The doors are now closed at the Excel centre, the carpets are being rolled up after over 25,800 visitors had walked on them and ICE 2015 is over. Its time, now, to take a moment to reflect on the global market trends, the recent legislative changes and those yet to come. How will this all affect existing gaming operators and suppliers and those seeking to break into our industry? Across the world, the legitimate existence, growth and competitive dynamics of the online gaming market is primarily shaped by prevailing regulation, which continues to change and to vary widely between countries, states and regions. Two regulatory measures of major significance for 2015 are the now imposed UK Place of Consumption Tax (POC), and the proposed measures to tackle Base Erosion and Profit Sharing (BEPS). But in addition to regulatory changes, there has also been a change in the market itself. Most industries evolve and companies are always eyeing opportunities to acquire or merge with rivals to strengthen their positions, and the e-gaming industry is no different in this regard. POC and M&A POC is set to challenge all operational mechanisms and values of e-gaming operators who will seek to maintain revenues and margins under differing market conditions. Thankfully, the effect of POC on the Isle of Man online gaming sector will be minimal compared to other jurisdictions due to the fact that, despite each Isle of Man licence holder having a different operating strategy and very different player profiles geographically, the vast majority of players using Isle of Man operators reside outside the UK. The legislation does not force UK facing licence holders based on the Isle of Man to move their companies to the UK nor does it force the processing of bets to take place on UK servers. This means our licensees have been able to retain their current structures with all of the benefits that they bring. The legislation also requires offshore licence holders to either appoint a UK based Financial Representative who, at great expense, will take responsibility and personal liability to pay UK HMRC the duty owed, or may negotiate to pay six months duty in advance. The positive news as far as the Isle of Man is concerned is that we have negotiated an arrangement with the UK tax authorities that UK facing operators licensed with us do not need to take on this vast expense. This represents a major saving over some other jurisdictions. The new UK Legislation will no doubt have a major effect in 2015 on those parts of the gaming industry that rely on UK players. We have already seen a large increase in M&A activity both in the licensed and the supplier sectors. Investors are demanding business plans that demonstrate an ability to make sustainable profits in spite of additional taxation on profits made from UK players. The global gaming industry has witnessed an unprecedented level of consolidation fuelled by cheap debt, with a succession of mega-mergers and acquisitions involving the supplier heavyweights. This year will undoubtedly see a further consolidation in the industry due to the new UK legislation and a slowdown in the number of start-ups being formed. Economies of scale are vital to survive in an industry where margins are now under real pressure both online and in bricks and mortar operations. To start up, survive, grow and thrive companies will need a really engaging and novel proposition along with a robust and defendable financial plan. Such companies are around, but those start-ups with just a “me too” sports book or casino offering will struggle to raise investment or become profitable. With the dust settling on the UK legislation, it is inevitable that all offshore jurisdictions will see the loss of a number of existing licensees who have not reached their economic goals, and may be forced to either sell up or close down. We are seeing an increase, however, in the number of quality, very well-funded new companies and those with really innovative intellectual property (IP) registering on the Isle of Man. We are hosting visits from companies with better and often unique business ideas, with more robust financial plans, more realistic marketing budgets and most importantly investment in the right order of magnitude to succeed in a very tough market. These companies are coming from the four corners of the globe including, of course, the Asian market where we already have an excellent reputation, but also from the emerging markets in the Americas, Africa and the Southern Hemisphere. Elsewhere, with the exception of the impending judicial review of the tax element, regulation changes in other European jurisdictions are in a continuous state of flux. Ireland seems to be further delayed whilst the Czech Republic is in the process of implementing its own version of POC. The real difficulty as new countries implement changes is pitching the tax rate at a level which does not drive online gaming underground. This would produce not just a loss of tax revenues but also a loss of control regarding player protection and a loss of the insight into betting patterns necessary to combat match fixing. Wider afield, the US state by state approach to regulation shows no sign of changing with the knock-on effect of restricting growth and effectively leaving smaller states off the radar for operators and suppliers. OECD and BEPS Another seismic shift that will affect both existing operators and new entrants in our sector comes in the form of new taxation proposals made by the Organisation for Economic Co-operation and Development (OECD), which we expect to hear more about this year. The organisation has issued recommendations for a set of actions to tackle Base Erosion and Profit Sharing (BEPS). BEPS recommendations include changes to model tax agreements that exempt business premises from permanent establishment status if they merely store, display or deliver goods, or collect information for the enterprise on offshore jurisdictions. Authorities around the globe are about to take a very keen interest in ensuring that companies who are incorporated in tax efficient jurisdictions actually have sufficient control and management expertise in that jurisdiction to warrant the tax treatment. This is something the Isle of Man has continuously advocated and promoted. Our small Island is home to some of the largest gaming companies and suppliers globally, including Pokerstars and Microgaming, with their senior executives, key staff and operations based with us. Quality housing, education and health care combined with an excellent quality of life and one of the lowest crime rates in Europe has attracted them to the Isle of Man and this demonstrates that the profits are recorded where the key decisions are made and the operations exist. We also have excellent technology and power generation infrastructure with world renowned data hosting facilities that protect both the integrity of the transaction processing and the brand of the operator, enabling CEOs and CFOs to sleep soundly at night. The future introduction of BEPS has already led to legal and financial advisors providing advice to their clients regarding the issues and potential risks of licensing in jurisdictions that merely offer a “brass plaque” solution. Merely storing some data or having a small amount of transaction processing in that jurisdiction will not convince tax authorities that the real management control and decision making resides there. 2015 is therefore likely to see a move from such jurisdictions to those where the environment and infrastructure exists for key staff to be hired or re-located. Conclusion There is no doubt that these regulatory changes pose challenges for all industry players and will change our sector’s landscape in an unprecedented way over the coming months and years. But for many they also bring an opportunity, with new openings for payment processing and giving investors a better idea of valuation for example. It is also forcing new market entrants to be more innovative and disruptive, resulting in some genuinely exciting and dynamic businesses, which can only be a good thing for the industry as a whole. And with BEPs will come a culture change in the way that businesses select a jurisdiction to reside. But what does all of this mean for the Isle of Man? Well, we are excited and optimistic about the times ahead! We have continued to enjoy the steady growth of the e-gaming sector on the Island, in the number of businesses based here as well as the number of people employed by the industry, and we are extremely well placed and prepared to navigate the changing industry landscape that lies ahead. One constant that really can be bet on is the Isle of Man’s firm and fair stance on regulation and gold standard in measures to protect players and their funds. Amongst the uncertainty, that will never change.
