Online gaming operators will be subject to tens of millions of dollars per year in value-added tax (VAT) starting in 2015 as the European Union (EU) implements changes related to the tax on electronic services.
For many years, VAT laws allowed gaming operators to only be subject to VAT based on the rules of the country in which their services are based. These rules allowed online gaming operators to strategically offer services from VAT-free countries or countries which waiver VAT on gaming products, allowing them to avoid a potentially hefty tax bill. This will all change starting on Jan. 1, 2015, when VAT laws will mandate that VAT on electronic services be applied based on the country where services are consumed instead of where the company is offering the services.
Some European countries apply VAT on all electronic gaming services, while many others allow for VAT exemptions on all online gaming or on some forms of online gaming and not others.
The VAT changes are expected to have a varying effect on gaming operators dependent on what countries their customers reside in as well as whether they were offering services in a VAT-free zone or not.
For example, UK-facing gaming operators are not expected to have an increased tax levied based off activities from its customers since the UK offers an exemption to activity involving online gaming products. UK-facing online gaming companies are already experiencing an increased tax bill in other ways due to the newly-enacted Gambling (Licensing and Advertising) Bill that imposes a 15-percent point-of-consumption tax on online gaming activity.
Other European countries, including Germany, France, and Ireland, apply differing VAT rules depending on the type of gaming or whether it is deemed to be skill-based or not.
DLA Piper tax lawyer and partner David Thompson explained to eGaming Review about how the new VAT changes could have a material impact to online gaming operators services certain countries, "As of January 1, changes will come into force that will have a disruptive effect on businesses based in countries where there is either no VAT, or where a full VAT exemption to gaming products applies."
"These businesses will be subject to VAT charges on the net value of transactions made with customers based in Ireland and Germany, and those who rely on strong customer bases in Ireland or Germany will find themselves facing shrinking margins as a result of growing VAT bills."
In Germany, VAT is applied to online poker and online casino games, but not to sports-betting activity, which is already subject to a five-percent turnover tax.
Gibraltar-based Bwin.Party Digital Entertainment, which is rumoured to be in negotiations for sale to either Amaya Gaming or Playtech, is positioned to be levied with a seven-digit annual tax bill in Germany alone since 26 percent of its customer revenues are based from German customers, which now apply a 19-percent VAT rate unless the country decides to amend its VAT laws to exempt all online gaming services.
Bwin.Party is expected to be hit again in France, where the gaming company is currently ranked third in the poker market, according to PokerScout.
PokerStars, which operates from the Isle of Man, is expected to be hit especially hard in France due to its much larger market share in the country. The gaming giant recently implied that these VAT changes could cost the company around €500,000 ($625,000) in 2015 alone due to the 20-percent French VAT it will now be subject to.
All is not doom and gloom for French-facing gaming sites, as Winamax, ranked first by PokerScout in France, is already paying VAT in the country as it has been offering its services from within the country's borders since it launched in 2010. For Winamax, these new VAT changes are a blessing in disguise as they should even the playing field, seen that in the past their competitors were not subject to the same VAT rules as they were.
A Winamax spokesperson echoed this sentiment, "This means less distortion of competition, even if we pay other local taxes that European operators do not pay."
What This Potentially Means for Players
While technically speaking the VAT changes will be the responsibility of the online gaming operators, could this also have an impact on players? It isn't a stretch of the imagination to believe that the new VAT rules could have a negative impact to many players in Europe and beyond.
Recently, PokerStars announced an increase in rake and a reduction of promotions. Some of these increases, such as rake on rebuys, are only applicable to customers in certain countries. It is unknown if these changes were introduced in reaction to new VAT laws or whether we might see another round of changes by PokerStars or other online gaming companies in hopes to pass down some, if not all, of the new costs associated with the change in VAT regulation.
It is also possible that players in certain markets may see a reduction of competition. We recently witnessed a few online gaming companies remove their services from the UK in reaction to the new gaming regime. While larger operators are expected to figure out a way to make the best of a new cost structure, smaller operators may no longer be able to compete in certain markets.
This potentially means that there could not only be fewer services offered in certain countries, but also less overall liquidity for online gaming companies, which at the end of the day isn't great news for players. New gaming companies may also think twice about entering certain jurisdictions since the barrier of entry will increase as of Jan. 1, 2015.