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Bran Backs Tax Hikes On 'Toxic' Gaming Sector

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Democratic National Alliance's (DNA) ex-leader has given his full backing to the web shop tax hikes, arguing that the industry has "been shown to be toxic" for Bahamian society.

Branville McCartney, pictured, renewing his call for a national lottery, told Tribune Business that such a venture would generate significant sums for causes such as education, sports and the arts as opposed to a sector where multi-million profits are retained by "a handful of individuals".

Dismissing the web shop industry's protests, Mr McCartney said they had little cause for complaint given that previous governments had allowed them to "operate for many years without penalty" - and amass huge profits - even though gambling was illegal.

"I think it's good. I support the Government on that," the former DNA leader said of the taxation increases. "My view, and I've maintained this view even today, is that the gaming industry is not fully regulated. If they're not properly regulated, they should not be in business.

"They've been allowed to be in business. Nowhere, in any modern society, would that be allowed. Under the PLP, they allowed it to happen." Mr McCartney's comments on the sector's regulation are likely to face instant challenge from the web shops, who have consistently argued they are more heavily supervised than most other sectors following the 2014 legalisation.

Yet he continued: "Gaming has been shown to be toxic for our country. You have young women going in there, spinning, and spending all their days in the web shops. That is not good.

"The proceeds of whatever persons spend in these web shops goes to a handful of people, whereas a lottery would go to the benefit of the country; going into education, sports and social programmes. I have no difficulty with the Government taxing the web shops the way they have."

Existing legislation mandates that web shops contribute 2 per cent of their gross gaming revenue (GGR) to 'good causes'. Based on the industry's collective $196 million GGR for 2017, this amounted to a total $3.92 million, but its sector body, the Bahamas Gaming Operators Association (BGOA), recently pledged to go $3 million above this requirement with a $7.1 million commitment.

Meanwhile, turning to the web shop industry's objections, Mr McCartney told Tribune Business: "I see the web shop boys are up in arms, saying it's unfair and discriminatory, but I don't see how they can speak to that being unfair and discriminatory when they had many, many years of operating web shops illegally without penalty.

"I want to applaud the Government for this, and encourage them to look at a Lottery where the country will benefit as opposed to a handful of individuals."

Mr McCartney's comments will likely resonate with Bahamians opposed to web shop gaming and the industry's legalisation, highlighting just how divisive an issue it has become.

They came as the FML Group of Companies and its principal, Craig Flowers, effectively broke ranks with other web shops and members of the Association by pledging that it was trying to stand firm against staff lay-offs and location closures.

Moving swiftly to calm employee fears after news of Asure Win's plans to terminate 50 staff and close 11 stores broke, Mr Flowers wrote to employees: "We are committed to doing our best to remain open.

"The gaming industry, as it relates to web shops, has faced many challenges over the past years and we have overcome. Let me provide clarity and assurances that the company has not changed its position. We are devoted to remaining open to secure your jobs and continue to act in your best interest.

"I cannot emphasise the importance of our company staying competitive and you, our trusted employees, providing exceptional customer service with warmth and positivity."

Mr Flowers and FML thus appear to be taking a more measured view on the industry's new tax structure, and are likely waiting to see its impact - especially the 5 per cent Stamp Duty on customer account deposits and over-the-counter lottery purchases - before taking any action.

Paradise Games, though, has become the third web shop chain to warn staff of impending lay-offs and location closures following the lead established by Asure Win and Island Luck.

Kevin Knowles, the chain's chief executive, told staff they will have to undergo performance appraisals similar to those underway at Island Luck. The results, he warned, "will be considered in the likely event that redundancies and storefront closures become necessary".

In language similar to that employed by Island Luck's staff note, Mr Knowles said Paradise Games was moving "towards the inevitable" as a result of the "aggressive, increased tax structure" imposed by the Government that will take effect on July 1.

He added that the Association, and Paradise Games, had "worked tirelessly on behalf of staff and its respective domestic partners to mitigate the negative impact of this new taxation structure, [but] all attempts to-date have been thwarted". Mr Knowles said the operator now faced the "sobering task" of preparing for downsizing.

Although Paradise Games has yet to indicate how many jobs and locations may be lost, it is unlikely to be dissimilar to Asure Win's proposed action. Between the latter and Island Luck, some 400 jobs are in jeopardy, based on figures from the two operators.

This is still some way from the 2,000 jobs, and 192 web shop locations, that an Association-commissioned study warned would be lost if the Government proceeded with its proposed taxation structure.

However, the potential loss of 400 jobs in a society as small as the Bahamas' will still have a large 'ripple effect', especially on the individuals and families involved. And the situation highlights what may happen in a wider sense with the VAT increase to 12 per cent - a move that will likely result in reduced consumer demand and spending.

Such a decline will lead to reduced business sales and revenues, prompting companies in general - not just web shops - to lay-off staff to better align costs with income. Unemployment increases, further depressing consumer spending, with the result that lay-offs and reduced spending feed off each other in a downward economic spiral.

Still, the web shop industry's own studies have backed up the Government's argument that six of the seven operators fall into the lowest 20 per cent tax bracket. And, with the same research suggesting a tax rate of between 15-20 per cent of gross gaming revenue (GGR) is in line with global standards, the majority of the industry is thus in line with global best practice.

The report by Christiansen Capital Advisors shows that all six of FML, Ultra Games, Asure Win, Island Game, Paradise Games and Chances will largely be taxed at 20 per cent - a rate that is some 81.8 per cent higher than the 11 per cent they currently pay. Only Chances, where a portion of its revenue falls in the 25 per cent category, faces a slightly higher overall rate at 88.6 per cent.

The data is skewed because the market leader, Island Luck, faces an effective 184.3 per cent in its overall tax rate under the new sliding scale structure, taking the overall industry increase to 138.9 per cent.

Still, the Christiansen report argued that the Bahamas' current 11 per cent rate - low by international comparisons - was effectively a trade-off for the web shop chains keeping a higher level of staff and number of locations.

"One way to look at the current tax regime for gaming houses in the Bahamas is that its business model, compared to the business model of government lotteries such as the Florida Lottery, trades tax revenue for jobs," the report said.

"The direct employment of a government lottery like the Florida Lottery is negligible: The entire sales operation is outsourced to retail businesses that act as lottery agents (convenience stores, newsstands and so forth).

"The only cost the Florida Lottery incurs for this huge sales network is the 5.6 per cent of sales commission lottery agents are paid. The BGOA business model, on the other hand, provides substantial direct employment - jobs that are important to the Bahamas."

The Christiansen report has also warned that the likely first reaction of Bahamian web shop operators to any tax increases would be to cut costs through closing marginal or unprofitable locations, resulting in significant job losses - something they already appear to be doing.

None of this appears to have made much impression on the Government yet, which has argued that the web shops are using the tax increase as an 'excuse' or 'cover' for downsizing they would have undertaken anyway as the industry shifts to an online gaming model. This enables them to blame the Government for any job losses.

K P Turnquest, Deputy Prime Minister, echoed such sentiments when he said it was "unfair" and "a bit of a stretch" to blame the Government for any web shop job losses, adding that the sector's downsizing threats were "premature".

Dionisio D'Aguilar, who has ministerial responsibility for gaming, told Tribune Business he had "nothing further to add" over the threatened web shop lay-offs and was "standing by" what he said during his Budget communication.

"We're certainly considering what they're saying, but right now I'm standing by my comments in the Budget," he said, referring to his suggestion that further web shop consolidation was inevitable without the tax hikes.

Under the new tax structure, different portions of web shops' revenue attract different rates as opposed to a single rate falling on an operator's entire revenue.

Mr D'Aguilar previously said 50 per cent of the industry's $196 million in gross gaming revenue (GGR) falls into the lowest tax bracket, attracting the 20 per cent rate that the web shop sector and its consultants suggest is in line with global benchmarks.

He added that six out of the seven licensed web shops fall into the 20 per cent category, while the 25 per cent, 30 per cent and 35 per cent rates would each apply to a further 10 per cent of industry revenues - meaning that 80 per cent of the industry's GGR would come under the four lowest rates. Only 5 per cent falls into the top 50 per cent tax bracket.

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