Profit and loss account A B
£m £m
Gross Gaming Revenue (GGR) 53.5 53.5
GGR from non-UK markets 30.0 30.0
GGR from UK 23.5 23.5
Less UK Point of Consumption Gaming Duty (15%) 3.5 3.5 Total Net Gaming Revenue (NGR) 50.0 50.0
Marketing expenses (70% in EU) 20.0 20.0 Administrative expenses (50% in EU) 20.0 20.0 Operating profit (before VAT/ Gaming Duty) 10.0 10.0
Irrecoverable VAT at 20% on EU expenses - (4.8)
Gaming Duty at 0.5% of NGR - (0.3)
Profit before taxation 10.0 4.9
Corporation Tax at 20% of net profits - (1.0)
Profit after taxation 10.0 3.9
The global eGambling and taxation environment is evolving into one of an increasing number of regulated markets, seeking to impose their share of taxes on the sector.
Whilst some new markets will open up to eGambling groups and opportunities will also arise for linking together players and businesses in different regulated markets, the overwhelming impact of regulation is to substantially reduce profitability in comparison with profits previously achieved in unregulated markets.
In this new world of multiple licensing authorities and taxation at the point of consumption of services, for eGambling groups looking to protect their overall levels of profitability, there are significant potential tax advantages to being based in Alderney*, including in the areas of direct taxation, indirect taxation, gaming duties and personal taxation for key employees.
Alderney is outside of the European Union and has no VAT, meaning eGambling services provided to licensees with a Place of Establishment outside the EU are not subject to VAT or other indirect taxes;
Alderney does not levy gaming duties on licensees, meaning that as a jurisdiction it does not compete with other regulated markets who levy duty at the point of consumption and Alderney licensees avoid double taxation;
Alderney has a 0% corporate tax rate, no capital taxes and low employment and property taxes;
Alderney has a highly competitive personal taxation environment, with no inheritance or capital taxes, 20% income tax with generous allowances and low social security contributions;
Alderney as a jurisdiction has a flexible approach and dedicated team to assist licensees in establishing a presence and relocating any management and operations should they wish to do so.
The potential impact of any tax structure will be unique depending on the specifics of an eGambling group’s business, but the table alongside gives a general comparison between two identical groups making operating profits of £10m, but one operating free from irrecoverable VAT, corporate taxes and gaming duties levied at the point of supply, whilst the other suffers all three, leaving it with post-tax profits of £3.9m.
If both groups were valued by the market with a P/E of 15, then Group A would have a market value of £150m, but Group B’s valuation would only be £58.5m.
* In this paper reference is made both to “Alderney” and to the
“Bailiwick”. Alderney is part of the Bailiwick of Guernsey.
Alderney has enacted its own domestic legislation to regulate eGambling activities under the Alderney Gambling Control Commission (AGCC). Alderney has a common tax structure with Guernsey (see http://gov.gg/tax) and any AGCC regulated operator with a presence in either or both islands may benefit
from that structure. The Bailiwick has been recognised by the OECD as meeting or exceeding OECD, EU and UK standards on transparency and information exchange and it has a long standing commitment to being well regulated and cooperative.
Alderney
ALDERNEY
THE MOST COMPETITIVE TAX ENVIRONMENT FOR EGAMBLING OPERATORS
The Impact of Taxation
In a similar way that the potential impact of any tax structure will be specific to each operator, the way in which an eGambling group may structure its business based in the Bailiwick and be regulated by AGCC to optimise profit and market value will vary widely.
Taxation and case law inevitably lag behind technological developments, but they are catching up with the Internet age. Not only do tax-collecting bodies scrutinise eGambling groups as they gradually tighten up their application of existing law regarding what presence businesses have in various jurisdictions (in order to determine whether they should be liable for direct and/or indirect taxation), but as “grey” unregulated eGambling markets become regulated markets, taxation now drives the governmental agenda.
Operators will need to take expert advice on tax and corporate governance matters to not only determine optimum structures for current circumstances but to “future proof” their position against the developing approach of tax bodies and minimise the risk that their activities are subject to higher than necessary levels of taxation.
Whilst it is not the purpose of this paper to give tax advice or deal with the specific tax circumstances of individual licensees, there are some general considerations that may apply and could be relevant to considerations for operators with their advisers. These are set out below.
VAT/CONSUMPTION TAXES
For most industries within the EU, VAT may not necessarily have a significant impact on costs and margins, paying input VAT on goods and services and then recovering this and passing it on as output VAT within their pricing decisions. As the provision of gaming services is exempt from VAT, eGambling companies operating within the EU cannot charge output VAT to customers and are unable to recover any input VAT they incur on EU expenditure associated with their eGambling activities. This is a significant issue for eGambling operators given the VAT levels applicable in EU jurisdictions, which mainly fall between 20-25%.
Alderney can offer the opportunity for eGambling companies to operate without incurring VAT. In comparison, the tightening up of the EU’s overall approach to VAT will increasingly challenge concessions by some other jurisdictions to exempt the expenditure of eGambling companies from VAT, through nominal business structures that have been implemented primarily to avoid VAT leakage. To mitigate the risk of having to absorb irrecoverable VAT, eGambling companies will have to demonstrate that they have a “Place of Establishment” in, and receive supplies of goods and services at that establishment located in the Bailiwick, or another jurisdiction that is outside of the scope of VAT.
The two tenets behind the Place of Establishment concept are:
The main business establishment – where the headquarters, central
administrative functions and corporate entity are;
The operational hub of a business and its decision-making processes – where the necessary human and technical resources are located.
To benefit from the Bailiwick being outside the scope of VAT, eGambling companies must demonstrate that their Place of Establishment is outside of the EU. Whilst it may be possible for some global operators with established presences outside of Europe to conduct business in the EU remotely, it is likely that they will require some European presence. As the Bailiwick is outside of the EU and has no VAT, it is an ideal location for an eGambling business to establish itself.
Although the recent clarifications of the definition of Place of Establishment by the EU have yet to be extensively tested by the courts, they are generally taken by the UK’s HMRC and other EU tax collecting bodies to mean that a business is established where the day-to-day decisions governing the core operations of the business take place.
Matters that EU countries may take into account include:
Where the central administration of the business is;
Where operational management meets;
Where general business operational policies are determined;
Where key contracts are put in place;
Where the residence of the individual managers of the business is;
Where administrative, computerised and accounting documents are held;
and
Where the main business bank accounts are based.
From the perspective of an AGCC licensed eGambling group, in order to minimise
the risk of irrecoverable VAT and prove a Place of Establishment in the Bailiwick, then the more substance they can point to behind these seven points, the further they are likely to move towards the lower end of the VAT risk spectrum.
EGambling companies seeking to demonstrate that their Place of Establishment is in the Bailiwick (or otherwise outside of the EU) should take expert advice to ensure that their business practices and structures are sufficiently robust.
One impending development to VAT is a change due in 2015 to the way the provision of electronic services is treated by EU businesses, which will level the playing field between EU and non-EU businesses in the way VAT is accounted for. The changes will mean that VAT will be payable based on the VAT rate in the jurisdiction of the end consumer – as non- EU suppliers of VATable services currently do. Whilst this will impact EU eGambling groups supplying services other than gambling (e.g. social gaming), their core gaming activity will remain an exempt supply for VAT purposes and will not be affected.
GAMING DUTY
The UK and other onshore jurisdictions are moving to impose Point of Consumption (“POC”) gaming duties on activities aimed at consumers within their markets in order to generate income and level the playing field with terrestrial gambling activities.
The Bailiwick does not level any gaming duty, so is not competing with these jurisdictions for a share of gaming duty
income. Other jurisdictions that have historically regulated eGambling activities levy their own gaming duties on their licensees based on where they are licensed and a general move towards POC gaming duties could result in those licensees being subject to double duties on some of their activities.
The UK has announced its intention to remove double taxation relief for remote gaming duty that was introduced to allow UK-based eGambling providers to claim relief of duty paid in other countries for their overseas customers. As Alderney does not levy gaming duties there is no risk that AGCC-licensed operators will be subject to double duties.
The imposition of POC gaming duties in other regulated territories does not prevent operators regulated by the AGCC and based in the Bailiwick from benefiting from the competitive corporate, other business and personal tax advantages that the islands offer, particularly from the absence of VAT or any other tax on consumption.
CORPORATE TAXATION
In order to benefit from the Bailiwick’s very attractive 0% Corporation Tax regime, an eGambling company will need to demonstrate that:
It is resident in and Managed and Controlled from the Bailiwick
Its main Permanent Establishment that generates all or the majority of group profits is in the Bailiwick
Many eGambling groups will have profit making activities in a number of jurisdictions and they will also need to give thought to where else they have taxable establishments and the Transfer Pricing considerations of any transactions between group entities in different jurisdictions.
Incorporation
Many countries, such as the UK, will treat companies incorporated in the country as resident for corporate income tax purposes.
Management and control
Although each eGambling group’s circumstances will differ and they will need to take expert advice in this area, the location of a company’s central management and control is generally considered to be the most important aspect of a company’s corporation tax presence as it will also help determine where the company is resident for tax purposes. For example, a company incorporated in the Bailiwick will nevertheless be resident in the UK if it is centrally managed and controlled there.
Many countries subject resident companies to tax on their worldwide income.
Further information is given below for those companies who may need to consider the Permanent Establishment or Transfer Pricing rules, but for many groups, being able to demonstrate that management and control is from the Bailiwick will be central to benefitting from the 0% corporation tax regime.
Comparison of Off-Shore Gaming Duty Rates Alderney None
Gibraltar 1% of T/O on bets 1% GGY casino
£85,000 payable pa
£425,000 pa maximum per licence held Isle of
Man
1.5% on T/O GGY 0.5% on T/O over £20m Malta 0.5% of gross bets placed
£466,000 maximum per licence held
Both the rules relating to central management and control and the depth to which HMRC and other EU tax collecting bodies review and challenge these matters should not be underestimated, but there are some matters detailed below that should be considered in demonstrating that an eGambling company is managed and controlled from the Bailiwick, which involve showing the substance behind what happens in the Bailiwick and also, importantly, what does not happen elsewhere.
Management and control in these circumstances refers to the overall strategic management of a business, as opposed to the day-to-day management and operations that are considered for VAT. Amongst the important questions that an eGambling group might need to consider in order to establish central management and control in the Bailiwick are:
Where does the Board meet;
What powers are reserved to the Board;
How regularly does the Board meet;
What are the skills of the Board members that make them capable of carrying out their duties;
What is the normal residency of the majority of Board members;
Is the Board empowered and capable of controlling a business and its strategic direction;
Are there any outside influences controlling or directing the Board / or any Board member; and
Is there any shareholder or other agreement that effectively limits the Board’s ability to exercise management and control?
Permanent Establishment
The Permanent Establishment (“PE”) rules look beyond management and control in order to ascertain whether a business has a taxable establishment in a country.
Where an eGambling group has profitable activities in more than one jurisdiction, they should take professional advice thereon, as even if they can demonstrate that the group is centrally managed and controlled in the Bailiwick, the group could still have a PE in a high tax jurisdiction if it has profit making operations elsewhere.
As an example, the UK rules (which are similar to those in most OECD territories) are that a non-UK company will have a PE in the UK if:
It has a fixed place of business in the UK through which the business of the company is wholly or partly carried on;
and/or
An agent (who is not economically independent) acting on behalf of the company has and habitually exercises in the UK, authority to do business on behalf of the company. For these purposes, an agent could include a subsidiary company or an employee and it will not matter whether or not there is a formal written agency agreement in place.
The consequence of having a PE in a jurisdiction is that any profits that can be attributed to the PE will be liable to Corporate Taxes in that jurisdiction. This then becomes a matter of profit allocation between different jurisdictions, rather than 100% of the profits necessarily becoming taxable. From an eGambling group’s point of view, it is important that they are able to document that the most profitable operations that are closely related to the eGambling activities are located in the Bailiwick (as a Permanent Establishment) or another low-tax jurisdiction.
The picture can be further complicated by the existence of legislation such as the UK’s Controlled Foreign Company (“CFC”) legislation (and similar pieces of legislation across many OECD countries), which deals with situations where high tax environments seek to tax the share of
profits that they believe have been artificially diverted into low tax jurisdictions, where the underlying operations lack substance and are perceived as being companies
“controlled” from the high tax jurisdiction.
Any eGambling companies who believe this may impact them should take professional advice.
For most eGambling groups based in the Bailiwick, the key risks are likely to revolve around the activities of directors and key employees of the group who spend time in a high tax jurisdiction and the use of third parties as agents to conduct large parts of the eGambling group’s business in those high tax jurisdictions. Groups wishing to take advantage of the Bailiwick’s attractive Corporation Tax regime and minimise the risk of having a PE elsewhere would normally need to take appropriate tax advice thereon.
Transfer pricing
Transfer pricing is concerned with the fair allocation of profits between the operations of eGambling companies that take place in different jurisdictions – i.e.
what prices goods and services are
“transferred” at between various companies. Many countries follow the OECD approach, in which inter-company transactions should be taxed on the basis of arm’s length pricing.
If an eGambling group has operations in multiple locations, it is important that they take professional advice on transfer pricing and ensure that documentation is in place to demonstrate how profits are allocated between operations.
In order to minimise corporate taxes payable outside of the Bailiwick, eGambling groups should seek to restrict any operations in high tax jurisdictions to routine, low value activities where it is common to derive profits on a cost plus model, so that only the “plus” element of profit is taxable elsewhere. The primary risks of the business and profit making activities of the eGambling group should
be located in the Bailiwick or another low tax jurisdiction.
Capital taxes
Whilst capital taxes (taxes on gains / sale of assets) may not be an immediate consideration for the on-going operations of eGambling groups, they can have implications should all or part of the business or its underlying assets be sold or relocated. This could trigger capital tax liabilities on assets such as databases, Intellectual Property, etc.
The Bailiwick’s zero capital taxes regime provides the potential to avoid such exposure and its cutting edge Intellectual Property legislation provides a competitive environment to protect such assets, including Corporate Image Rights protection that is not available elsewhere.
EGambling groups wishing to locate or re- locate assets to the Bailiwick should seek professional advice thereon.
Employment and Property Taxes
Tax on Employment (equivalent to social security / national insurance contributions) for employers is 6.5%
capped at annual earnings of £130,000 and Property Taxes (equivalent to Business Rates) are far lower than those in the EU.
From an employer’s perspective, whilst salaries reflect the strong economy and demand for labour in the Bailiwick, salaries are generally lower than major European cities and the rates of employers’ social insurance and other business taxes are relatively low.
Personal taxes
The Bailiwick has an extremely attractive taxation regime for individuals who are used to living in the EU, USA and other large economies. Income tax is set at 20%
with a generous personal allowance, reliefs on loan interest, personal pensions and double taxation and a maximum charge in any year of £220,000 on Guernsey-sourced income and £110,000 on non-Guernsey income. Social security is only 6% for employees and is capped at annual earnings of £120,000.
For those Directors and key employees remunerated via equity or significant shareholdings, the Bailiwick has neither capital gains tax, nor inheritance tax on individuals.
Guernsey residency rules use the 90 and 180-day rules common across OECD countries, where the general rule of thumb is that more than 90 days in Guernsey will establish residency and 180
days will establish sole or principal residency.
Those Directors and key employees who may wish to “partially” locate to the Bailiwick but continue with some presence elsewhere whilst still benefiting from the Bailiwick’s tax regime will need to consider the “Residency Rules” of the other territories involved. For example, under the UK Statutory Residence Tests, employees and directors of eGambling companies who were considering relocating to the Bailiwick might need to consider how many of 5 Statutory Ties they have to the UK (a family tie, an accommodation tie, a work tie, a 90 day tie and a country tie) and depending upon the number of ties, this would determine how many days they could still spend in the UK without becoming UK resident again.
The favourable and flexible options for incoming persons who may be resident in the Bailiwick, but not solely or principally resident, make the Bailiwick an attractive proposition for high-earning key individuals. With options to only be taxed on Guernsey source income and remittances from non-Guernsey global income (but not worldwide income), the Bailiwick residency rules allow incoming persons to plan their affairs effectively.
CONCLUSION
Alderney can offer an extremely attractive tax environment for eGambling groups licensed by the AGCC and / or who create a presence in the Bailiwick - with no VAT, no gaming duty, 0% corporation tax and low rates of personal and employer taxation.
The strategic goals and operating activities of a particular eGambling group will differ from those of its competitors and whilst all groups should consider the potential advantages that Alderney could offer them, it is essential that they should get appropriate tax advice tailored to their own circumstances.
