Wider Online Gambling Tax Net Seems Safe Bet for EU Members

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By Joe Kirwin and Ben Stupples

The odds of European Union member states changing their taxation of online gambling companies will probably be short following a Jan. 19 opinion from the European Court of Justice’s top legal adviser.

In a case involving Gibraltar’s betting and gaming association and the U.K. government, the European Court of Justice’s Advocate General rejected a legal challenge from the trade association over U.K. laws introduced in 2014 that shifted the point of focus for their taxation.

Rather than the company’s location, Gibraltar-domiciled betting and gambling companies operating in the U.K.—such as Ladbrokes Coral Group Plc, William Hill Plc, and Paddy Power Betfair Plc— are now taxed based on the location of their customers under the U.K.'s new tax regime.

The Gibraltar Betting and Gaming Association, or GBGA, argued that the U.K.'s new regime for the industry violated European Union rules guaranteeing the freedom to provide services in the trading bloc, and that Gibraltar and the U.K. should be treated as separate entities.

Yet Advocate General Maciej Szpunar rejected the GBGA’s argument.

His opinion is non-binding, but the European Court of Justice follows its opinion in around 80 percent of cases.

AG Comments

“For the purposes of the freedom to provide services, Gibraltar and the U.K. are to be treated as one entity,” Szpunar said in the Jan. 19 opinion.

“As a result, the application of EU law to Gibraltar does not create new or supplementary rights between the U.K. and Gibraltar that are in addition to those flowing from the U.K. and Gibraltar constitutional law.’'

Szpunar went further to say that if even if the ECJ were to decide that the EU free movement of services tenet should apply in this case, it would not mean the U.K. tax regime is illegal.

The U.K.'s tax regime, referred to in the case as the New Tax Regime, “does not constitute a restriction to that freedom,’' Szpunar added. “The New Tax Regime imposes domestic gambling duties that apply indistinctly to service providers.”

‘Bad Omen’

The Advocate General’s ruling is a “bad omen” for the European Court of Justice ruling on the case later this year, according to Tim Ferris, a London-based corporate international tax partner at BDO.

It also signals that the European Union courts are happy for member states to set their own taxes for online gambling, he added.

A pan-EU approach for online gambling taxation is “dead in the water” he told Bloomberg BNA in a Jan. 19 telephone interview. “There are still a number of countries who have yet to properly deal with it.”

U.K. Tax Regime

Former Chancellor George Osborne first announced the changes to the U.K.'s taxation of online gambling companies at the 2012 Budget.

Under the government’s previous tax rules, companies based outside the U.K. that provided gambling services to U.K. customers escaped the British government’s tax net for paying U.K. gambling taxes.

By changing the taxation of companies based on the location of their customers, the offshore companies—most of which are in Gibraltar—became subject to receipts from U.K. residents using their services.

“It was partially an accident as you couldn’t operate online gambling businesses in the U.K. when people first started setting them up,” Ferris says about why Gibraltar has become a popular destination for online gambling companies active in the U.K. market.

Responding to the Jan. 17 opinion—in a statement e-mailed from representative law firm Olswang—GBGA CEO Peter Howitt said that the association was “naturally disappointed,” adding that he looks forward to the ECJ’s decision.

“We continue to believe that the gambling duty applied by the UK government to operators out of the jurisdiction, in circumstances where the customer may not be in the UK when they gamble or even a UK resident, is a disproportionate restriction on operators,” he added.

Clive Hawkswood, director of the Remote Gambling Association, which represents the worldwide online gaming industry, told Bloomberg BNA in a Jan. 19 e-mail that the tax in question has been in force for about two years “so the industry will suffer any further damage if the U.K. position is eventually upheld.’'

He added that additional tax burden from U.K. gaming operations as well as those in Gibraltar amounts to approximately 400 million pounds ($492 million) but has “partially been offset by market growth.’'

Hawkswood cautioned about the precedent that the case could set.

“What makes the U.K. situation unique is that it both licenses the companies but also let’s them remain based or largely based outside of the U.K,’' he said.

“Although this was a pragmatic and sensible licensing stance it also called for and enabled collection of U.K. gambling tax on an extraterritorial basis.

“That difference, the significant impact on operators in Gibraltar and the legal relationship between the U.K. and Gibraltar put this case into a category of its own but we await with the court’s comments on all of this and whether it sets any precedent,’' Hawkswood said.’'

To contact the reporters on this story: Joe Kirwin in Brussels at correspondents@bna.com, and Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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