Opinion: Can GGR tax save Italian online sports betting?

The Italian online sports betting market is facing a major crisis following a reduction in spending in the sector from €173m in 2010 to €135m in 2013, as opposed to countries like the UK where online sports betting spend has increased from €489m in 2009 to € 776m in 2012, despite the fact that it is a very mature market.

The reasons for such a decline in Italy were reviewed during a seminar held by my law firm DLA Piper this week in Rome titled ‘Sports betting crisis in Italy ““ how to reverse the decline?’.

The main issue of the Italian online sports betting sector appears to be the current tax regime prescribed for sports betting which is based on the turnover as opposed to the gross gaming revenues (GGR), which is the method adopted by most other jurisdictions.

The current turnover gaming tax between 2% and 5% depending on whether the bet has more than seven possible outcomes is considerably hampering the market, especially when it is considered that, for example, in September 2012 the spending of the market was minus €1m i.e. the amount paid to players in winnings was higher than their actual spending.

Despite this trading negative, operators still paid an aggregate of € 2.7m in gaming taxes during that month. Additionally, 2012 had been a very unlucky year for sports betting operators since the pay-out was 87% of the amount spent which means that, given the current tax regime, in the majority of the cases operators paid gaming duties for amounts that were not representing a gross profit for them.

This scenario impacts on the sports betting offering as operators are forced to adopt a prudent approach in order to avoid major losses and reduce their potential advertising investments due to the uncertainty of future profits. This, in turn, contributes to the growth of the unlicensed market which is able to provide a more attractive offering.

And according to market experts the scenario could worsen with the recent launch of bets on virtual events and the introduction of betting exchanges early next year. These games will be subject to a 20% GGR tax which, in the experts’ view, might lead to a cannibalization of the online sports betting market as there will be similar products targeting similar players, but with two different tax regimes.

However, the above might change in the next future. During the seminar, the head of remote games at Italian regulator AAMS, Francesco Rodano, declared that the tax regime cannot be deemed the sole reason for this crisis, proportioning some of the blame for a “static” market to the unlicensed market.

However, he also added that the possible introduction of a GGR tax should be considered, at least as part of a testing phase. Even in the unlikely scenario it would lead to a reduction in tax entries, this would not be a relevant loss for the State since the online sports betting sector contributes for a very small portion to the tax entries which are largely dependent on the land-based AWP and VLT market.

A testing phase of at least one year where the 20% GGR tax regime currently applied to virtual events and betting exchange is extended to sports betting might show the Government and regulator that such regime can:

1) allow operators to offer better odds also attracting players from the unlicensed market and therefore increasing the number of active players in the market that has been static in the last years;

2) allow players to better enjoy their betting experience since a higher payout would enable them to play for longer with the same amount of money; and

3) increase the tax entries both in terms of gaming duties as the whole growth of the market would generate more taxes, but also indirectly through the higher advertising investments that operators might be able to afford with a better structured tax regime.

It will be interesting to monitor the future developments but the above is certainly a good sign for the market.