Last week, online gambling trade associations demanded that the European Commission (EC) intervene and order German lawmakers to justify a discriminatory 5.3% turnover tax on online casino and poker verticals. Though market stakeholders may get their desired response on taxes, Regulus Partners states that an EU-level intervention will have little to no impact on Germany’s illogical approach to adopting a new federal gambling framework.
The European Gaming and Betting Association (EGBA) has filed a state aid complaint against Germany’s proposed 5.3% turnover tax on gaming, alongside the German DSWV trade association. In response, the European Commission has requested that Germany justify its fiscal policy in relation to online gaming. Germany is expecting to generate c. €365m in taxes from its proposed tax, which we believe is a logical expectation for an illogical duty (it implies an effective tax rate of c. 80% on our estimates of post IST4 remote gaming revenue).
Historically Germany has tripped up over its ability to adequately explain its confused approach to online gambling regulation and so the challenge might succeed. However, this may be yet another case of ‘beware of what you wish for’.
Germany’s proposed 5.3% turnover tax makes traditional online gaming products completely unworkable, since the blended average payout of all games is usually 96.5%, meaning the effective tax rate would be an economically impossible 150%.
However, this can be overcome mathematically by altering payout ratios for all products, which a critical mass of licensed operators will undoubtedly do. The limits of this flexibility are imposed by customer enjoyment, domestic competition, and the allure of unrestricted black-market content: getting a blended payout ratio much above 93% will become counter-productive, hence the reverse-engineered effective tax rate.
A black market will undoubtedly dominate at any level of turnover tax and has already been given a significant boost by deposit limits. Online gaming is not a mass-market product (outside certain narrow parameters) and customers intuitively understand the value. We estimate that after a full year of IST4 being in operation, assuming minimal state-by-state adoption of online gaming, c. €500m will have shifted to the black market.
The remaining c. €450m of online gaming revenue will comprise of those customers who are less price-sensitive, which are typically mass-market betting (and potentially media) cross-sell and/or retail led. In a retail environment, slots with a payout ratio of c. 85% are not all that rare and some jurisdictions (eg, Italy) mandate payout limits at around this level. However, to impose them with a turnover tax is clearly inefficient and potentially discriminatory, especially since this tax does not exist for retail operations in Germany. Further, while the government may collect a reasonable amount of money (it was until recently collecting c. €130m in VAT), it reduces ‘legally acceptable’ remote gaming operator contribution from €1,650m to just €85m: a 95% reduction.
Germany’s retail gaming market may observe this complaint with two observations. First, an 80% effective rate of tax on revenue is already in place in some state casino regulation: the effective rate is not in and of itself clearly punitive by land-based standards. Second, Germany’s arcade sector has been the subject of systematic regulatory attacks since 2012, with the latest round of impacts disguised by the new problem of Covid-19 disruption.
A bruising regulatory regime is therefore also something to be expected on an omnichannel basis from German lawmakers. Germany’s online fiscal-regulatory regime might vary in important specifics to its land-based counterparts, but the central theme of confused restrictive mess is quite evenly distributed across products and channels, in our view.
Where the EGBA has a very clear case is that a turnover tax on gaming is inefficient and distortive in ways that have a lot of negative unintended consequences from a policy perspective. Such taxes are therefore almost completely indefensible from the perspective of proportionate efficacy and coherent logic unless the policy’s stated aim is to cause wilful and indiscriminate damage to gaming consumers and the legitimate online gaming sector.
However, what does the process of German political consensus on online gaming reform really want or effectively demand as an outcome? We would suggest that this is a heavily restricted sector that is kept small until conditions are potentially created to liberalise it, in which politicians do not have to openly identify with any particular policy, all of which contains some toxicity. In a badly thought out but ‘quick fix’ way, this is essentially what has been created through IST4 after over a decade of false starts.
Conversely, if the challenge wins, German lawmakers have three choices:
- Give up on incoherent restrictions and embrace an open licensing regime with relatively low taxes
- Work out an effective restrictive regime that has a coherent and defensible legal logic (eg, very high revenue-based taxes and specific product restrictions); however destructive and unpalatable this may be commercially as well as being practically unworkable from a consumer protection standpoint (due to the inevitable growth of a black market), this approach is not contrary to EU law, it is simply playing the EU game
- Go back to an overall ban or just a stunted and highly taxed poker market, using French precedent as justification at EU level
The problem is that there is no consensus for option one and neither the appetite nor apparatus for creating option two. That leaves option three as the path of least resistance…
Featured article edited by SBC from ‘Winning Post’ Sunday 06 June 2021 (click on the below logo to access a full unedited version)