August 15, 2016
This article was first published by World Online Gambling Law Report.
With the political confusion surrounding Brexit it is impossible to analyse with any certainty what the effects will be until the terms of the UK’s exit are proposed, let alone agreed. In relation to online gambling operators, regulatory questions concerning server locations and licence validity to access EU-based players have been raised, especially in relation to Gibraltar – where issues over workers crossing over the Spanish border are also a worry. Moreover, any changes to cross-border data and payment processing could present issues for all companies operating across the EU. But what about the tax implications? Sue Crawford and Andrew Lindsay discuss the uncertainty from a taxation perspective.
Though Brexit could lead to changes in the tax treatment of transactions between UK and EU entities, it is likely any increases faced by UK online gaming operators specifically will be due to politically motivated decisions from the UK government, rather than a direct consequence of leaving the EU. However, online gambling operators should consider the potential tax implications of Brexit generally, and monitor developments to ensure they have appropriate structures in place.
Remote gaming duty
Implemented in December 2014 as a 15% point of consumption (‘POC’) tax on players based in the UK, the remote gaming duty represented one of the largest taxation changes to face the industry. It is unlikely to be affected by Brexit. Though UK
direct taxes, which the remote gaming duty falls under, are a matter for the UK government, they must be implemented in
accordance with EU law (ensuring freedom of movement of capital/people/services, etc).
Whilst a Brexit situation which sees the UK not becoming a member of the EEA, and therefore not required to adopt or conform to certain EU legislation, would allow a UK government greater flexibility in its tax regime, the political climate in the UK is unlikely to result in a reduction or removal of remote gaming duty. Indeed, being a ‘sin industry,’ coupled with the 2016 Budget identifying that the government believes that online gaming operators ‘benefit from a more generous tax treatment,’ means that this sector will remain an easy target in the future for further UK taxation.
One interesting question is what impact Brexit may have on the GBGA’s (Gibraltar Betting and Gaming Association) challenge to the UK’s POC regime which was referred to the Court of Justice of the European Union (‘CJEU’) in July 2015. At least 55% of remote gambling services provided to UK-based customers are from operators based in Gibraltar. The questions raised for the CJEU include whether the new tax regime constitutes a restriction on the right to the free movement of services enshrined within the EU treaty. If the case proceeds, and the UK’s tax regime is found in breach of European law, HMRC could be ordered to repay all the tax unlawfully taken. It will be interesting to see how this unfolds – if the UK exits before the CJEU judgment, is that the end of the matter or could the CJEU have any continuing jurisdiction over current cases?
All EU Member States must adopt the common system of VAT provided for by EU law, with Member States required to give
effect to EU VAT directives. Due to the significance of VAT receipts for the UK government VAT is unlikely to be repealed or subject to any major overhaul, unless a UK sales tax is imposed. However, post-Brexit there is the opportunity for the UK government to revisit VAT, introducing new rates and rules, free of EU constraints. Taxpayers would also be free of the strictures of judgments regularly issued by the CJEU. Whilst this may have significant impact on some areas, with the UK able to extend VAT exemptions to make the UK more attractive to certain sectors, VAT treatment for online gambling is unlikely to change. Within the UK the government has opted to designate ‘game of chance’ services, including those online, as exempt
supplies for VAT. Therefore operators cannot recover any VAT they incur on purchases or expenses, such as advertising, and,
as noted above, the UK already imposes a 15% POC tax.
However, UK entities general trading activities with EU parties may be affected, with the imposition of a VAT import duty imposed for goods entering the EU. Whilst this could be reclaimed, there would also be further administrative issues of reclaiming VAT incurred by those businesses.
Place of supply issues faced by operators in offshore locations such as Alderney are likely to remain. To maintain continuity, one can expect VAT to continue to be charged on business services where they are received, and so offshore operations would need to retain sufficient resources in those locations to satisfy the requirement that their business is established there – rather than in the UK or other VAT charging jurisdiction. HMRC is known to be scrutinising these operations, and if the services are treated as having been received in the UK (or other VAT charging jurisdiction) rather than in the offshore ‘VAT free’ location, the VAT will be a real cost.
From the indirect tax perspective, initial conclusions suggest there may not be any immediate significant fiscal consequences
from Brexit. However, there is a clear risk of additional reporting requirements, including the possibility of appointing fiscal representatives in EU states. Additionally, while one might expect licences across EU jurisdictions to remain in place, Brexit could see UK operators required to deposit guarantees for the payment of gaming duties in Member States where they are licensed. The UK of course requires this for non-domiciles and for non-EU gaming operators and businesses for gaming duties and VAT. Additionally, VAT registration arrangements and reporting processes may also need to be considered carefully since the UK operators might themselves no longer be able to rely on the UK mini one-stop-shop regime.
A company operating digitally cross-border will be concerned whether its activities overseas are structured such as to not attract local corporation tax on its business profits. Some overseas tax authorities classify servers and websites as ‘permanent establishments’ thereby creating sufficient nexus with that jurisdiction to tax the attributable business profits. The UK currently does not regard a server as such an ‘establishment’ but other countries (such as India) do, and EU countries may follow suit. So the additional EU-based servers required post-Brexit to meet most EU jurisdictions’ licensing requirements carry a veiled threat for the UK operator – the risk that they become ‘established’ in that (EU) location for tax purposes.
Operators with corporate group structures with entities incorporated in the UK and other EU countries may, post-Brexit, face more complicated inter-group relationships, and the threat of accounting for withholding tax. Current EU directives, such as the Interest and Royalties Directive and the Parent-Subsidiary Directive, simplify intra-group transactions by abolishing (if criteria are met) withholding tax on certain payments between associated companies.
The Interest and Royalties Directive removes the need to withhold tax if the parties have a direct 25% ownership/voting
relationship, or if a holding company has a 25% relationship in both the payor and payee companies. Online gaming groups
currently benefit via not having to account for withholding tax on interest on intra-group loans, or payments for intra-group brand licensing. Losing this exemption could affect the recipient company’s cash flow, receiving less money as tax to be paid on the interest/royalties will be deducted by the payor company. However, many double taxation treaties specifically afford interest payments an exemption from withholding tax, although this can be denied in certain circumstances (for example, where the recipient company has a permanent establishment – possibly even only a server – in the other jurisdiction), and companies will face the extra administrative burden of applying for exemptions.
For a variety of reasons the UK is a popular choice to incorporate a company within an EU group structure, two of these relating to the tax treatment of dividends. The first is that the UK does not – unlike many European jurisdictions – impose withholding tax on outbound dividends on the repatriation of profits. The second is that a UK holding company is generally able to receive dividends from its EU subsidiaries free of withholding tax under the Parent-Subsidiary Directive. Whilst outbound dividends from the UK are unlikely to be affected, depending on where any EU subsidiaries are based, post-Brexit withholding tax could be incurred (subject to any relief under any double tax treaty), and companies should review and assess if their current tax structure is the most effective.
Thus, in short, Brexit would not seem to post an immediate threat to the gaming industry from the perspective of tax alone. However, operators will be advised to monitor the situation as the debate progresses, particularly with regard to their group structures and any VAT recoverability issues.