The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Web shops were yesterday urged to withhold all revenues currently due to the government, amid claims planned tax hikes were intended to wipe them out in favour of a national lottery.

Philip Galanis, the former MP and senator, told Tribune Business he had personally advised the sector to place all tax liabilities "in escrow" until the escalating dispute over the industry's proposed new structure was resolved.

A long-time advocate for the sector's legalisation, and an auditor for several operators, Mr Galanis blasted the magnitude of the government's tax "grab" as "illegal, immoral and perverse".

The HLB Galanis & Company principal argued that the domestic gaming industry had been "targeted at the front end and the back end" by the 2018-2019 budget, with taxation set to be imposed directly on its customers as well as operators.

He added that the tax hikes, which the industry argues range from 238 percent to 453 percent, would "literally kill a number of the web shop operators" as their gross gaming revenue (GGR) or turnover exceeds $100m - placing them into the highest 50 percent bracket.

Urging the web shops to make good on their threats of legal action to block the government's new tax structure, Mr Galanis suggested that the industry's "deep pockets" would tie the matter up in court for years - with the placing of tax revenues in escrow depriving the Public Treasury of much-needed revenue.

"I'm hoping and believing the web shop operators will go to court if they do not get this resolved," he told Tribune Business. "I've advised them to put existing taxes into escrow until this is resolved.

"This deprives the government of taxes they would have otherwise earned. They [the web shops] have the financial capacity and resources to withstand this row for the Government."

Mr Galanis pointed out that any court battle could take up to six years to fully resolve, should it proceed to full litigation and move through all levels of the Bahamian legal system. His suggestion is likely to further fuel an increasingly-heated dispute between the gaming industry and the Government, where no side shows any sign of backing down.

The HLB Galanis principal also argued that the Government was using the tax increases to eliminate the web shop industry in favour of a National Lottery, something he argued was akin to "nationalisation" and "expropriation" of operators' private property.

"The other objective I believe the Government has in mind is to knock these operators out of the picture so the Government can then step in and set up a National Lottery. It's perverse," Mr Galanis told Tribune Business.

Such suspicions have already been voiced privately by persons connected to the domestic gaming sector, although there is no proof this is the Government's intention.

The taxation row comes as the web shop industry's own research, ironically, suggests there is scope to tax the industry more - although nowhere near the magnitude of the increases proposed by the Minnis administration.

The industry-commissioned 'Review of the Gaming House Operator (Amendment) Regulations 2018' conceded that its current total tax rate, at 13 per cent of gross gaming revenues (GGR), was "below average, but not significantly out of sync with [a global] average rate of 20 per cent".

Drawing on data from Copenhagen Economics, the report said the Bahamian gaming industry's total tax rate was below that of the UK's and New Jersey's, which stand at 15 per cent and 17.5 per cent. The same consultancy suggests that an "optimum" tax rate for high-volume/revenue generating gaming jurisdictions is between 15 per cent to 20 per cent.

The study, conducted by 10-year gaming industry veteran and accountant, Gavin Hamilton, said web shop profit margins were in line with the global average - standing at 24 per cent in 2017 compared to a 23 per cent world benchmark.

However, the Hamilton report said one 'trade-off' of the lower tax burden was that the Bahamian domestic gaming sector generated higher employment. The 2,750 jobs it provides account for 1.2 per cent of the country's total employed labour force, compared to just 0.3 per cent in the UK, a difference of some 275 per cent.

Mr Galanis, meanwhile, told Tribune Business that "the Bahamian people should be disappointed the Government has taken this tack" with the web shops, given predictions that the revised 'sliding scale' tax structure will lead to 2,000 jobs losses if implemented as is.

"Certainly the gaming operators are disappointed because they seem to be the target of a government that is determined to put them out of business," he said. "Because of the enormous taxation put on operators, and the 5 per cent tax on patron deposits, what they're saying to these people is they don't want them to be in that business."

Mr Galanis said it was "perverse" that deposits made at banks, and with lawyers, accountants and any other profession/industry that accepted such monies, were not being subjected to a similar 5 per cent levy.

He argued that this showed the discriminatory nature of the Government's domestic gaming taxation plan, and said: "That change demonstrates they have been targeted at the front end and the back end.

"That's going to literally kill a number of the web shop operators. I'm not being hyperbolic about this; this is real life." The former PLP MP and Senator said that, after working in partnership with the former Christie administration to legalise the sector, the Government had now turned around "and all of a sudden blindsided them, is not going to consult with them and they're essentially nationalising the industry.

"They're expropriating the assets of people that built the industry. I think it's illegal, I think it's immoral, and it's perverse," the HLB Galanis principal told Tribune Business. "They're expropriating the industry and they believe they have popular support; that there are people that don't want it.

"What this boils down is nationalisation of the industry. They [the Government] are driven by the fact these are young, entrepreneurial, black Bahamians that have found a way to make a lot of money in a very, very short time and don't believe they should have done."

Mr Galanis argued that the existing seven licensed web shop operators had "paid for their past sins" by parting with "an enormous sum of money", equivalent to six years' worth of revenue, to become legal. He added that at least two to three operators had only been in the business for several years, but still had to pay up.

"They've paid for their past sins," he said."Let's dispel the notion they have not paid nothing."

The Hamilton report, produced for the web shop industry, said the Government's new proposed taxation structure would jump from an existing 13 per cent of GGR to an average of 44 per cent, and a more "marginal" 68 per cent at the upper end. It argued that such percentages were higher than the "monopoly" Jamaican market.

With web shops' collective GGR standing at $196 million, and net revenues at $184 million after rebates, the report estimated that the industry would be driven into loss with $82 million in taxes wiping out $72 million in earnings before interest, taxation, depreciation and amortisation (EBITDA).

Individual web shops were said to generate a 9 per cent profit margin after tax, based on an average $740,000 in gross turnover and $165,000 in EBITDA. The Hamilton report argued that if the new tax structure was introduced as is, an average web shop location would be plunged into a $161,000 annual loss.

"At a 44 per cent expected tax rate, revenues per shop would need to increase more than 150 per cent to restore the same level of profitability," the study added.

The present tax structure requires web shop operators to pay 11 per cent on taxable revenue or 25 per cent of EBITDA (earnings before interest, taxation, depreciation or amortisation), whichever is greater.

However, under the proposed new 'sliding scale' they will pay:

• Up to $20 million in revenue, a rate of 20 per cent.

• Between $20 million and $40 million, a rate of 25 per cent.

• Between $40 million and $60 million, a rate of 30 per cent.

• Between $60 million and $80 million, a rate of 35 per cent.

• Between $80 million and $100 million, a rate of 40 per cent.

• Over $100 million, a rate of 50 per cent.

And, in a nasty twist as far as web shop operators are concerned, the Government has also imposed new taxation on gamblers themselves rather than the sector. Patrons, from July 1, will have to pay a 5 per cent Stamp Tax on both their web shop deposits and non-online games/digital sales.