There is a curious trend in countries where gambling has recently been legalized. Governments are rapidly starting to increase the tax and regulatory burden on legal gambling. At the same time, the environment created for legal gambling operators is quite tough from the very beginning. However, since this topic is sensitive within society, many politicians are trying to gain political capital by increasing the pressure on legal gambling. It only leads to the decline of the legal market and a decrease in tax revenues to the budget.
Recently there was news about the Romanian government planning a significant increase in the tax rates on winnings. Winnings up to RON 66,750 (USD 13,550) are taxed at 1% rate and winnings up to RON 445,000 (USD 90,300) – at 16% rate. Winnings over RON 445,000 are taxed at a 25+% rate.
In the draft budget proposed by the Romanian government for the next year, these rates are significantly increased. It proposes to tax winnings up to RON 3,000 (USD 610) at a 10% rate, winnings from RON 3,000 to 10,000 (USD 2,030) – at a 20+% rate, and introduced an additional commission of RON 3,000. Winnings over RON 10,000 will be subject to 40% tax plus an additional fee of RON 1,700. Tax rates will also be applied to each withdrawal.
At first glance, it may seem that the Romanian budget will receive more tax revenues. The effect is likely to be the opposite, and the experience of Georgia demonstrates this perfectly. In less than half a year of gambling reforms aimed at increasing tax and regulatory pressure, the income of legal operators has decreased by 18%, resulting in reduced revenues to the state budget from gambling taxation.
The experience of our neighbours, Georgia and Romania, clearly shows that any increase in pressure on legal gambling harms both the sector itself and state budget revenues. However, this is not the only detrimental effect. Regardless of the country, the increased tax and regulatory burden on gambling lead to several unintended results.
1. Rise of illegal market participants. The market for certain services exists regardless of the regulators’ actions. Gambling is no exception since there is always demand. And the only question is who meets this demand. If the regulatory legislation is favourable, market players will work legally due to clear rules of the game and, as a result, predictable business development. If the tax and regulatory laws are too burdensome, few companies will be willing to operate legally in such a market, encouraging illegal market participants to meet the demand. Everyone perfectly understands what it means for gamblers.
2. Unfavourable investment climate. Investors need security guarantees for their funds and predictable returns on investment. Hence, the more difficult the tax and regulatory laws, the less likely will be investments in a particular jurisdiction. Why invest a million dollars in a market where, due to high taxes, these funds will return in four years if you can invest in a neighbouring country and make it in two?
3. Weakened social responsibility of gambling. An increase in tax rates, including on winnings, will always mean a decrease in legal operators’ income, which will result in terminating “outlier” projects and initiatives. Businesses will not invest their survival-critical profits in projects failing to produce revenues.
We must recognize our neighbours’ mistakes for at least two reasons. First, to create a favourable environment for gambling development in the country. Second, to strengthen its position in the region and become a more attractive jurisdiction for gamblers and investors seeking better conditions in Central and Eastern Europe.
Anton Kuchukhidze, Chairman of the Ukrainian Gambling Council, exclusively for the Ukrainian News
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