International E-Commerce & E-Gaming - Tax
By Offshore E-Com Editorial
27 July, 2012
National tax systems, which have traditionally rested on the principles of jurisdiction and physical presence, have been slow to adapt to the nimble and borderless world of e-commerce, especially of the offshore variety. However, driven by the need to raise ever greater sums in tax revenue, this is a situation that is beginning to change.
E-commerce raises many issues for governments, tax authorities, legislators and the courts, and of these by far the most challenging is the question of taxation. The growth of offshore e-commerce adds an extra layer of difficulty. Almost any business involved in e-commerce can gain from moving partly or wholly offshore, not just on a fiscal level but also through increased flexibility. The tax benefits are primarily through reduced corporation tax, but some types of offshore e-commerce transaction also escape sales taxes.
Governments have begun to feel seriously threatened by tax leakage via e-commerce, especially the offshore variety. They tend to share a view that e-commerce undermines key concepts used in the existing structure of taxation, and they largely agree that any new initiatives are going to have to be taken in concert by all or most countries. Bilateral and multilateral agreements between governments to share tax information are the principal weapons being deployed to counter the threat to national treasuries from international tax avoidance. Absent a global agreement on taxing internet-based transactions however, several countries are going their own way in order to ensure that interaction between an offshore e-commerce provider and their citizens will attract at least some degree of taxation.
This is especially so in the sphere of e-gaming and gambling, and cash-strapped European governments are using a variety of legislative tactics to ensure that offshore e-gaming firms are caught in their tax net.
Developments in the EU
In our first example, it emerged in May 2012 that the Spanish tax authority was using laws that pre-dated the internet to require online operators with customers in Spain to pay back-taxes under two historic laws that previously were not applied to offshore online gaming. One company that fell foul of Spain's reinterpretation of these laws was Sportingbet, which disclosed that the tax authorities were seeking payment of fresh tax liabilities on income derived from the provision of services to the Spanish market during the period January 2009 to May 2011. Industry giant Bwin also announced that it had received an assessment on a similar basis, but had resolved the matter with a EUR33m payment.
Bwin explained in a statement that the Spanish tax authority contacted all of the major online gaming operators some weeks previously and made clear that, in their opinion, any online operator that has ever accepted customers from Spain has an obligation to pay Spanish taxes under two laws, one dating from 1966 and the other from 1977. Formerly, these laws were applied to operators based in Spain carrying out offline gaming activities and to certain kinds of bets (other than fixed odd bets). With the operators eager to secure a gaming license from Spanish authorities in June, Sportingbet is thought likely to join Bwin in complying with the request. For its part, Bwin said it hoped the payment of tax dues would fulfil all the requirements of the Spanish authorities, enabling it also to secure a license.
In another example, offshore gambling firms were dealt a blow in the United Kingdom's 2012 Budget, which amended the tax rules applicable to the supply of gambling services to the UK market. As a result, wagers will now be taxed on a point-of-consumption basis, bringing offshore operators under the UK tax net. Proposals to carry out the change were previously announced by UK Minister for Tourism and Heritage, John Penrose on July 14, 2011, after a review of the UK gambling regime, aimed at levelling the playing field between UK-based companies and their offshore competitors, as well as being intended to generate fresh revenues for UK coffers. Following the departure of several UK gambling companies to offshore locations such as Gibraltar in recent years, lured by significantly lower taxes, the government has estimated that 90% of online gambling services are now supplied to the UK market from overseas territories. The change will mean that any wagers taken in the United Kingdom, whether supplied by an overseas operator or not, will be subject to UK gambling levies. Government projections anticipate that the decision will boost revenues by GBP55m (USD88m) in 2014-15, rising to GBP270m by 2016-17.
"The current taxation regime for remote gambling has allowed operators to avoid paying UK gambling duties by basing their operations abroad," the Budget report states. "To broaden the tax base and provide a fairer basis for competition between UK and overseas remote gambling operators, Budget 2012 announces that the government will move to a tax regime that ensures operators anywhere in the world pay gambling duties on gross profits generated from customers based in the UK. This is in line with the actions of several other European countries."
Nevertheless, William Hill, one of the operators that recently joined the tax exodus to Gibraltar, said it would maintain its partial tax residence in Gibraltar because of the tax benefits available when supplying services to other jurisdictions.
The Irish government is taking a similar approach by using legislation published by Finance Minister Michael Noonan in July 2012 to bring all remote bookmakers and betting exchanges under the remit of the licensing and taxation regime. The Betting (Amendment) Bill 2012 is designed to ensure fair and equal treatment of all bookmakers and betting exchanges offering services in Ireland. According to the Department of Finance, the new licensing system for remote operators will prevent crime and protect consumers against fraud. It is designed to guarantee the appropriate regulation of all businesses offering betting services from Ireland or to persons in Ireland. To this end, the legislation amends the Betting Act of 1931, which contains the existing provisions governing the licensing of bookmakers.
Unveiling the legislation, Noonan said that the bill will ensure that all bookmaking activities offered in Ireland are taxed equally: "The fact that off-shore bookmakers were not subject to the betting levy represented a competitive disadvantage to on-shore firms and also narrowed the Stateâs yield from the levy." Noonan also pointed to the additional revenue this initiative could generate. He explained that "there is significant down-stream revenue potential from investment by major firms that have expressed strong interest in Ireland as a base for their operations. Such major firms prefer to base themselves in a properly licensed and regulated regime. One leading betting exchange has already located some of its operations here creating over 75 jobs with the potential of more.â
Some other European Union (EU) member states have also seen an opportunity to tax remote gaming as part of legislative reforms to liberalize the gambling industry. In some cases this has been much to the exasperation of the e-gaming and gambling industry, which has complained that such laws sometimes favour national monopoly providers through tax discrimination in contravention to EU law, while also distorting completion to the detriment, rather than the benefit, of consumers.
In December 2011, the European Gaming and Betting Association (EGBA) and the Remote Gambling Association (RGA) filed a complaint with the European Commission on Greece's controversial, recently-adopted online gambling law, which would allow the provision of taxed gambling services. The complaint relates to the Greek regime's tax and non-tax barriers to market entry, which the Associations have alleged infringe EU law, such as forcing providers to have a permanent establishment in Greece and limiting financial transactions to Greek banks. The law also imposes a higher age limit for online than offline gambling with no justifiable evidence to support that restriction
The EGBA and RGA, which between them represent the majority of the largest European remote gambling operators, are particularly concerned about the new tax regime. The regime will require licensed gambling operators currently operating in Greece to potentially pay their taxes on any revenues earned from Greece-based customers retroactively from January 1, 2010, until the new licences have been awarded. The Associations argue that this provision is tantamount to a market entry fee that will have to be paid by all of the operators which are currently unable to be licensed in Greece. At the same time, the Greek government has also decided to grant OPAP, the incumbent monopoly gambling operator for offline games, an extension of its existing licence for an additional 10 years from 2020 to 2030 in âa wholly uncompetitive and non-transparent fashionâ, the Associations say. OPAP currently pays no gambling tax on its offline activities, whereas online operators will be required to pay 30% of gross gambling revenue. This differentiation in tax liabilities is subject to a separate State Aid challenge which has been lodged with the European Commission.
The RGA has also expressed its disappointment at proposals from 15 of the 16 German states on a national plan to regulate and tax the domestic gambling market. The 15 states have revised the State Treaty on Gambling to improve its terms, increasing the number of operator licenses to 20, from seven previously, but retaining a turnover tax regime, a decision which makes the regime "wholly uncompetitive", according to the RGA. The proposed tax rate has nevertheless been significantly reduced from 16.6% to 5%.
The Association said the adoption of a turnover tax system ran contrary to successful market liberalization programmes implemented by Denmark and Spain, which have introduced "more viable" gross-profits taxation models. The State Treaty has also drawn industry criticism for prohibiting the provision of online casino and poker games, a major source of revenue for operators.
The German state of Schleswig-Holstein, however, proposed its own gambling law, which from this year applies a gross profits basis, seen as more favourable to gambling operators. The territory has also passed legislation to regulate all gambling products on a gross profits basis following continuous disagreement between German states. âThe European Commission has repeatedly stated that the draft State Treaty falls foul of EU law and the latest version appears to make little headway in meeting the Commissionâs concerns. In fact, such an approach simply makes the Schleswig-Holstein proposal more attractive and creates a fragmented, confusing and undesirable situation for German consumers,â the RGAâs Clive Hawkswood concluded.
In the case of Denmark however, it was the established land-based casino operators that complained about unfair fiscal treatment arising from liberalization of the industry, unsuccessfully as it transpired. After an in-depth investigation, the European Commission concluded that a law liberalizing gambling in Denmark and at the same time creating lower taxes for online casinos than for land-based ones is in line with European Union (EU) state aid rules. In a ruling on September 20, 2011, the Commission decided that the positive effects of the liberalization of the sector outweigh potential distortions of competition.
Denmark adopted a law in 2010 liberalizing gambling, which historically has been a state monopoly. The entry into force of the law was postponed while the Commission investigated whether it was compatible with state aid rules. Under the new law, online gambling services may legally be provided by gambling providers established in Denmark and licensed by the Danish authorities. The Danish Gaming Duties Act foresees that online providers of casino games and gaming machines will be subject to a duty of 20% on the gross gaming revenue (GGR - stakes minus winnings), compared with up to 75% for land-based casinos and gaming halls.
In assessing the law's compatibility with EU state aid laws, the Commission took into account the availability of sometimes illegal online offerings by providers established in other countries, which are subject to low or even no taxation. It also accepted the lower tax rate of 20% on the basis that making Danish online gambling provision too expensive would have rendered the liberalization of the market devoid of purpose. The Commission's decision establishes that "the lower rate of taxation for online gambling indeed constitutes state aid but finds it compatible with EU rules, because the positive effects of the liberalization of the market outweigh the distortions of competition brought about by the measure".
The Commission investigation was initiated after it received complaints from land-based gambling operators, to establish whether the different tax treatment entailed an unjustified competitive advantage to online casinos. However, those member states who already have liberalized their gambling markets normally apply a lower duty for the online provision of services compared to the land-based casinos (e.g. UK with a 15% tax rate on GGR for gambling and up to 50% for land-based casinos), the Commission notes. Further member states that currently are in the process of liberalizing their gambling markets, such as Spain, Greece and Germany, also intend to provide for different tax rates.
United States Sales Tax
Perhaps the biggest issue confronting e-commerce development in the United States is the vexed question of state sales tax (although not in relation to e-gaming, which cannot be conducted across a state line). Sales tax is easily enforceable when a âphysicalâ transaction takes place between a business and a customer if a âbrick and mortarâ shop. However, it is not so easy to enforce when that same person chooses to buy something over the internet from a company based out-of-state. Given that several state governments have been through a lean period, they are understandably champing at the bit to close this âloopholeâ.
The United States Congress has been grappling with this issue for some time, but the issue is rather a delicate one, for no lawmaker wants to be seen to be impeding interstate commerce, while on the other hand some kind of solution must be reached to appease the states.
The latest hearing on the subject took place on July 26 in the House of Representatives Committee on the Judiciary which considered proposed legislation enabling states to collect sales taxes from retailers who lack a physical presence in the state, and thereby, it is said, allow local 'Main Street' retailers to compete more effectively against out-of-state internet sellers. Local 'brick-and-mortar' retailers are looked on, by some, as having a competitive disadvantage because they must collect sales taxes at the point of sale, while out of state retailers give their customers an effective discount of up to 10% by collecting no state or local sales taxes.
Judiciary Committee Chairman Lamar Smith (R - Texas), in his introduction, noted that currently, under a US Supreme Court ruling, known as the âQuillâ decision, retailers are only required to collect sales tax in states where they also have brick-and-mortar stores. The burden falls to consumers, who are required to report to state tax departments any sales taxes they owe for online purchases on their tax returns (but only about 1% do so). He pointed out that state and local governments view the taxes they cannot collect on most online sales as lost revenue. It is estimated that this âloopholeâ will cost state and local governments an estimated USD24bn in lost tax revenue this year, with California alone expected to face USD1.9bn in uncollected sales taxes.
One of the sponsors of the proposed bill, Jackie Speier (D â California) said that âthe failure of Congress to address this issue has led to more, not less confusion in the marketplace,â with some states resorting to attempted legislation, 'Amazon deals' or the interstate Streamlined Sales and Use Tax Agreement. At least 30 states have taken some action to try and increase their sales tax collections on online sales, she observed. However, Smith added that, in the Supreme Courtâs view, to force a retailer to collect and remit taxes to more than 9,000 state, county and local taxing jurisdictions throughout the country would place a serious burden on the retailerâs ability to sell in interstate commerce. âQuillâs bright-line âphysical presenceâ rule for tax collection,â he stated, âmakes sense for small businesses that cannot afford to track and comply with 9,000 different tax codes as a cost of doing business throughout the country.â
The proposed bill, the âMarketplace Equity Actâ, would replace the physical presence requirement with a requirement that state and local governments significantly simplify their tax policies if they want to collect sales taxes from out-of-state retailers. It also contains an exception from the tax collection duty for small e-retailers that do not have more than USD100,000 in remote sales in an individual state per year, or USD1m in sales nationally. The bill would also require states that opt-in to the framework to provide technological tools and services cost-free to online retailers for them to comply and collect sales taxes.
Nevertheless, the Computer & Communications Industry Association (CCIA) has continued its opposition to tax legislation over online sales, as, with thousands of different state and local tax jurisdictions that online retailers would have to comply with, the bill would still âimpose tax collection burdens on small internet businesses, which are some of the most promising candidates for future economic growth.â
CCIA President & CEO Ed Black said: âThe assumption that having online retailers collect sales taxes would result in a fair balance is mistaken. The compliance burden of managing a complex system of multiple tax jurisdictions is not comparable to collecting at a physical store for just that one jurisdiction. If the burdens are different, it would only result in a new imbalance.â
Black added: âE-commerce has enabled businesses to broaden the scope of their activities beyond traditional geographic limitations. It is neither fair nor equitable to negate their achievements and place a compliance burden on online retailers for daring to utilize a new legitimate business model that does not fit well with a sales tax system based on physical location. We need policies that recognize the value of innovation and new business models like e-commerce, rather than penalizing and taking advantage of their creativity in the name of âfairnessâ or âequityâ.â
Although many countries aspire to be at the forefront of the e-commerce revolution, in the current economic climate governments seem just as keen to find ways of penalizing businesses through taxation as encouraging them with new incentives or better regulation, and the world of e-commerce is no different.
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