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The latest quarterly report from the Serviço de Regulação e Inspeção de Jogos (SRIJ) which regulates online gambling in Portugal makes disturbing reading for advocates of low online gambling taxes.
The report marks the first full calendar year of online sports betting since new regulations came into force in 2016. French operator BetClic was awarded the first sports betting license in May 2016 and it has since been joined by three other licencees.
In total in 2017, online gambling generated €122.5 million ($151.5 million) of revenues. Gaming taxes took €54.3 million ($67 million) of this revenue, an effective tax rate of 44 percent.
However, taxes on sports betting are set at 16 percent of turnover rather than as a percentage of gross gaming revenue. In a high handle, low margin activity like sports betting, this means that operators are paying the equivalent of 60 percent in tax on gross gaming revenue.
At the time that the tax rates were set, many commentators felt that they were so high that online sports betting would not succeed in the Portuguese market. But 2017’s numbers suggest that on the contrary, high taxes have not been a market killer.
Sports betting revenues for each quarter of 2017 were;
2017 revenues month by month were:
Portugal’s population is 10.3 million with average GDP/capita of $19,813. Its nearest neighbor, Spain, shares a similar culture and has a population of 46.6 million and a GDP/capita of $26,528.
Spain levies relatively high gaming taxes, but they are substantially lower than those in Portugal. Making a simple market comparison, it’s clear that despite the high taxes in Portugal, the new system has generated similar market revenues to those in Spain.
In the final quarter of 2017, the Spanish regulator, the Dirección General de Ordenación del Juego (DGOJ) reported sports betting revenues of €103.63 million. Spain’s population is around 4.5 times larger than Portugal, but the performance can be compared by expressing the revenues as a figure per million of population.
Spain’s sports betting revenues for Q4 of 2017 work out at €2.24 per million citizens. Portugal’s revenues come in at €1.99 per million – only 11 percent less than Spain.
If we take into account the lower income in Portugal then the figures are even closer. GDP per capita in Portugal is actually 25 percent lower than in Spain, so maybe Portugal has actually done better than Spain even with its crippling taxes.
This comparison is not perfect, since gambling propensity, different product availability and other factors also come into play. But the stark and simple message is that a regulatory system with apparently absurdly high gambling taxes can work.
Although we are in the early stages of the political debate, taxes are sure to be a contentious issue, especially after the experience in Pennsylvania over its new online gambling regime.
Concerned by fears of cannibalization, Pennsylvania has adopted a 54 percent tax rate for online slots. This high rate tries to protect the land-based casinos where the slots tax is equally high. Fortunately, the state walked back from setting equivalently high tax rates on table games and online poker, but only after much-heated debate.
The real argument over gambling taxes is not about the potential total revenues.
Gambling taxes affect behavior, and jurisdictions which set them too high find that they only capture a portion of online gambling in the regulated sector.
The rest goes to offshore operators who don’t pay tax, so can offer a more competitive product. Of course, players who opt to go offshore face all the risks of depositing their money outside the legal and regulatory protection of the state system.
The Swedish government contracted Copenhagen Economics to look at optimal tax rates for online gaming. In their report they looked specifically at the impact of high taxes on “channelization;” that is the percentage of players attracted to the regulated market.
They discovered that tax rates have a direct effect on the proportion of players who remain in the black market.
In Portugal, they found that only 52 percent of players played on sites regulated by the SRIJ. In Spain the figure is 70 percent. For comparison, in a low gambling tax jurisdiction, such as the UK, 95 percent of online gambling takes place in the regulated sector.
So Portugal’s high taxes may be sustainable in terms of generating tax revenues for the government, but almost half the population has ignored the new laws and taken their play to offshore, unregulated sites.
Few numbers are yet available, but it is entirely likely that the four operators with sports betting licenses in Portugal are not making profits from the market.
BetClic’s compliance director Humbert Michaud has said that Portugal’s gambling taxes have reached 66 percent of their revenues. As a result, the company is already reconsidering whether it can stay in the market.
In 2015, the French regulator ARJEL publicised the fact that nine out of 11 operators offering online poker had never made a profit since regulation began in 2010. More than half of online poker licensees have left the market since then.
Only five of the eleven licensed sports betting operators have been able to make a profit in France.
With only four online sports betting licensees, Portugal faces a worrying level of market concentration if even one of them pulls out.
US politicians looking at data from Portugal in the hope that it will offer support for their own high gambling tax proposals should remember that the systemic effects of high tax rates can cause a lot of collateral damage.
They both reduce the level of consumer protection new laws provide and reduce the positive industry impact on which rosy additional employment expectations are based.