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New 15% Tax? Isle of Man and Gibraltar Gaming Companies Will Stay Put

TAGs: Editorial, Gibraltar, Isle of Man, Point of Consumption Tax, Rafi Farber, tax

New 15% Tax? Isle of Man and Gibraltar Gaming Companies Will Stay PutThe tax man cometh. This time he cometh in the form of a 15 percent point of consumption tax on UK gamblers. This means that gaming companies serving UK gamblers incorporated in previously untaxed (by UK Proper) locales like the Isle of Man and Gibraltar will now be taxed.

The new tax comes in the context of a larger move to introduce new taxes on savings in the EU. Just this month, Spain passed a .03 percent tax on bank deposits. The purpose, stated in clear, concise, perfectly Orwellian language, is to “be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis.”

Interesting. A tax to fund long term investment. Can’t people freely fund long-term investment without being taxed to do so? Or is it that only the government knows how to fund long-term investment and must therefore take the money for itself? It seems more likely that taxing savings at a rate of .03 percent is merely a trial balloon to get Spaniards used to the idea that deposits will be taxed, and then jack up the rates. In a country with a persistent unemployment rate at over 25 percent (higher than the worst year of the Great Depression), not many people have any savings to tax in the first place. Something is seriously wrong in Spain.

In order to see that this (and possibly the new 15 percent gaming tax itself) is a trial balloon and the rate will soon be increased substantially, all you have to do is look at the table below of the original income tax rate in the United States, passed in 1913. The bottom rate from $0-$20,000 was only 1 percent, and $20,000 in 1913 is equivalent to nearly $500,000 today. Imagine that. A 1 percent income tax on up to half a million in annual income. That’s how it started.

Revenue Act of 1913
Normal Income Tax and Additional Tax on Individuals

38 Stat. 166 [7]

INCOME

NORMAL RATE

ADDITIONAL RATE

COMBINED RATE

0

1%

0

1%

$20,000

1%

1%

2%

$50,000

1%

2%

3%

$75,000

1%

3%

4%

$100,000

1%

4%

5%

$250,000

1%

5%

6%

$500,000

1%

6%

7%

But back to the point of consumption tax. What will the effect be on the industry? It is a common economic fallacy to assume that consumption taxes can be pushed forward onto the consumer. They can’t. Prices are determined by supply and demand, never cost. Prices determine cost, and not the other way around. What will happen is that the marginal gaming firms on the periphery in the Isle of Man and Gibraltar serving UK customers will be in trouble. Those that cannot afford to pay this tax will either shrink or fold, reducing the gaming supply. The reduction in supply will in turn push gambling prices up for everyone. So indirectly, taxes do increase costs for consumers, but only because consumption taxes cause a shrinkage of supply.

If UK lawmakers think that instituting this tax will bring companies back to UK proper, they are sorely mistaken. You can’t bring capital back by raising taxes. Only politicians think that way. You can only bring it back by lowering taxes, and the UK has a long way to go to get taxes down to Isle of Man or Gibraltar levels.

Take the Isle of Man: No capital gains tax, no wealth tax, no stamp duty, no death tax, no inheritance tax, a top personal income tax rate of 20 percent, import tax of 20 percent and 0 percent corporate income tax.

Take Gibraltar: No capital gains tax, no wealth tax, no VAT, 12 percent import tax, 10 percent corporate income tax.

Compare those numbers with taxation in UK proper, where corporate tax rates are 26 percent as of 2011, along with capital gains, inheritance, motoring, excise, VAT, and national insurance. There simply is no contest. Adding a 15 percent point of consumption tax on gaming companies, while it will be difficult for smaller companies, it will not induce any of them to relocate to the UK just to avoid dealing with a new regulatory body.

Gibraltar is currently fighting the new gaming tax in court, but it will probably lose, given the direction the EU is going and government’s insatiable need for more money in the wake of a continent-wide sovereign debt crisis, which could flare up again any day. It is an open secret that none of Europe’s debt problems have been solved, not even remotely so.

The only thing that could really induce these off shore UK companies to move back to UK proper would be a sudden and drastic raising of all kinds of taxes in Isle of Man or Gibraltar. This is very unlikely in the Isle of Man in particular, given that its public debt is miniscule. As of 2012, public debt totaled £2,074 per head, compared with £16,500 per head in the UK. Higher taxes in Gibraltar are a little more likely, though not in any immediate sense, and probably not anywhere near UK levels. Debt in Gibraltar was low and under control as of 2009, totaling a scant £93M, 12 percent of GDP at the time. But it has exploded of late to £303 milion by March 2012.

The relevant public companies involved here are bwin.party, which has been doing horribly and has reached new lows last week. 888 Holdings is also performing poorly at 18-month lows. Amaya is now involved with its acquisition of Poker Stars, an Isle of Man company.

Assuming the tax will hold up to court challenges, the marginal firm here is bwin.party, which hasn’t been able to get its act together. Second is 888, with Amaya being the strongest of the three. It is difficult to make an investment call based on a single tax and to what extent the decline has already taken place because of it. I tried to call a bottom in bwin.party in March but clearly that did not pan out. If you still own BPTY, I wouldn’t sell now, but any move back to 100 and begin scaling out on any further up moves. As for 888, I would stay away for now. Amaya won’t be hurt by this tax too deeply, and may even benefit if some of its weaker private competition can’t handle the tax man’s heat.

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