George M. Mangion | Wednesday, 30 September 2009

Taxing arcade halls

A lot has been written of late about the need to balance our books and lower the deficit. This has been the main battle cry from the opposition hinting that the 20 year rule of the incumbent party has led the island finances into the doldrums. This may be true but of course there are a number of positive reforms that have been implemented turning the economy from one based on low- added textile manufacturing to one highly focused on services.
Financial services and ICT have been slowly gaining momentum while the bucket and spade tourism of the seventies have partially given way to five star hotels and restaurants apart from the lucrative cruise liner terminal which was converted by Viset to a world class standard. Other embellishments include the Cottonera Casino and yacht marina and the vast improvement in healthcare facilities. It is true that since the onset of recession, our deficit last year shot up to 4.7 per cent, and invariably this year will see the Commission chastising us for exceeding the threshold. It is most likely that our best endeavours will not see a deficit this year lower than of 3.8 per cent. All this points out to a budget in the coming weeks which looks to cut expenditure (particularly abuses on social services) and try harder to collect long standing tax arrears while refraining from adding more taxes not to upset the recovery. So what can the minister of finance do to generate the drop of €80 million in tax revenue this year while threading carefully not to stifle initiative for green shots to take shape? Not much.
This leads us to consider a claim for lower VAT rates from hoteliers and restaurants. This concession for a 5 per cent vat rate is being studied by the government but it appears that the country cannot afford a drop of about €30 million unless this is partially replaced from other sources. This logic is all very well and true but for instance the government has omitted to tax a lucrative gambling sector consisting of more than 80 amusement arcades. Here unlicensed operators have invested millions to rake in the regulation loophole. The Opposition rightly criticised the Government for having refused to regulate the gaming sector for so long.
Opposition spokesperson Charles Mangion declared in parliament that millions have been forfeited by the Authority over the years out of this inconspicuous loophole. He calculated that there were between 10,000 and 15,000 gambling machines and the exchequer was losing annually between €7 and €10 million in annual tax revenue. It is well known that these machines are a powerful and sophisticated piece of equipment which may cost between €3500 to €8,000 each. with an average national investment of over €50 million. This loophole obviously discriminates against the three land based casinos and the 200 remote gaming operators which are firmly regulated and highly taxed. It is a mystery to foreign investors who, having followed diligently the stringent remote gaming laws, have seen arcade halls ride rough shot over their business interest. These investors created over 2,500 highly paid jobs .What made this loophole so glaring blatant is the fact that the government is loathing to spare cash for a lower VAT rate on dining but has refrained from taxing foreigners who have invested like mad freed of any restrictions running gambling parlours in the core centres of our villages. It is ambiguous. to say the least. that when in the past the ex-CEO of the gaming Authority and the Chairman Dr Zammit Maempel had called for an urgent meeting to all unlicensed machine operators the policy was clearly stated that nobody will be allowed to operate such machines (VLTs) without a permit. At that meeting it was clearly stated that machines had to conform to a standard specification while measures will be taken to wire all machines to a central database at the LGA headquarters so that any illicit traffic will be monitored. To the unacquainted it is relevant to explain that VLTs are similar to the ones found in any of the three licensed land based casinos. They were no amusement boxes. But while the abuse existed in the past, thank God we are now wiser and all the 80 halls have been closed down during the summer. Operators protested that they had the verbal approval of the Authority’s top officials to invest until the rules are formalised. It seems that the amendments are the being discussed this week as a matter of priority and Finance Minister Tonio Fenech said the government did not want to see Malta being turned into one big casino. Annual licences would be issued renewable only if there were no pending court proceedings against the owner at the time of renewal.
Is this a case of closing the barn after the horse has bolted? Yes, but now the penny dropped and law aims at protecting minors and other vulnerable people against compulsive gambling. Finally after so many infringements the Authority has been empowered to set standards aimed at eliminating any potential criminal or money-laundering activity. One expects the Authority is better financed as it needs to employ more inspectors and IT experts in order to enforce the new regulations. The Bill proposed that players would only be able to access gaming machines at the age of 18. This is commendable given that previously there were no restrictions to entry. In fact, research reveals teenagers who regularly play video and arcade games are more likely to develop anti-social behaviour that can lead to problem gambling.
Minister Fenech revealed that the maximum number of machines available at gaming premises must not exceed 10, with each game having at least a two-square-metre periphery. Gaming premises could not be opened in the vicinity of educational centres, football grounds, churches, schools or any other place which offered education to children. Such premises would need to move out from the village core and move to the periphery. The playing of more than €2,000 in gaming places would need to be reported for the purpose of money-laundering monitoring. Typically, in the UK, excessive VLT-playing is the most documented form of pathological gambling amongst adolescents. One may criticise that this reform in gambling rules is being too little too late and that the effect of unregulated gambling halls together with unfettered jackpot prizes of Maltco has sown the seeds of addiction. Other countries such as South Africa have for a long time strictly regulated such activities and each machine is wired to a central server which monitors in real time that players are not being cheated. This was the pet idea of Mario Galea (former CEO of the Lotteries and Gaming Authority) but the idea was shelved.
To conclude, we must be very careful that under-age gambling and addiction is not encouraged with a laissez-faire attitude. There are various empirical studies which can be carried out to explore the social world of video lottery terminal users employing participant and non-participant observation methodologies. These studies can be co-financed in Malta out of a direct subvention from the LGA. The study aims to observe the arcade clientele and their behavioural characteristics, and to examine motivations for machine playing. Measures have to be in force to enforce self exclusion of pathological gamblers. The Ontario Lottery and Gaming Corporation have started deploying scanners utilising facial recognition software to prevent problem gamblers from entering gambling avenues. Can we also install such devices that will recognise persons who have been excluded, due to their compulsive gambling? For pleasure or for addiction, one of the mysteries of gambling is that even when we should know we’re going to lose, we somehow think we’re going to win.


George Mangion
Partner at PKF – an audit and business advisory firm



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30 September 2009


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