Wednesday, August 27, 2008

Casino and NFO tax increases in Budget 2008

Malaysia's Budget 2008 is likely to impose a gaming tax hike. The Malaysian government needs to maintain the budget deficit at 2.3% of GDP. Malaysia's gaming industry comprising numbers forecast operators (NFO) that conduct online 4D and Lotto games will provide an additional source of financing to contain the budget deficit.

The recent imposition of windfall taxes on independent power producers (IPP) and oil palm plantation companies lend further credence to this view.

Tax risk on NFOs

The last revision for NFOs (from 7% to 8% of gross revenue) and casino (from 22%-25% to 25% flat of gross revenue) were 10 years ago. NFOs’ betting duty was standardised from 6%-12% to 6% of net revenue in 2003.

It is estimated that every 1% hike in gaming tax would add about RM100 million or 4% to the Malaysian government’s annual gaming-related revenues of RM2.6 billion which comprises less than 1% of the government’s total annual revenue.

Tax risk on casino operations

It is felt that casino operations are even more vulnerable to tax risk in Budget 2008 than NFOs due to its more significant revenue contribution. In 2007 government revenues from casino operations was RM1.4b. This constituted a whopping 55% of total gaming tax revenues. 

Casino operations are regarded as being relatively more resilient demand. The Malaysian casino's grind market - an industry term for retail-type gamblers, as opposed to high-rollers - constitute a significant 70% of Malaysian casino revenue.

Risk impact

The tax hike, if any, is unlikely to be substantial. Malaysian casino’s present gaming tax of 25% is already Asia’s second highest after Macau’s 39%. In contrast, Singapore is considering a 15% tax the for grind market and 5% for the high-roller segment.

A huge increase will erode Malaysian casino's competitiveness, especially in the thinner-margin high-roller segment, as it reduces flexibility in offering rebates and commission to boost casino patronage. Industry observers believe that there is a possibility of the Malaysian government introducing a two-tier gaming tax similar to Singapore's model.

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