The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas' "national interest" demanded that the government "slow down the rate of growth" in web shop gaming through increased taxation, a Cabinet Minister is arguing.

Dionisio D'Aguilar, minister of tourism and aviation, told Tribune Business that too many Bahamians are "robbing their livelihood" to feed an industry whose gross gaming revenue (GGR) will have almost doubled in just four years if 2018 forecasts prove accurate.

The minister, who has responsibility for gaming regulation, reiterated his belief that a web shop sector generating around $50m in collective profits would be able to absorb the tax hikes more easily than it is letting on.

Suggesting that operators were exaggerating the threat posed to hundreds of jobs, Mr D'Aguilar said the revised web shop tax structure would only hasten industry consolidation and business model changes already being driven by the move to online gaming.

He added that the number of physical web shop locations "is fast becoming irrelevant" through such trends, and said that if existing operators do not adjust appropriately "someone else will", even though the former government imposed a ten-year moratorium on new market entrants.

Pointing to the 92 percent top-line growth forecast to be enjoyed by the web shops since 2014, Mr D'Aguilar said this $100m-plus revenue rise was evidence that the sector had been able to shrug off a much greater trauma - the impact of its legalisation four years ago.

"The gaming industry is growing so exponentially," he told Tribune Business, pointing out that web shops' collective GGR had increased from $112m in 2014 to $154m in 2015, representing a $42m year-over-year increase in the first year of legal operations.

Mr D'Aguilar added that the industry's revenues had grown by around $20 million "every year thereafter", hitting $175 million and $195 million in 2016 and 2017 respectively, with projections of similar growth to $215 million for 2018 (prior to the Budget's tax changes).

"It's almost doubled in four years," the Minister said of GGR. "It's in the national interest to slow down the rate of growth. We don't want people to keep throwing money into this.

"People clearly want disposable income to put into gaming. They're robbing their livelihood, quality of life, in order to feed this past-time."

Mr D'Aguilar's comments allude to growing concerns about gaming's negative impact on families and wider society, especially in the Family Islands, given the numerous reports about how persons are prioritising funding this activity above everyday necessities such as food and clothing.

Domestic gaming's explosive growth since the 2008-2009 recession is also viewed as having sucked money away from productive sectors of the economy, notwithstanding the sector's own contributions to 'good causes', while also feeding the 'easy money' and 'something for nothing' mentality that is present in some sectors of society/

The Government's move to hit domestic gaming players directly with taxation, in the form of 5 per cent Stamp Duty on account deposits and over-the-counter (OTC) lottery sales, also appears designed to deter Bahamians from gambling so frequently and easily.

Mr D'Aguilar, explaining how the industry's new taxation structure was arrived at, said the Government started with the belief that payments should be linked to the amount of revenue each web shop generates.

He reiterated that the sector's average tax rate will increase to 28 per cent of GGR, from 11 per cent of GGR, which - although a 154.5 per cent increase - was substantially less than the 238 per cent to 455 per cent range forecast by the industry and its consultants.

"The belief was that the greater your revenue, the greater the percentage drop to the bottom line, which means the Government could drive up the rate of taxation," Mr D'Aguilar told Tribune Business.

"The premise is that the more you make, the greater the rate of taxation. As I demonstrated on Thursday night, the number of locations is diminishing so your overheads should be diminishing too.

"So you are going to get a profitable rate of return on the business, and obviously your sales are going up with the advent of technology. The number of locations is fast becoming irrelevant, as people are moving more and more to an online environment."

The 'tiered' web shop taxation structure means different portions of web shops' revenue will attract different tax rates as opposed to a single rate falling on an operator's entire revenue. This means, for instance, that an operator earning more than $100 million in GGT per annum will not be taxed at a 50 per cent rate across-the-board.

Mr D'Aguilar said six of the seven web shop operators' fell into the lowest 20 per cent rate and, of these, only one had a small portion of their revenue in the 25 per cent tax bracket. Only one web shop chain, Island Luck, generates sufficient annual revenues to cover all points in the new structure - something that is backed by the industry's own research.

He added that the debate on whether web shops should be taxed more was over, as the sector's own research had shown that the current 11 per cent of GGR rate was below the 15-20 per cent global gaming industry.

The only issue remaining, the Minister said, was to determine the optimum tax rate/structure that both the industry and the Government "can live with". He conceded that "more tweaking" may be needed once data comes in on the new structure's impact.

"What is the sweet spot? What is the number the Government wants, and what is the number the gaming sector can live with; not necessarily be happy with, but what can they live with?" Mr D'Aguilar told Tribune Business.

"Just like 12 per cent VAT, what is the rate of tax they can live with? There are many examples of many, many sectors where you can go from 10 per cent all the way up to 50 per cent....

"There will probably be a need to do some tweaking, but the general construct is right," he added of the new tax structure. "The more you make, the greater the rate of taxation should be. They need to pay more tax, and the rate of taxation should increased relative to revenue.

"The question is: What rates are appropriate to the different tiers? Maybe the rates are not absolutely perfect, maybe more tweaking needs to be done to make it more palatable."

Mr D'Aguilar said it was "amazing" that, under the current 11 per cent tax rate, the Government's tax earnings had increased by just over $2 million - from $19.25 million in 2016 to $21.45 million in 2017 - while the web shops' total gross gaming revenue jumped by $20 million.

Web shop operators, though, have argued that the industry's perceived 'low rate' tax structure is a trade-off for maintaining all the physical locations and jobs. Some have privately told Tribune Business that the Bahamas is not yet ready to move entirely to online gaming, pointing to the struggles that banks are having in pushing customers to electronic banking.

The industry is also arguing that the Government has used inappropriate comparisons to derive its new tax structure, given that Bahamian domestic gaming has minimal similarities with state-controlled lottery monopolies, online gaming in the UK or a Macau-style casino market.

The Bahamas Gaming Operators Association (BGOA), in its initial response to the proposed tax increases, also argued that the burden being imposed on web shops paled into comparison with those faced by BISX-listed companies.

It singled out, in particular, Commonwealth Brewery given that it was involved in a similar 'sin' industry. The Brewery, though, paid $16.1 million in taxes and Excise on $133 million in revenues in 2017 - a sum equivalent to 12 per cent of its gross. Profits stood at $24.2 million.

And Mr D'Aguilar argued that such comparisons were disingenuous, given that the Brewery and other BISX-listed companies paid border taxes, Business Licence fees and were significant collectors/generators of VAT.

He added that web shops did not levy VAT on their customers and, as a 'service' sector, the amount of duty/Excise Tax and 'input' VAT produced was relatively minimal.

The Minister expressed confidence that web shops' principals will "adjust" relatively easily to the new tax structure and rates, although the move was likely to hasten a continuing post-legalisation consolidation in the sector.

"Because you are leaner and meaner you have to alter your business model," Mr D'Aguilar told Tribune Business. "This is a $215 million industry, and if they don't sort it out someone else will.

"There will be some adjustment. There will be further consolidation. In four to five years, this business will look very different than compared to now, as it is in 2018 compared to 2014.

"Just because they operate the way they operate doesn't mean the Treasury should not optimise what it can get out of this industry. Design a business model to support it. I'm sure there are people who can do it."