Gambling from the perspective of tax and financial law

The gaming sector in Brazil goes through an ambiguous social and moral conception. On the one hand, much of the gambling exploited by private individuals is prohibited and criminalized, such as casinos, jogo do bicho, bingo etc. On the other hand, the State is authorized to explore “luck” through federal lotteries.

“Chance”, however, does not seem to be the relevant criterion for prohibition, given the existence of other authorized activities that also deal with the laws of fortune (such as financial activities linked to stock exchanges).

The following are some points of attention that inform the discussion on the legalization of gambling:
 

1. There is an inseparable moral issue that permeates the debate on the legalization of gambling, whether in the Bill n. 442/1991 (Chamber of Deputies), or in Bill no. 186/2014 (Federal Senate), or in the Statement of Non-Compliance with Fundamental Precept (ADPF) 563, or in Special Appeal no. 966,177;
    
2. There are two types of users: (i) the conventional player (whether sporadic or not); and (ii) the pathological gambler, who manifests the addiction to gambling (ludopathy). Therefore, there is an important public health component that guides the debate on the authorization of gambling in Brazil; 
    
3. Because such activities are illegal, there is no question that there is a link between them and criminality. The debate in the criminal field is also relevant to guide the authorization of gambling in Brazil. 
    

Although these three aspects are important, the purpose of this column is to answer the initial question based on the premise that gaming would be (or will be) legalized and / or authorized.

To this end, the international experiences of Macau, Portugal and the State of Nevada (in the United States of America) were studied, reaching some findings outlined below:
 

1. In Macau, taxation is levied on the gross revenue of concessionaires authorized to operate gaming. A portion of the collection is intended for the development and promotion of cultural, academic, educational, social sectors, as well as urban and tourist development, and social security. In addition, it conditions its exploitation to the payment of financial remuneration; 
    
2. In Portugal: (i) land-based gaming is taxed using two calculation bases: the first installment is the initial working capital, with rates that vary according to the location; and the second installment is gross revenue, with rates that vary according to location. The proceeds of the collection are destined to tourism; and (ii) online gaming is taxed based on gross revenue at fixed rates, the product of the destination being linked to tourism, sport, culture, safety, health, addict assistance and compliance costs. In addition, there is provision for payment of financial consideration (in cash or not) in relation to casinos; and
    
3. In Nevada, bands of gross revenue are taxed, with progressive rates, and allowing restricted deductions from the calculation base, focusing only on entities that have unrestricted licenses. There are fixed taxes that are divided by the number of games, in addition to complementary taxes on activity related to games of chance (such as entertainment).
    

On the other hand, international literature shows that the relationship between taxation and gambling has some important debates that need to be highlighted:
 

1. Could the imposition of a tax alone change behaviors linked to irresponsible gambling or even pathological gambling? 
    
2. How to measure and separate healthy and harmful demand, so that the tax can capture what can have negative effects on users and society?
    
3. Can the authorization of the activity be compensated, taxing it, without, however, burdening and making the activity unfeasible?
    

These three questions, based on what has been studied, make us believe that (i) inducing behaviors, in the case of gambling, through taxes is not easily verifiable in practice; and (ii) it would be possible to offset the social cost of authorizing such activities through the public revenue generated.

Bringing the question of gaming collection to Brazil and answering the initial question, a possible authorization could generate the following tax and financial consequences:
 

1. Gambling activities, if legalized, would be subject to the Service Tax - ISS, either because there is a specific item on the list of Complementary Law no. 116/2003, either because the Federal Supreme Court understands that the stakes are within the framework of the constitutional concept of service;
    
2. Gambling would also fall within the scope of the social contribution, due to constitutional authorization, provided for in article 195, item III, of the Federal Constitution (which bears the expression “revenue from prediction contests”); 
    
3. Depending on the type of game to be explored and the way in which it is explored, there would be the possibility of (i) creating fees; (ii) institution of counterparts to remunerate public contracts; and (iii) direct reversion of part of the collection to the public budget (as with lotteries); and  
    
4. With the authorization, it is possible to foresee expenses with administrative, inspection and personnel expenses, in addition to expenses arising from the negative externalities of the authorization to exploit the game (criminal, social and health), which must be aligned with the Law of Fiscal Responsibility (Complementary Law 101/2000).
    

In addition, it is suggested the establishment of an Intervention Contribution on Economic Domain - CIDE, with a low rate. To this end, a criterion is adopted for linking revenue to public expenditure resulting from the authorization of activities (such as public health), tourism development and regional development linked to the locations where the games are explored.

Thus, apart from the normal taxation that any economic activity is subject to in Brazil (with the incidence of the IRPJ, CSLL, and PIS / COFINS), it would be possible to carry out a tax conformation similar to that of Macau and Portugal, with tax revenues linked to specific development and public health expenses.

This column addressed possible financial and tax issues arising from the eventual legalization of gambling. It is expected, therefore, to have collaborated with the debate on the exploration of such activities in Brazil.

The reader is invited to join this debate.


João Vitor Xavier
Tax attorney in São Paulo, at Galvão Villani Navarro. Graduated from the Federal University of Paraná (UFPR), specialized in Tax Law from the Getúlio Vargas Foundation of São Paulo (FGV-SP) and master in Financial Law from the University of São Paulo (USP).