Warwick Bartlett on tax – The Only Way is Up

warwickbartlett Warwick Bartlett, CEO of Global Betting and Gaming Consultants, discusses how government’s approach taxation means that rates are more likely to go up than down.

The most pleasing sight at ICE 2015 was to see some of the younger companies which two years ago took the smallest booths are now spending upward of £250,000 on impressive stands.  Such companies have common elements that have brought about their success – drive and determination. But they can be so preoccupied with the success of bringing product to market that they forget issues such as where to base a company so as to limit high taxes in the future.

The UK Point of Consumption Tax is causing companies by necessity rather than choice to licence in the UK. In so doing they are forgetting that there is a wider global gambling market that may be best served away from the UK from a fiscal perspective.

The reason why I bring this up is that the momentum for taxation is only going one way – upwards.  All of the UK political parties have said so.  Governments have become very creative introducing new taxes that would not have previously been acceptable. In the midst of the 2008 financial crisis I wrote to GBGC‘s subscribers pointing out that in all previous recessions that were as serious as we expected this one to be it was likely that governments would resort to imposing exchange control regulations. Today there are about 38 countries that impose exchange control regulations which include the world’s second largest economy China and the seventh Brazil with Russia in ninth position.

The purpose of the note was to warn business that while you can trade profitably in a market there may be no opportunity to repatriate your profits to the company’s home base.  Some see little point going to the expense of developing a market in Brazil when you cannot repatriate profits.

In 1972 the Chancellor in the UK imposed Exchange Controls on the sterling area and they stayed in place until Mrs Thatcher abolished them in 1979 as the economy improved.  They were harsh controls.  People could not take more than £50 spending money on holiday and it was during this period that Malta (then in the Sterling zone) became a prime destination for UK tourists.   A business wanting to invest abroad had to complete forms and seek approval.  The process was lengthy and a restriction to trade.

The UK Government has learned the lessons from the past.  There are no exchange controls in the UK because the Government has approached the problem from a different angle. Faced with appalling economic decline and not wishing to shoot themselves in the economic foot by restricting trade, the UK Government chose instead to place barriers on offshore financial centres that would restrict tax saving opportunities through trusts, companies, and migration.  So far it has worked but tax rises have further to go so I would expect to see more measures introduced.  Already the leader of the Labour opposition Ed Milliband has said that if he were to form the next government Labour would introduce a black list of offshore financial centres that did not comply with his dictate. His main thrust is transparency where the directors and shareholders of companies can be seen in a register.

He may for example follow Japan’s lead with a new wealth tax that has been structured as an exit tax.  Japanese nationals with financial assets of about US$850,000 must pay the normal capital gains tax rate on any unrealised gains on those assets’ departure.  The aim of the Japanese government is obvious. It wants to keep its taxpayers in Japan and prevent them from moving to lower taxed areas such as Hong Kong or Singapore.

This is all part of a growing trend where nations will want to contain capital and maximise taxes.  The free movement of capital should no longer be taken as a right.  I expect any newly elected government to have no qualms at all at imposing such taxes.

When PokerStars sold to Amaya for US$ 4.9 billion the founders would have received the proceeds free of capital gains tax.  If you look at the accounts of PokerStars you will see that the corporation tax paid over its history is practically zero.  This happened probably by design rather than accident because the founders had considered the implications of competing in a competitive market from the beginning and the drain on resources that high corporate tax would have.

Many in gambling have used offshore companies to reduce the burden of tax to remain in this market but many owner-directors have not actually moved their place of residence or their back office offshore.  It is my opinion that this position will not be sustainable in the future.  The UK in particular will want to make sure that if you say your headquarters are offshore that you will have a presence offshore that is capable of actually running the business. Poker Stars employ something like 250 people at their global headquarters on the Isle of Man and the founders and directors of Poker Stars lived on the island.

Over the last few years 20 governments have increased the taxation of gambling.  Ironically the taxes were already high in those countries.  The only area untaxed was the payout to the gambler and most of the increases announced are a tax on players’ winnings.

 

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