for Gibraltar if Britain were to leave the Euro. This week, as the atmosphere in the British Conservative Party becomes ever more toxic, Michael Castiel, partner at Hassans lawyers on the Rock, goes into more detail (this piece written before the Iain Duncan Smith resignation and subsequent arguments happened).

However unlikely it may prove, the prospect of Britain's withdrawal from the EU sends shivers through Gibraltar's financial services, gaming and tourism industries, which are at the core of Gibraltar’s economy. For, if Britain leaves the EU, Gibraltar goes too, and, should Brexit occur, it is Gibraltar’s relationship with the UK that as in the past, largely will shape Gibraltar's future.

Gibraltar joined the European Union in 1973 as part of the UK. While rights to freedom of services across borders of EU member states apply between Gibraltar and the rest of the EU, because Gibraltar is not a separate member state (and is in fact part of the UK Member State) those rights do not apply between Gibraltar and the UK. Instead a bilateral agreement, formalised almost two decades ago, gives Gibraltar's financial service companies the equivalent EU passporting rights into the UK. Accordingly and pursuant to such agreement, where EU rights in banking, insurance and other financial services are concerned, the UK treats Gibraltar as if it is a separate member state.

This reliance on the special relationship with the UK is recognised by both the Government and the Opposition in Gibraltar, and when the territory (which in this instance as part of the UK electorate) goes to the polls on 23 June, the vote to remain in the EU is likely to be overwhelming. This may have symbolic significance but realistically seems unlikely to influence the outcome. In actual terms, although some non-EU jurisdictions use Gibraltar and its EU passporting rights as a stepping stone into Europe, almost 80% of Gibraltar’s business dealings are with the UK.

But whether or not Britain maintains the 'special relationship' with Gibraltar, if Brexit becomes a reality, other factors will come into play, with the ever-present Spanish Government’s historic sovereignty claim over Gibraltar topping the list.

Recently Spain's caretaker Foreign Minister Jose Maria Margallo went on record that if the UK voted to leave the EU he would immediately 'raise with the UK the question of Gibraltar.' If this was to come about it could take one or more of several different forms, ranging from a complete closure of the border between Spain and Gibraltar, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, imposing more stringent border controls, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

Here, again, imponderables come into play, for much will depend on which political parties will form the next Spanish government. A Spanish government headed by the right wing PP party is likely to take a less accommodating attitude towards Gibraltar (the Foreign Minister having recently indicated that in case of Brexit the Spanish Government may opportunistically push once again for a joint sovereignty deal with the UK over Gibraltar) whereas a left of centre coalition will likely adopt a more pragmatic and cooperative relationship with Gibraltar in the event of EU exit.

The most significant changes to Gibraltar's post-Brexit operation as an international finance centre are likely to be in the sphere of tax, and while Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, it has also been slightly uncomfortable with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Although it was formed as a free market alliance, since its inception fiscal matters have been at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed considerable latitude in relation to what taxes it imposes or those it doesn't. However, as is the case with other member states, Gibraltar has increasingly found in recent years its fiscal sovereignty eroded and its latitude on tax matters severely curtailed.

As in Britain, Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

As a stepping stone for foreign direct investment, should Brexit come about EU subsidiaries could no longer rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar (subject of course to the agreement by the relevant counterparties) or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the wholehearted support of the British Government

Whilst Gibraltar’s economy is likely to be adversely affected should Brexit occur, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, an EU exit would probably enable Gibraltar to introduce tax rules and incentives that are contrary to EU tax laws and would provide the Gibraltar Government more freedom to adopt competitive tax regimes that may be considered contrary to EU state aid rules. How possible or effective any such strategy would be is doubtful given the OECD driven anti-tax avoidance climate affecting all reputable jurisdictions whether within or outside the EU.

In this as well as other possible change much will hinge on any post-Brexit relationship with the UK - an issue which the Gibraltar Government addressed recently in a paper sent to Westminster's Foreign Affairs Committee. It stressed not only that 'EU membership has been an important factor in the development of Gibraltar’s economy' but also the importance of 'clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations.'