A defence of Macau’s approach to taxation of gaming revenue
Hands up who has read, or even heard of, Article 105 of the Basic Law of the Macau SAR? I am sure not many, yet it is fundamental to understanding why Macau has such an apparently high tax rate (35%) on gross gaming revenue. Article 105 provides as follows:
The Macao Special Administrative Region shall follow the principle of keeping expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product.
The concessionaires, particularly those controlled from Nevada, have periodically asserted that Macau’s special gaming tax is too high, and that it is uncompetitive. The inference is that the sky will fall in if it isn’t drastically reduced, though the prospect of that occurring in the context of Macau’s continuing gaming revenue growth would seem remote anyway. They, and sympathetic commentators, point to the 6.75% gaming tax rate in Nevada as the beacon which should guide other jurisdictions wishing to nurture their gaming industries. The situations each jurisdiction faces are not comparable, and it is facile in the extreme to look only at the headline gaming tax rate. Here’s why.
Centralism versus regionalism
Nevada is one of 50 states, operating in a federal system. Like other federal systems, such as Australia and Canada, there is a fiscal imbalance embedded in it. The United States’ system necessitates transfer payments being made from one level of government to another, to match sources of revenue with the place of expenditure. In the US, most income tax and social security revenue is collected by the federal government, which then allocates funding according to state requirements and its own policy agenda. Some states impose income tax on their individual and corporate residents; Nevada is not one of them, and has benefited from the immigration of tax exiles from states which do impose such taxes. What Nevada does, though, is impose ad valorem indirect taxes, in particular sales tax, which account for more than 66% of its 2011 state budget, the 5th highest such proportion in the US. By comparison, gaming tax revenue will only represent about 8.7% of state revenue in 2011. Contrary to what has become conventional wisdom, Nevada is not a low tax jurisdiction; In fact, Nevada ranks 16th among the United States in direct tax revenue per capita in 2011. It has simply moved the tax base, and point of collection, away from its key industry.
Back to basics, again. Article 104 of the Basic Law provides that Macau is a unitary fiscal jurisdiction:
The Macao Special Administrative Region shall have independent finances. All the financial revenues of the Macao Special Administrative Region shall be managed and controlled by the Region itself and shall not be handed over to the Central People’s Government. The Central People’s Government shall not levy taxes in the Macao Special Administrative Region.
Not only does Macau not suffer the fiscal imbalances which affect federal systems, but it is ostensibly master of its tax policies. So what should guide a good tax policy? Let’s start by asking ‘What is the tax for?’ Macau has an enormous programme of infrastructure spending ahead of it through to 2016, especially in regard to the bridge
spanning the Pearl River Delta that will link Macau by road to both Hong Kong and Zhuhai, the light rail system, new hospital facilities, improvement of border crossing facilities, agreed development of Hengqin island, and so on. The primary beneficiary of that spending, at least in the short term, is likely to be Macau’s casino industry.
A good tax is one that can be collected efficiently. Like a sports car, it needs a low drag co-efficient. Macau currently collects more than 70% of its public revenue through the payment of special gaming tax, a mechanically simple tax to calculate, collect and remit. Has anyone tried to fathom the intricacies of US or Australian tax law recently? Macau imposes no tax at all on gambling winnings. Contrast that with the US, which generally requires gambling winnings (limited exceptions exist for bingo, keno and slot machine winnings) to be included as personal income. In some cases, federal withholding tax may also be applicable. For example, a payer is required to withhold 28% of the winnings of any resident who does not provide their social security number (non-resident aliens will be subject to 30% withholding). The associated form-filling obligations repose both with the payer and payee—and keep tax advisers in work.
A good tax cannot be dodged and is certain. The more distributed the tax base, and the more technical the requirements to calculate the tax, the more likely it is that compliance will be an issue. That means heavy investment in data-matching and investigation/prosecution activities. Macau has six taxpayers (the casino operators) currently providing at least 70% of its tax revenue. That’s because it’s their responsibility to pass on the 35% tax levied on their winnings from bets taken. Nowhere else in the developed world of market economies is that likely to be replicated. The drag co-efficient is infinitesimal.
The myth of non-competitiveness
Back to the refrain that the current special gaming tax rate makes Macau’s gaming industry relatively uncompetitive.
Really? Well perhaps someone can explain to me why revenue growth is powering ahead in Macau and the other, emerging, high gaming tax jurisdiction, Pennsylvania? In 2009, Pennsylvania had nine casinos, offering slot product only. Its revenue from gaming tax was about US$1.1 billion (the gaming tax rate is 55%); more than US$200 million ahead of the tax revenue generated by Nevada’s near-300 casinos. That gap will have widened in 2010. From a revenue base of just over US$13 million in 2006, when slot-only casinos were first operational, Pennsylvania’s gross gaming revenue is likely to overtake the fallen powerhouse, New Jersey, by 2013. Both Pennsylvania and Macau have the strategic benefit of room to move should it become apparent that their policy objectives, especially economic growth, are not being met by the industry, or that investment is being driven elsewhere. It is far easier politically to reduce a tax than increase it (Nevada and New Jersey prove the point), but there is no compelling evidence that a case exists for a decrease of the gaming tax rate in either Macau or Pennsylvania.
A response open to businesses to deal with a high tax rate is to change their business model. Special gaming tax paid by the Macau concessionaires to the government is probably not much greater than the commission/revenue share paid by the industry to the junket operators, who generate around 70% of all gaming revenue. I rarely hear an operator say that the cost of junket operations makes them uncompetitive; the impediment to them earning even greater returns is always said to be the tax system. I wonder what the response would be if the government were to increase the gaming tax rate; would there be a new, urgent imperative to develop non-gaming attractions, to do more to develop the so-called mass market, and to internalise more of the value chain in the concessionaires’ operations? Perhaps that is a little too radical.
David Green is CEO, Newpage Consulting. The author is a former gaming regulator and tax partner with a major international accounting firm. He lives and works in Macau.
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