(Full text of letter published in abridged form in the Irish Field, 28 Jul 2012, p.A4.)
Dear Sir
The long saga of missed deadlines for the promised legislation to reform the regulation and taxation of the Irish betting industry reminds me of the apocryphal story of the builder who promised his client that she would be able to move into her home before Christmas, but neglected to mention which Christmas. Last week's publication of the Betting (Amendment) Bill 2012, however, was some way removed from the ideal of all our Christmasses arriving at once, and debate continues over the advantages of a gross profits tax versus a turnover tax. With the Oireachtas having gone on its summer vacation, there is still time to amend the Bill - and still the danger of further procrastination.
The ongoing debate centres on (a) the merits in principle of a gross profits tax versus a turnover tax, in the short, medium and long term, both from the perspectives of the tax collectors (government and Horse Racing Ireland) and from those of the tax payers (betting operators and their clients) and (b) the amounts that might in practice be raised by various methods.
Before addressing these questions, I must say that I agree with Brian Graham and the Irish National Bookmakers Association (Irish Field, 21 July) that if the exchanges put more of their financial information in the public domain, it would be easier to analyse the merits of different taxation models, and to credibly forecast their outcomes. Even providing a breakdown of gross profits into commission and premium charge components would be a big help. I must also agree with Brian Graham and the INBA that payments to Irish racing should be on a commercial or statutory basis, and not purely voluntary, as before the present unfortunate impasse.
In principle, the relative merits in the short term of gross profits tax and turnover tax are easily seen. If we define profit margin as the ratio of gross profits to backers' stakes (a less ambiguous term than turnover), then there is no difference between a tax of 15% of gross profits and a tax of 1% of backers' stakes for an operator whose gross profits are 6.67% of backers' stakes. I will call this ratio of gross profits to backers' stakes the operator's `profit margin', although my usage of the term may differ from Brian Graham's usage (Racing Post, July 7). Operators earning higher profit margins (say the 10% mentioned by Brian Graham) are clearly better off paying a 1% turnover tax (in this example, only 10% of gross profit, rather than 15%) and operators earning lower profit margins (say 5%) are clearly better off paying a 15% gross profits tax (in this example, only 0.75% of backers' stakes, rather than 1%). This general principle (but not the precise trigger point of 6.67%) applies regardless of the actual tax rates. The punter will clearly prefer to deal with the more efficient operators who can fund their operations and pay a return to their shareholders from lower profit margins - the very operators who are better off under the gross profits tax.
Could the various betting operators not be allowed to choose in advance at the start of each year whether to pay tax on a gross profits or turnover basis? This freedom to choose would treat all players in the market equally, as demanded by Brian Graham and the INBA. I suspect, however, for the above reasons, that the outcome initially would be identical to that due to be enshrined in legislation.
In the medium term, the tax regime can have dramatic effects both on the type of business which operators can undertake and on their profit margins. For example, if a 1% tax on backers' stakes is passed on to the backer, then bets at decimal odds of 1.01 are no longer rational, as the maximum potential profit of 1% of the backer's stake disappears in tax. Similarly, the exchange trader who aims to lock in a profit before the start of an event by correctly forecasting small movements in odds and backing and laying accordingly will be seriously disadvantaged by a tax on backers' stakes. In a similar vein, I am curious as to how the INBA would like to tax transactions with operators with innovative trading models like that of oddsfutures.com.
Also in the medium term, punters will migrate to the more efficient operators who are able to run their business on lower gross profit margins, and the operators who survive this competitive process will naturally all prefer to be in the gross profits tax regime.
In the long term, as a punter, I have always had grave reservations about gross profits tax, as the fixed ratio of tax to profit means that the interests of government and HRI (maximising the tax take) and those of the betting operators (maximising their shareholders' profits) will coincide. Thus, in the long run, racing will be structured for the benefit of betting operators (and the horsemen who benefit from increased prizemoney) to the detriment of the ordinary punter. Some punters would argue that this process is already evident in the changing structure of race programming in Britain, a decade or more into its era of gross profits tax.
Turning now to the amounts that might be collected from Betfair by various tax regimes, the Bill, as predicted by Mark Costello in your columns recently (Irish Field, 7 July), proposes a 15% gross profits tax, which would have yielded EUR2 million from Betfair's stated gross profits from Irish clients in 2011 of EUR13.5 million.
The best-case scenario for the funding of Irish racing would appear to be a 100% NET profits tax, equivalent to the nationalisation of Betfair's Irish operations. A few years ago, this might have seemed like a ridiculous idea, even to the most extreme left-wing adherents of nationalisation policies. Our recent governments, however, have already nationalised a number of loss-making financial intermediaries (banks) running highly inefficient or non-existent systems for processing high volumes of financial transactions in real time. Why should they not consider nationalising a profit-making financial intermediary (Betfair) with a twelve-year track record of running a highly efficient system for processing high volumes of financial transactions in real time? (I probably should not mention one or two blips, like the Voler La Vedette incident last Christmas!)
Nationalisation of Betfair's Irish operations would have yielded tax revenue for government or racing equal to Betair's gross profits less operating costs, which probably account for the majority of the EUR13.5 million published gross figure.
Finally, we have Brian Graham's model, far more extreme than nationalising Betfair, producing an estimate, which his latest contribution appears to defend, of annual tax revenue of EUR21.4 million from Betfair, or 158% of Betfair's stated GROSS profits.
Where are Betfair's operating costs and the extra EUR7.9 million to come from? Ultimately, they will have to be taken out of the net winnings (after commission etc.) of Betfair's winning clients, or added to the losses of Betfair's losing clients, or extracted from shareholders' funds. Betfair's staff could also be subject to 100% pay cuts.
The only evidence of the relationship between Betfair's own gross profits and the profits of its winning clients comes from the premium charge structure, which allocates commission generated across clients, and requires total charges paid by its most successful winning clients to be at least 50% of each client's winnings before commission, with less successful clients paying a higher percentage. In the impossible situation in which there were no losers and all Betfair clients were in this 50% bracket, then their aggregate winnings, after commission and premium charges, would have been only EUR13.5 million in 2011. In any possible real scenario, clients' aggregate winnings would be much less, and I have no doubt that raising EUR21.4 million would wipe out all the gross profits of Betfair itself and of all of its winning Irish clients.
In short, it is unthinkable that an exchange could still compete effectively with other betting platforms while providing 58% more revenue for the government than it is currently producing in gross profits.
As regards Brian Graham's final assertion that anyone who has hit the lay button on the Betfair website has broken the law, my address is below, and if the Gardaí wish to round up all Irish Betfair layers and throw us into the country's already overcrowded jails they know where to find me - but if Betfair cares to put up a market on this possibility, I will be a layer rather than a backer at 1000!
Yours sincerely
Paddy Waldron
55 Ard Coillte
Ballina
Killaloe
Co. Clare
Ireland
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