Who will blink first in a row over online gaming tax?
Dr Jack Lam, the first gaming entrepreneur allowed to run a whole Macau casino openly in tandem with his existing Macau VIP junket business, is considering moving his online betting operation away from the Philippines to Cambodia according to well-informed sources.
The reason given by the sources is Dr Lam’s concern that in the Philippines taxes are allegedly being imposed on his online operation in an ad hoc way, above and beyond the percentage of the gross originally agreed with the licensing authorities.
Dr Lam’s Philippines-licensed online gaming businesses are Chinese-language websites aimed at the Greater China market. Because of the sensitivity surrounding the topic of online betting in mainland China the sites are not generally advertised. Instead they are promoted via a network of marketing teams.
The Philippines is the only jurisdiction in Asia to issue official online licences to companies providing online gaming outside the country’s domestic market. First Cagayan Leisure and Resort Corporation, a body authorised by the Philippines government to act as an online operator in its own right as well as regulator for international operators seeking an online licence, was set up following the enactment of the Interactive Gaming Act in 2003. It currently provides licences and supervision to more than 40 online operators via the legal vehicle of the Cagayan Special Economic Zone and Freeport (CSEZFP).
Tax regime
A CSEZFP licensee does not have to pay local corporation tax but is normally subject to a special tax rate of 5% on gross income (net of allowable deductions) in lieu of all national and local taxes. Sources indicate Dr Lam is currently paying 10% on the gross of his online gaming business. If he is paying above the ‘going rate’ it may amount to a goodwill gesture. If as suggested in some quarters his online businesses licensed in the Philippines are turning over more than US$100 million a month, that would amount to an annual tax take to the authorities of US$60 million at the 5% rate, or US$120 million at the 10% rate. The latter figure would be more than the entire estimated taxes take made from Philippines land-based casino gaming in the whole of 2008.
Cambodia is not currently known as an online gaming jurisdiction, but does use a flat tax system for land-based gaming operators (see our separate story on Cambodia in this edition).
Other holders of Philippine online licences include internationally famous sports betting brands such as SBOBET.com and equally high profile sports and live casino operators such as bodog88.com, the Asia-facing site of Calvin Ayre’s casino brand bodog.com.
There is no suggestion that officials from First Cagayan are asking Dr Lam or other operators to pay extra money or make irregular payments. The allegation is that third parties with political connections on occasions interpose themselves between online operators and the regulator in the Philippines and ask for ‘special fees’. There is no suggestion that major international brands such as SBOBET or bodog.com have faced such a request. Such requests are however commonly assumed to be a euphemism for a bribe. Those familiar with business practices in the Philippines say such bribe requests are sometimes (though not exclusively) ‘seasonal’ in the sense they tend to occur during periods of intense political activity in the country such as a general election. That’s a time when some politicians are seeking cash for patronage or as a pension plan should they fail to be re-elected or reappointed to lucrative public posts.
Wider concerns
Other industry sources suggest Dr Lam is not the only operator concerned about this kind of irregular business practice in the Philippines online licensing sector. An online industry source speaking on the sidelines at the recent iGamingAsia Congress in Macau, suggested a handful of operators with Philippines online permits are considering withdrawal from the Philippines online licensing regime. Others are contemplating ‘double’ licensing in not only the Philippines but also one of the so-called ‘White List’ jurisdictions approved by the United Kingdom government or the jurisdictions approved by the European Economic Area.
Speaking on condition of strict anonymity, the source told Inside Asian Gaming: “A number of online operators are increasingly wondering whether it’s beneficial to have a Philippines online licence.
“Double licensing is already quite common. It’s based on the principle ‘the more the merrier’. Having two online licences—say one in Europe and one in Asia—is seen as something that can’t do any harm, and may actually do some good,” added the source.
“Until now there’s been a feeling in the industry that the stronger regulatory jurisdictions can actually help improve standards in the weaker ones. Some people are now beginning to question that assumption as it applies to the Philippines.
“Some online operators are concerned there’s a lack of transparency about the financial implications of having a Philippines online licence,” added the source.
Casino business
Dr Lam’s reported threat to move his online business away from the Philippines—possibly to Cambodia—comes only twoand-a-half months before presidential elections in the Philippines. Changes of national president have in the past resulted in changes of policy direction regarding the gaming industry although the changes are usually in terms of the government seeking a bigger cut rather than in the direction of prohibition. Politicians who in opposition appear to be anti-gaming generally get more comfortable with it while in office. One of the key reasons is that gaming is a major source of the country’s tax income. Whoever controls the industry controls a large amount of discretionary spending for political patronage as well as social projects.
In December 2009 the Philippine Amusement and Gaming Corporation (Pagcor)—the operator-cum-regulator of the land-based gaming industry—announced it posted gross income from gaming of P29.61 billion (US$640 million) in 2008. That was a 102% increase on the gross income achieved in 2000. The gross for the first half of 2009 alone was P14.6 billion added Pagcor. Based on the 25% tax on the gross levied on the grind for casino table games and slots and the 15% levied on the high roller gross (and assuming all the tax revenue due on the income formally declared finds its way to the tax authorities) the tax take on 2008’s income could amount to more than P5.5 billion (US$120 million).
Political issues
The challenge faced by land-based and online gaming operators licensed in the Philippines isn’t purely related to accounting. The Philippines has a segment of policy makers opposed to further expansion of the industry and some even in favour of a contraction.
The current chairman of Pagcor, Dr Efraim Genuino, has been seen as sympathetic not only to gaming expansion, but also specifically to Dr Lam’s business aspirations in the Philippines.
In the land-based market, Dr Lam’s Jimei Group owns a controlling stake in Fontana Leisure Parks & Casino at Pampanga. Dr Lam is also a founding member of a Pagcorsupported lobby group within the Philippine gaming industry called the Euro-Asian Cooperation on Gaming Association Ltd that was set up in 2006.
Some opposition politicians in the Philippines are however less supportive of the industry in general and Dr Lam in particular. In 2006 Senator Jinggoy Estrada used the local equivalent of parliamentary privilege to make a speech in the Senate attacking him specifically.
RelatedPosts
Three separate attempts by friendly politicians to reappoint the current Pagcor chairman Dr Efraim Genuino to his post before the national election were unsuccessful. If the incoming national president does not reappoint Dr Genuino, there is no guarantee that the new Pagcor chairman will be as supportive of the current taxation and regulatory system for land based and online gaming, including those affecting Dr Lam’s operations.
