Operators face multi-million pound VAT hit

The online gaming industry is set to be whacked with a multi-million pound VAT bill next year as the European Union implements changes to how VAT on electronic services is applied within its member states, with some operators facing a seven-digit hit to their bottom line.

From 1 January Europe-facing businesses will have to pay a levy based on the rules of the country in which their services are being consumed, rather than where the business is based, as is presently the case.

And with many businesses situated in VAT-free jurisdictions, or countries which waiver VAT on gaming products, operators may find their levels of tax spend increasing markedly in 2015.

Not all countries apply VAT with a large majority of EU member states, including the UK and Italy, applying an exemption to online gambling and gaming products.

Some nations, however, including Germany and Ireland, apply differing VAT rules depending on the product and wider tax regime.

Disruption

“As of 1 January, changes will come into force that will have a disruptive effect on businesses based in countries where there is either no VAT, or where a full VAT exemption to gaming products applies,” David Thompson, tax lawyer and partner at DLA Piper, told eGaming Review.

“These businesses will be subject to VAT charges on the net value of transactions made with customers based in Ireland and Germany, and those who rely on strong customer bases in Ireland or Germany will find themselves facing shrinking margins as a result of growing VAT bills,” Thompson added.

France also applies a VAT levy to online poker due to its consideration as a skill game rather than a game of chance, which are VAT exempt in the country.

And poker operators such as the Isle of Man-based PokerStars and Gibraltar-headquartered bwin.party will have to pay 20% VAT on their French poker activities for the first time in 2015, with the latter recently estimating the change will cost it around €500,000 over the course of 2015.

Yet bwin.party looks likely to be hardest hit in Germany, a country which applies VAT to both poker and casino games although not to sports betting, which is already taxed at 5% of turnover.

German pain

According to the bwin.party’s H1 results, Germany-based players contributed 26% of bwin.party’s total revenues so the prospect of a 19% tax on a proportion could set the operator back millions of euros.

When contacted for comment, a spokesperson for bwin.party said the firm would not comment publically on tax issues, although eGR understands the company is still hopeful of a redrawing of the boundaries from German tax authorities and for all gaming to be deemed exempt.

Speaking with eGaming Review earlier this month, 888 chief executive Brian Mattingley acknowledged his firm would be faced with increased tax bills at the start of next year, although added that he didn’t think they would have a “massive material” impact on the business.

“We have been aware of that [the VAT switch] for some months now and have been working with VAT lawyers, particularly in Germany and in Ireland,” Mattingley said.

“But it is not going to have a massive material effect on us although it will have an impact – it will be below double-digit millions,” he added.

Silver lining

While the financial cost of the VAT change will come as a blow to some firms, for a small number of others it is expected to usher in a more level playing field. France-based Winamax, for instance, has long been subject to VAT on its poker activities at home and abroad in other EU states.

However, from 1 January, not only will all of its French market rivals be subject to VAT but it will also see its tax bill outside of France reduced as a consequence.

“This means less distortion of competition, even if we pay other local taxes that European operators do not pay,” a Winamax spokesperson said.