Research Shows That High Taxes Could Severely Damage The Netherlands Market

The Netherlands Rejects Experience And Votes For Punitively High Online Poker Taxes

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The lower house in the Netherlands parliament has finally voted in favor of amended gambling laws that will allow offshore operators to apply for online gambling licenses.

The news is generally positive for the industry, since for more than two years, online poker operators have been forbidden from advertising in the Dutch market.

After the laws pass through the upper house, license applications will start sometime in early 2017, with a go live date for operators now possible sometime in the summer.

The one major fly in the ointment is an amendment that the Dutch politicians passed setting gaming taxes at 29 percent of gross gaming revenue (GGR). This is an extremely high rate of tax and will squeeze operator margins to the bone.

The tax is the same as that levied on live casinos and is designed to protect the current monopoly operator Holland Casino from competition while it is privatized and broken up.

Over three years the government plans to reduce the tax rate to 25 percent, still a very high level, but the commitments of politicians to reduce taxes are, as always, subject to future events.

Academicon: tax level has “potential to destroy the market”

The German economic and legal research consultancy Academicon released a report in September 2014 estimating the potential size of the Netherlands market. Based on the proposed 20 percent tax rate, it estimated that in 2013, the online poker market produced $63.8 million in net revenues.

Academicon added a warning:

“The tax level is most important and should be thought about carefully, since it has the potential to destroy the market.”

Using data from PokerScout the authors created an approximation of the price elasticity in online poker — “for every 1% increase in price, poker turnover declines by -1.4%.”

A tax rate of 29 percent cannot be completely absorbed by the operators. Part of the tax will be passed on to players in the form of lower VIP benefits and higher cash game rake and tournament fees.

The higher cost of the regulated market offering will provide unlicensed offshore operators with a competitive price advantage in the market. The result will be fewer players channeled to the regulated sector and a large proportion continuing to play at unregulated poker rooms.

High gaming taxes keep customers out of the regulated sector

Academicon’s research has been backed up by other research from prestigious organizations.

KPMG report for the Remote Gaming Association

In 2013, KPMG was commissioned to write a report on the 15 percent point of consumption tax proposed for the U.K.’s new gambling laws.

The report recommended a rate no higher than 10 percent and concluded:

“Due to the high price sensitivity of many online gambling customers, brand awareness will not protect a large proportion of companies’ businesses from customers switching to duty-avoiding offshore competitors.”

KPMG said that high gambling taxes, even at around half the rate agreed in the Netherlands, “will put the Government’s fiscal and social objectives in jeopardy.”

The social objectives include bringing players into the regulated sector where operators are required to follow strict regulations to prevent under-age gambling and to combat gambling addiction.

Deloitte report for JDigital

In September 2013, the Spanish industry association JDigital published a report by Deloitte which showed that high gambling taxes were making online poker a losing proposition for operators in the major regulated jurisdictions.

The report highlighted 2012 figures from French regulator ARJEL that showed poker licensees lost a total of €68 million ($75 million) and another €100 million ($110 million) from their other regulated online gambling.

The report concluded that there is “a direct relationship between the degree of fiscal pressure and the viability of the sector.”

“It is necessary to insist, as a fundamental point of the report, on the fact that a tax reduction does not necessarily decrease revenue for the Treasury.”

PwC report for Sweden

Sweden has a monopoly system of regulation that has been criticized as illegal under EU treaties. The EU Commission has now brought a prosecution against the country for failing to reform its gaming laws, although the process appears to have stalled in the EU bureaucracy.

In the early days of political wrangling over how to reform the system, the government commissioned the largest professional services firm in the world to produce a report on possible changes.

PricewaterhouseCoopers (PwC) came back with a voluminous report full of international comparisons and references with the sub title “Evaluating tax scenarios in order to define the best regulatory model for the re-regulation of online gambling.”

The report conclusions made the point that new markets can sustain high tax rates for a short period as new entrants are prepared to pay the higher rates to gain the opportunity to secure market share, but that in the medium term high tax rates become unsustainable.

The third conclusion highlighted the impact of high taxes on the proportion of the market attracted to the regulated sector.

“Third, comparing different tax regimes suggests that higher tax regimes (e.g. France compared to Italy and Denmark which have lower rates of tax compared to France) appear to encourage lower rates of absorption (defined as the % of the online market which is locally regulated) and slower rates of regulated online gambling market growth, as the locally regulated offering becomes less attractive compared to that of not-locally regulated competition, both from an operator and a customer perspective.”

Finally, the report dared to make the politically unpalatable forecast that:

“All other things being equal, in the long term we would expect a 10% tax on GGR to lead to the highest tax revenues as this rate will ultimately be able to sustain the highest proportion of the market being locally regulated and encourage higher levels of growth than our other scenarios.”

Recent gambling laws have erred on the side of high tax rates

Despite all of the evidence, some of the most recent countries to introduce online gambling regulation have adopted punitively high taxes:

In France, ARJEL has long argued for a change to the tax system so that it is based on GGR rather than turnover, but its attempts have been rejected by parliament.

The French system takes 2 percent of every cash game pot in online poker, regardless of whether there is a flop. ARJEL reports that the taxes on online poker are the equivalent of 37 to 38 percent of GGR.

Industry impact is complex

The most obvious consequence for online poker operators is squeezed margins and a reduction in the size of the addressable market. Indirect impacts also play a role in shaping the market under high tax scenarios.

As smaller operators exit, separately regulated markets concentrate in the hands of a few large operators. In France the market now consists of only two brands on the regulated iPoker Network, two on the network plus Winamax and

Every other market entrant has dropped out. An unsurprising result of the fact that only three operators have ever made an annual profit since the market opened. Currently, PokerStars and Winamax account for nearly 75 percent of the market’s cash game liquidity.

In the wider industry, the situation has driven a wave of takeovers and mergers as operators determine if they are big enough to survive market shakeouts and have the economies of scale necessary to make the most of a low margin business.

There is a natural chain of cause and effect between the political decision to impose high gambling taxes and concentration of the industry into the hands of a few extremely large companies.

The market further splits into those that accept the regulatory regime and pay the gambling taxes, and a large gray or black market which is happy to take the extra profits handed to them by those same politicians.

- A former founder of Poker Industry Pro and Head of Content at PokerNews publisher iBus Media, Joss Wood is a graduate in English from the University of Birmingham. Joss also holds a master’s degree in Organisational Development from the University of Manchester. His career path has taken him from the British Army, through business and finance to seven years as a successful professional poker player.
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