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Sex, drink and gambling - By Kitty Miv, Editor

Kitty Miv, Editor
29 March, 2012

Those clever-socks at the UK Treasury have now brought to life their cunning scheme to recapture lost revenue from all those betting and gaming companies that have swapped the UK's sideways rain and high taxes for beach bars in Malta, Gibraltar and Antigua.

A year ago now the EU launched a consultation on the subject of cross-border gambling, having already published a green paper on the issue. It's a highly problematic matter: several low-tax member states and some other not-quite-member-states like Alderney and the Isle of Man are dining out on having attracted great swathes of the betting and gaming industry, by offering perfectly legitimate regimes. Yet a number of countries, now joined by the UK, are legislating to tax Internet betting transactions regardless of where they originate.

Malta and the others complain (but not too loudly, in case they get thumped in other ways) that this is illegitimate, because under 'passporting' and 'freedom of establishment' rules they have every right to offer their services across the EU, and the countries of consumption have no right to tax such supplies.

It's easier to see the inequity of the situation if you think about it backwards: suppose a British insurance company insures my car in Poland and I pay that company in the UK. How would it be if the Poles charged me 13% tax on the premium on the grounds that their domestic insurance companies have to pay that rate on policies they offer locally? It would be against EU rules, of course, because if there is tax to pay it should be due in the UK, where the business was done, not in Poland.

If such nationalistic, not to say protectionist practices were allowed throughout the EU, the single market (the EU's one clear and highly successful achievement) would be destroyed virtually overnight. So why is the EU so ambivalent about gaming? Why does it hang back from attacking such clear breaches of single market rules?

Well, there is an undercurrent of Mrs Grundyism here. Sex, drink and gambling, the three great sins which are popularly supposed, at least among Mrs Grundies, to bring ruination upon those who indulge in them, are subject to different rules, even if these are not explicit.

Of the three, it is really only gambling which poses a European-scale problem. No doubt to the great relief of Eurocrats, sex is by its nature not a cross-border activity, although I suppose the sale of pornography could be. And the supply of alcohol is quite a local affair, since it can't be delivered by the Internet, or even by mail without immediate attention from border guards and tax officials. Where there are major differences in the cost of alcohol on the two sides of a border, smuggling is immediate and pervasive, but has physical limitations, and is not the subject of EU-wide regulation.

How different the situation is with gambling! Once upon a time, before the Internet, something difficult for young people to imagine, gambling was a local activity and the State (all states) did things like raiding clubs or even private houses to break up illicit gambling parties. This had nothing much to do with tax, although in some countries, including the UK, it was done partly in defence of an established State gambling monopoly. Now, States have entirely lost the battle against illegal gambling, and it requires a close-to-totalitarian regime to control (or tax) on-line gambling.

So this discussion in the end comes down to practical reality. Our Polish friends could impose their 13% tax if they wanted, because they could require me to display a tax sticker, verifying that I had paid the tax, on my car. But the British government is in a very different situation if it tries to tax cross-border Internet gambling. With those gaming firms that maintain a presence in the UK, it can compel them to disclose UK-origin betting activity even if it passes through their 'offshore' (they use that word to make their actions sound better justified) subsidiary in say Malta (which is not offshore at all any more). But how will they tax the UK user of an Antigua-based gaming site which has no UK presence?

The UK government had previously tried to square this circle with its 'white-listing' system, whereby foreign gaming providers were only permitted to market into the UK if they conformed to the UK's (Mrs Grundyish) regulatory requirements, with attached licensing fees. The government has understood that this tactic has failed; indeed the exodus of UK betting firms (and their tax revenues), which they had hoped to stem, has continued unabated. So now they are trying something else.

But they just don't get it! The only result of this latest manoeuvre will be to drive the few remaining UK betting providers out of the country altogether in order to protect the revenues of their foreign 'offshore' operations.

As for the EU, it is on a hiding to nothing if it attempts to regulate the Internet gaming sector. Sorry, Mr Barnier, but your well-meaning efforts are mis-directed, and you should stick to fighting VAT fraud, where you can actually achieve a result.





About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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