High tax burden "would discourage online betting market" in Chile

The bill that regularly searches for online betting houses advances in its first legislative process. Last week, the Economic Commission of the Chamber of Deputies approved the indications of the Executive regarding the tax regime for these platforms, where the application of the specific tax of 20% is considered. It will not be a substitute for VAT —as the administration of Sebastián Piñera had proposed—, since this tax will also be applied to equalize the charge that physical casinos have.

In this regard, Enrique Leikin, tax expert and leading partner of Entrepreneurship and Private Equity at EY Chile, stated that this tax burden raised by the Executive in the bill "will end this market" in Chile. “This law is pro physical casino, to regulate an industry that today is not regulated. If you equate that with the fees paid by land-based casino operators, they are basically killing the online gambling industry.”

Black market
Given a greater tax pressure for these operators, the probability that they "have incentives" to enter the legal market in the country will be less, he assured. From the point of view of valuation, he believes, if there are no incentives for these firms to pay the tax proposed by the Government, "a black market for these platforms will be formed, as well as these firms will choose to operate in other markets of the region, where the rates are lower,” he said.

Leikin —who in the past advised companies in the field— pointed out that a reduction in the tax rate that will be established in the Chilean market should be analyzed in the legislative discussion.

"Here we are talking about 39%, which is VAT plus 20% specific tax, which is very high and exceeds what is established in any country in the region," he said.

“There are cases in other countries, such as France, where the rates are very high (57%) and online gaming has had a very strong decline. So, there is comparative legislation and there are cases that have done well and in others it has gone wrong. And with these proposals, Chile would be on the path where it would go wrong, because this legislation would kill the online casino industry and the collection would be very low, ”he said. 

The Executive expects to raise some $84,000 million under the regime.

On the other hand, Leikin maintained that it should also be discussed regarding which tax would be more appropriate to apply to encourage these platforms to be regulated. He stated that they should analyze a specific tax lowered to a rate of 15%, and that is a substitute for VAT, or apply the latter tax, since both taxes would discourage these firms from continuing to operate in the country.

Stay in Chile
“This industry must be 100% regularized, but it must not be killed. This means that they must set rates and taxes that are competitive with the Latin American market, given that in Peru they have 12% and in Colombia, 16%, for example. “They have to decide between leaving the specific tax, hopefully lowering it to 15%, and removing the VAT payment, or vice versa. This, so that these firms, which want to be regulated and pay taxes, stay in Chile,” he indicated.

According to a study by Copenhagen Economics —carried out in 2016 at the request of the Swedish government, prior to the regulation of the online gambling market in that country—, a 15% tax rate on the gross income of the online betting operator provides a best balance point between maximizing collection and channeling rate in this industry.

Meanwhile, Enrique Leikin maintained that another relevant aspect, "beyond regulating this market, has to do with auditing and for that it is important to strengthen the role of the Superintendence of Gaming Casinos and the Internal Revenue Service to address the issue of the collection.”