Vikas Sharma, PMP®Principal Consultant, Frost & Sullivan June 2013Vikas Sharma Page 1Broken downfurther intounderlyingindicatorswhereverappropriatePoliticalFeasibilityAdministrativeFeasibilityEfficiencyEquityAdequacyCasino Tax Evaluation FrameworkEvaluating Singapore’s Casino TaxIntroductionSingapore approved operations of 2 casinos (integrated resorts) in the year 2005, simultaneously introducing a‘Casino Tax’ to be levied on the gross gaming revenues of the operators. This tax was in addition to two othertaxes to be levied on the casinos – GST and corporate income tax. The intent of this memo is to present anevaluation of the Casino Tax. To this end, the memo first introduces the various criteria used for the evaluation,and then proceeds on to the actual evaluation itself.Choice of Criteria for EvaluationAs shown in Figure 1 below, five pertinent criteria ‘buckets’ have been identified to evaluate the Casino Tax on.Wherever appropriate, these criteria buckets have been broken down further into constituent ‘indicators’ and theanalysis presented using them as pivots.Figure 1
Vikas Sharma, PMP®Principal Consultant, Frost & Sullivan June 2013Vikas Sharma Page 21. Efficiency: Taxes almost invariably distort market behavior and lead to deadweight losses / excess burden. It isimportant to evaluate how well the Casino Tax allocates resources and keeps deadweight losses acceptable.2. Equity : It is important to judge whether the Casino Tax is ‘fair’ and equitable in its construct. Does the tax – 1)allow taxpayers to pay according to their ability/benefit received 2) have a progressive structure (whereby the rate oftaxation increases with the taxable base) that is typically considered desirable in tax structuring3. Adequacy : This criterion bucket helps to assess whether the Casino Tax does a ‘good job’ as a source ofrevenue for the government. The underlying indicators used here are:a) Revenue Raising Capacity: Does the tax constitute a positive revenue stream for the government, that is. are therevenues raised by the tax enough to justify the costs incurred?b) Elasticity: Is the tax robust enough to work well over time and continue to bring in adequate revenues, as thevalue of money decreases and price levels in the economy move up in general?4. Administrative Feasibility : This criterion bucket evaluates the resource commitments required by thegovernment as well as the tax payers towards the Casino Tax. The underlying indicators used are:a) Administrative Costs: The resource commitment required from the government to collect tax from operatorsb) Compliance Costs: The resource commitment required from the operators to comply with the tax5. Political Feasibility : This criterion bucket evaluates the level of popular support that the Casino Tax would beable to garner from the various influential stakeholder segments that are involved. These stakeholders are:a) Punters/Players: the actual consumers of the Casino gaming servicesb) Casino Operators: the suppliers of Casino services in Singapore (for e.g. Resorts World Sentosa)c) Academics / Policy Thinktanks: these groups would likely comment on the suitability and quality of the taxationstructure adopted. It would be ideal to consider their views and aim to achieve their support
Vikas Sharma, PMP®Principal Consultant, Frost & Sullivan June 2013Vikas Sharma Page 3Results of the EvaluationThis section discusses the evaluation of the Casino Tax against the criteria presented above. For criteria that havebeen broken down into indicators, the evaluation has been done at the indicator level.1. Efficiency: In the traditional model of casino taxation that existed in several countries (please refer to UK casefrom the references section), tax was charged directly on the casino’s TOTAL revenues. This meant that all betsplaced by the players were taxed. Before discussing the efficiency of this approach, tt is important to understandthat players’ propensity to gamble in Singapore’s casinos can be said to be elastic in nature. A big reason for this isthe ready availability of substitute casino options in Macau/Genting/Star Cruises, as well as availability ofsubstitute gambling options like lottery tickets, online poker games, football betting etc. in Singapore. Hence,putting a tax on the players’ bets would reduce their incentive to bet in the casinos, and lead to allocativeinefficiency. The Singapore Casino Tax counters this efficiency problem by taxing the gross gaming revenues(GGR) of the casinos instead. This means reduced tax burden on the players, giving them better value for theirstakes, hence incentivizing them to increase their stakes. This reduces the deadweight loss associated with taxationand is allocatively more efficient than the traditional taxation approach. Furthermore, moving away from a tax onplayers’ stakes also removes the incentive to engage in illegal untaxed gambling, which further justifies the betterallocative efficiency of the gross gaming revenue taxation approach used in Singapore’s Casino Tax2. Equity: By taxing the gross gaming revenues (not the total revenues), the Singapore Casino Tax regime allowsthe casino operators to offset the winnings that they pay out against the bets that they receive. This means that thetax burden on the operators is proportional to their ‘ability to pay’ – when they make more gross profits (GGR),they pay more tax and when they make less gross profit (GGR), they pay less tax. Hence, the Casino Tax isequitable as it allows the tax payers to pay according to their ability. If taxes were levied on the total revenuesinstead, it would be unfair to the operators because they could potentially be paying taxes even when they aremaking losses. In addition, the Singapore Casino Tax can also be argued to be ‘progressive’ in a way. The
Vikas Sharma, PMP®Principal Consultant, Frost & Sullivan June 2013Vikas Sharma Page 4operators pay a lower tax rate of 5% if they only rely on income from their ‘premium’ players (who maintain aminimum account and hence can be thought of as ‘regular’ players). However, if the casinos want to make moreincome by attracting non-premium ‘other’ players, then they have to pay a higher tax rate of 15%. Hence, theeffective tax rate is higher as the casinos’ gross gaming revenue increases, which makes it a ‘progressive’ tax.3. Adequacy: Evaluation of the two indicators included under this criterion is presented below:a) Revenue Raising Capacity: As per the information given in the ‘innovategaming’ link, the total tax revenuegenerated from the two integrated resorts in FY2011 is expected to be USD1.1 billion. For the sake of argument,we assume that 90% of this revenue is attributable to the casinos, that is, expected FY11 revenue from Casino Taxis 90% X USD 1.1 billion = USD990 million. We also know from the assignment problem, the number of problemgamblers in Singapore (38,319) and the associated direct social cost per annum (USD 13,586 per problemgambler). This gives us a a TOTAL social cost of: USD13,586 X 38,319 = USD521 million. Subtracting this totalsocial cost from the total Casino Tax revenue, we get a positive net tax revenue of USD (990-521) = 469 million.Hence, we can see that the Casino Tax does a good job of producing a positive revenue stream for the government.b) Robustness: It can be argued that the profile of people who play in the Singapore casinos is socio-economicallymuch better (tourists and locals who are willing to pay the $100 admission fee) than that of regular gamblers whobet on football/lottery/toto etc. Hence, frequenting the Casinos can be considered a kind of ‘luxury’ good. Hence,its demand is elastic to incomes and by association; therefore, Casino Tax can also be considered elastic withrespect to incomes. Hence, the Casino Tax should do a good job of increasing tax revenues with rising incomes.4. Administrative Feasibility: Evaluation of the two indicators included under this criterion is presented below:a) Administrative Costs: Government effort can be argued to be not very high. It is similar to administeringcorporate income tax. Also, the tax has to be administered only twice because there are only two casino operators.b) Compliance Costs: Compared to administrative costs, compliance costs are higher. It is the operatorsresponsibility to keep track of their premium/non-premium gross revenues and file their taxes correctly and ontime. Otherwise, they can incur penalties for late filing/incorrect filing/later payment or tax evasion.
Vikas Sharma, PMP®Principal Consultant, Frost & Sullivan June 2013Vikas Sharma Page 55. Political Feasibility: Evaluation of the three stakeholder segments included in this criterion is presented below:a) General Public: The Casino Tax does not levy a direct tax on the players and hence, will find support from thecasino players because it incentivizes them to bet more. In addition, by charging a higher tax rate for the non-premium players (likely to be low/middle class people), the Casino Tax discourages the casino operators fromfocusing on this segment, and instead, incentivizes them to focus on the affluent premium players. This should bepopular among the public since this tax structure, in a way, shields regular local people from gambling excessively.b) Casino Operators: The Casino tax only taxes gross gaming revenues, instead of total revenues, hence allowingthe operators to pay according to their ability, which should find support from the operators. Howeve, the highertax rate charged for non-premium players would not be popular among operators since it reduces potential profits.c) Academics/Policy Thinktanks: As explained under the efficiency criterion, the Casino Tax has better allocativeefficiency the traditional tax structure for casinos. Furthermore, it discourages players from engaging in illegalbetting markets. For these reasons, the Casino Tax should find support from the academics and policy thinktanks.ConclusionBased on the preliminary evaluation presented above, the Singapore Casino Tax can be said to be well-designedand should continue to be a good source of tax revenue for the Singapore government in the coming years.Reference SourcesGiven below is a non-exhaustive list of reports/weblinks that were consulted for this paper::1. “How Casino Tax is computed”, Inland Revenue Authority of Singapore2.”Singapore Casino Tax revenue to hit $1.1 billion” www.innovategaming.com/singapore-casino-tax-revenue-to-hit-1.1bn3. “The Modernisation of Gambling Taxes: Consultation on the Evaluation of the Gross Profits on Betting – OneYear On” HM Revenue & Customs, United Kingdom4. “An economic analysis of the options for taxing betting (2000)”:a study conducted by Nottingham andNottingham Trent Universities