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Web shops: Tax rises attempt to seize industry

Web Shops: Tax Rises Attempt To Seize Industry

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Tribune Business Editor

The government has been accused of trying to seize control of the web shop industry through tax increases that will “decimate” all operators and 3,000 jobs in less than a year.

The Bahamas Gaming Operators Association, in a furious post-budget counter-attack, has warned the government it will take legal action over the “expropriatory, discriminatory, excessive and penal” tax rises of up to 355 percent unless it agrees to talks before the week ends.

Alfred Sears QC, the Association’s attorney, said the proposed “sliding scale” tax structure that the government intends to impose on the industry is tantamount to “compulsorily acquiring more than 90 percent” of the industry’s revenue.

Mr Sears, in a May 31, 2018, letter to KP Turnquest, the deputy prime minister, argued that the tax increases were so “drastic” that the government’s main motive appeared to be “expropriation” of the domestic gaming sector – meaning that it was seeking to seize, and take over, their property.

He added that the planned five percent stamp tax on patron deposits to web shops, a move possibly intended to deter Bahamians from using the sector as a money transmission business, amounted to “double taxation” should these monies be used for gaming.

The former attorney general also warned that the government’s proposals would be counter-productive, and have unintended consequences, since they threatened to drive the “numbers” business underground where it would be harder to regulate – a development that would attract the attention of sanctioning international regulators.

Arguing that research had shown that the optimum tax rate was between 15-20 percent of “gross gambling revenue”, Mr Sears said the industry’s revised taxation structure would also “prejudice” web shops’ ability to offer shares to the Bahamian public through initial public offerings (IPOs).

Such applications were currently before the Securities Commission for approval, and Mr Sears said the outcome of previous Supreme Court rulings – that parties affected by government decisions had a “legitimate expectation” of prior consultation, and that the court could interfere with Parliament’s legislative process before a Bill is passed – gave the Association and its members an “actionable claim” against the tax increases.

Web shop chiefs were understood to be meeting late yesterday afternoon to further discuss their response to the Government, as the Chamber of Commerce’s chairman backed their right to be consulted rather than be dictated to on measures affecting their business.

Acknowledging that gaming was often categorised with alcohol and tobacco as an anti-social activity, Michael Maura said of the web shops: “Even they deserve consultation. Even they deserve an opportunity to sit down and have dialogue, rather than sitting by the radio and learning the Government plans to tax gaming as much as they did.”

Mr Sears, meanwhile, has already set a seven-day deadline for the Government to consult his clients or face Supreme Court action over “the proposed unconstitutional, discriminatory, punitive, irrational and unfair sliding scale tax increase and Stamp Duty deposit revenue measures on the revenue of gaming operators”.

He added: “Clearly, the proposed sliding scale rate on taxable revenue, coupled with the 5 per cent deposit Stamp Tax, are exceptional and would have immediate, irreversible damage amounting to expropriation without compensation, cause massive unemployment, the closure of the web shops, loss in revenue and other substantial damage and prejudice to gaming operators.”

Seeking to build the web shop industry’s case for discrimination, Mr Sears’ letter cited the taxes – and tax rates – said to be paid by other Bahamian businesses that were not subjected to the same “draconian increases” in the 2018-2019 Budget.

The companies cited were all BISX-listed companies, and the letter paid special attention to Commonwealth Brewery given its involvement in liquor production, wholesale and retail activities that some see as having a similar social impact to gaming.

Mr Sears said it was “inequitable” for Commonwealth Brewery to be paying just 6 per cent of its $133 million annual revenue in taxes in comparison to the proposed structure for the web shops.

Suggesting that the focus on web shop gaming was contrary to the principles of “progressive” taxation, Mr Sears said foreign-owned resort casinos were being treated more favourably than their domestic counterparts. He added that casinos were taxed at $4.1 million, plus 5 per cent of each dollar of taxable revenue in excess of $20 million.

The present tax structure requires web shop operators to pay 11 per cent on taxable revenue or 25 per cent of EBITDA (earnings before interest, taxation, depreciation or amortisation), whichever is greater.

However, under the proposed new ‘sliding scale’ they will pay:

  • Up to $20 million in revenue, a rate of 20 per cent.

*Between $20 million and $40 million, a rate of 25 per cent.

  • Between $40 million and $60 million, a rate of 30 per cent.
  • Between $60 million and $80 million, a rate of 35 per cent.
  • Between $80 million and $100 million, a rate of 40 per cent.
  • Over $100 million, a rate of 50 per cent.

Warning of the likely repercussions, Mr Sears said: “The inevitable consequences of the Government’s misguided approach in this proposed selective tax increase will be the creation of ‘black market’ gambling houses which will expose our jurisdiction to possible international sanctions.

“The discriminatory proposed sliding scale rates will have a materially prejudicial effect on the pending share offering fund applications before the Securities Commission for permission to offer ownership shares in gaming houses to the wider Bahamian public.”

The Association argued that there was nothing to show the proposed ‘sliding scale’ was sustainable, pointing to a 2016 report by Copenhagen Economics that suggested the optimum online gaming tax rate was between 15-20 per cent of gross gambling revenue.

“If the proposed sliding scale is implemented, then it would result in the Bahamian government expropriating, or compulsorily acquiring, more than 90 per cent of our clients’ revenue through the various forms of taxation and licensing fees,” Mr Sears warned.

“Moreover, this would represent an anomalous 400 per cent increase in the tax rate over the revenue collected by the Bahamas Gaming Operators. The result of this drastic increase in the tax rate, without industry consultation, would decimate most of the seven gaming operators within a year of the implementation of the Government’s proposal.

“Therefore, the predominant motive appears not to be revenue raising but, rather, the penal elimination of smaller operators and the expropriation of the larger gaming operators under the guise of tax measures.”

He added that the web shop sector already employs around 2,800 Bahamians, and contributes $25 million in taxes and fees to the Government’s Consolidated Fund annually.

Mr Turnquest last week denied that the Government was “targeting them or trying to destroy” the web shop industry, arguing that the tax rate faced by such businesses in other jurisdictions was as high as 80 per cent.

He added, though, that the former administration had ignored the results of a referendum/opinion poll that rejected the web shop industry’s legalisation. And the Deputy Prime Minister suggested the sector needed to contribute more, given the anti-social impact gaming has in sucking money out of the economy and redistributing it into the hands of a few.

Governments worldwide frequently target activities such as gaming, and products such as alcohol and cigarettes, with heavy taxation. This is due to both their addictive nature, with persons prepared to pay no matter how prices go, and the desire to levy so-called ‘sin taxes’ on industries seen as having a potential negative social impact.

The UK government, for instance, concerned about the proliferation of gaming houses and betting shops there, has launched a review of the sector’s regulatory framework. It is especially concerned about fixed odds betting terminals (FOBT), which are seen as contributing to gambling addiction problems because of the high frequency with which bets are made.