In Canada, we expect to welcome another provincial lottery corporation, the Ontario Lottery and Gaming Corporation, online in 2014. There is an absolute need to have governments involved with iGaming sites as they play an important regulatory role in setting standards and offering a safe and secure environment for players who wish to try online gaming.

But what about the thousands of Canadians who have offshore accounts? Anecdotal evidence does not suggest they will simply migrate over to a lottery corporation’s iGaming site. The big operators effectively launched this industry and have been in business for a decade or longer, and have a very loyal player base.

Here’s a thought for consideration: reputable offshore operators are willing to seek licenses in jurisdictions that offer them, and we at the Interactive Gaming Council (IGC) submit that partnering with those operators via a licensing system is better public policy that simply pretending they don’t exist.

If we use Ontario as an example, H2 Gambling Capital has forecasted the possible development of the regulated online market for online casino, poker, and bingo in Ontario, if the province were to introduce a licensing system for these products. The underlying assumption is that there are sufficient onshore licenses available in order to ensure a commercial and competitive market.      

The offshore gaming industry, exemplified by big name operators who are licensed and regulated in European jurisdictions such as the United Kingdom, Spain, Italy, and Denmark, are successful companies because of ongoing investments made in product development, technology, fraud detection, and player protection. They have loyal customers that number in the tens of thousands (if not millions), massive liquidity, and employ some of the best and brightest minds in the high tech sector.

In Europe, paying tax in these individual jurisdictions is the cost of doing business in a regulated environment. In exchange for access to a country’s market via a license, operators and regulators agree on how much tax (Gross Gaming Revenue or Gross Profit Tax) will be paid. Taxation of offshore gambling can provide an important source of revenue for governments if it is properly designed—a point worth underscoring with Canadian provinces.

A case for offshore taxation

The Remote Gaming Association (RGA), the largest trade association for remote gambling operators in the world, summarizes the key aspects of a properly designed tax system for remote gambling as follows:

“[T]he choice of an efficiently structured tax can have benefits for consumers, operators, and governments. A Gross Profit Tax (GPT) is the best option for the remote gambling sector because it has the highest potential to provide better value, entertainment, and choice for the consumer. GPT is levied directly on the operator’s revenues. It creates a level playing field between operators, permitting the freedom to provide consumers with greater choice and value without concern for the margin of specific offerings.“

A study issued by Ipsos Reid in 2010 revealed that the idea of internet gambling was gaining acceptance in North America, with more people expressing an interest to see it legalized with proper regulation. More than half of Canadians (55%) are willing to permit internet gambling as long as government regulations are in place. This is not surprising, as the first Ipsos poll on the topic, conducted almost seven years ago in September 2007, showed that over 70% of Canadians believe gambling over the internet is considered to be legal.

The irrefutable truth is that Canadians are playing online. H2 Gambling Capital estimates the size of the Canadian market to be in excess of $870 million for 2013 (including sports betting, casino, poker, and bingo). This is not an issue that will go away if ignored, or disappear underground. Online gambling is mainstream, popular, and getting bigger every year.

In Canada, we expect to welcome another provincial lottery corporation, the Ontario Lottery and Gaming Corporation, online in 2014. There is an absolute need to have governments involved with iGaming sites as they play an important regulatory role in setting standards and offering a safe and secure environment for players who wish to try online gaming.

But what about the thousands of Canadians who have offshore accounts? Anecdotal evidence does not suggest they will simply migrate over to a lottery corporation’s iGaming site. The big operators effectively launched this industry and have been in business for a decade or longer, and have a very loyal player base.

Here’s a thought for consideration: reputable offshore operators are willing to seek licenses in jurisdictions that offer them, and we at the Interactive Gaming Council (IGC) submit that partnering with those operators via a licensing system is better public policy that simply pretending they don’t exist.

If we use Ontario as an example, H2 Gambling Capital has forecasted the possible development of the regulated online market for online casino, poker, and bingo in Ontario, if the province were to introduce a licensing system for these products. The underlying assumption is that there are sufficient onshore licenses available in order to ensure a commercial and competitive market.

A model that fits

Here’s the “but”: we recognize that lottery corporations and provincial governments may not currently have the political appetite to launch a full licensing or regulatory model. However, we believe that there is an alternative to the traditional monopoly model that governments should view as the evolution of iGaming in Canada: a vendor of record (VOR) model with a reasonable rate of taxation for offshore operators. This would allow governments to obtain a maximum financial return as well as provide the appropriate consumer protections expected by the public.

This model stops short of a full regulatory or licensing component, in acknowledgement of the legal hurdle posed by the current interpretation of “conduct and manage”. As more clarity is achieved, a VOR model plus tax could eventually evolve to include full licensing and regulation. One thing is certain: based on the exponential growth of this industry in the past five years, there’s no telling where it will be in the next 10.

It is worth taking a deeper look at why taxing offshore operators makes sense for provincial governments.

Based on H2 Gambling Capital’s estimates for the Ontario regulated online market, if the government was so inclined it would be able to collect $19.5 million in Year 1 from taxing online casino, poker and bingo at 5% of Gross Win, and $164.4 million in the first five years. If the tax rate were to increase to 15%, then the government would collect $58.5 million in Year 1 and $493.1 million in the first five years.

This is not an argument in favour of an expansion of gambling—no new products are being developed. By taxing offshore play, governments are dealing with only the existing activity. Governments would shoulder no responsibility for building games, marketing or advertising, or managing the play. The only investment required is in processing and reviewing applications and collecting payments. This avoids issues with “conduct and manage” but does allow for the introduction of consumer protection standards. Looking at the table below, that equates to almost half a billion dollars over five years.

Protecting the player

Of greater importance is player protection, because not all offshore operators are created equal.

Membership in the IGC has increased significantly since its establishment in 1996 and today counts the largest and most respected online gaming companies in the world, including PokerStars, Microgaming, and Full Tilt Gaming; who together comprise a significant percentage of the online market in terms of revenue. IGC members are strictly regulated in first tier jurisdictions that include the Isle of Man, Gibraltar, Alderney, France, and Italy, which are recognized by the United Kingdom as having acceptable regulatory standards.

Members are obliged to follow a strict Code of Conduct that outlines the terms and conditions for conducting and managing online gaming operations. This Code ensures that IGC members are at all times acting with integrity, accountability, and transparency, and that player protection is paramount. IGC members must also adhere to an advertising code and responsible gambling guidelines, which are available for review on its website at igcouncil.org.

These are the standards that European regulators endorse, and that would be brought to bear on any partnerships with provincial lottery corporations and governments.

Running a successful online operation that is able to compete with offshore operators requires a constant investment in technology, development of the product offering, and huge spending on marketing. Providing multiplayer games such as poker or single player games typical of an online casino is technically challenging and the exemplary products currently available in the market are the result of many years’ research, development, and experience. Partnering with reputable operators would leave operational risks to the companies while bringing in more revenue to Ontario’s government via an online gambling tax.

When choosing which operator to play with, consumers are looking for value (i.e. product, choice, prices, etc.) A competitive local system (a mix of lottery corporation and offshore products) would ensure that consumers do not have to look offshore for value, which means partnering with online gaming operators would also be better for player protection as governments could control who is approved for taxation—and people are more likely to play at locally-regulated gaming sites. 

A competitive market and a gross profits taxation model with reasonable tax rates would provide a reliable source of income for Ontario’s government, value for consumers in a safe environment, and a healthy competitive environment for the online gaming industry.

Put another way: why reinvent the wheel when you can partner with the best in the business instead? For provincial governments, turning to the private sector just makes sense: more money (more quickly) and less operational risk for the government, and a safer playing environment for consumers.

Amanda Brewer is the spokesperson for IGC Canada. She can be reached at .