The Government of the Czech Republic has presented a proposal for a consolidation package. The changes are intended to affect the tax rates of gambling activities, along with a significant reduction in the threshold for income exemption from raffles and gambling. The Institute for Gambling Regulation (IFGR) warns that the current taxation of gambling in the Czech Republic is already one of the highest in Europe and expresses concerns about the negative consequences of excessive tax burden. It also highlights the inconsistency of the proposal and the threat of an increase in illegal gambling and its associated impact on the state budget.
According to the current proposal, the tax rate for operators of selected gambling activities is set to increase from 23 to 30 percent starting from 2024. This mainly applies to sports betting and live games (such as dice, cards, and roulette), as well as bingo, totalizator games (horse racing), small-scale tournaments (poker), and tombolas. The change also affects the winners, as the current threshold for income exemption from raffles and gambling will be reduced from one million to 50,000 Czech crowns per year.
“The priority of IFGR is tax stability, which is unfortunately lacking in the Czech Republic. In the past seven years, the legal regulation of gambling taxation has been amended four times, not to mention the winnings tax. Adjustments to tax rates should be made only based on expert discussion. Unfortunately, such a discussion has not taken place at all. The proposed 30% tax increase is not supported by any analysis,” says Jan Řehola, the Director of the Institute for Gambling Regulation, the largest professional association representing 95% of the legal market.
As the Institute points out, the tax increase will have minimal impact on players’ behavior. It is not a consumption tax that would directly affect citizens, as is the case with tobacco products or alcohol. The direct tax is paid by the gambling operators themselves. “Therefore, it is not possible to connect the tax rates with reducing the risk or increasing player protection. Higher taxes do not protect players in any way; unfortunately, it is quite the opposite,” comments Jan Řehola.
According to the IFGR, it is also important to note that the mentioned tax is paid by the operator from their revenue without the possibility of deducting costs. Subsequently, they also pay the regular income tax and other mandatory contributions. “In the end, the biggest operator of gambling becomes the state itself, which earns two to three times more from gambling than all legal operators combined,” adds Jan Řehola.
There is a lack of thorough analysis of the impact of the changes.
According to IPRH, the proposed changes are inconsistent in the current situation. “Last year was the first period in three years that was not significantly affected by measures to combat the spread of the COVID-19 disease. We consider it irresponsible to significantly intervene in the tax structure of gambling with the potential prospect of a higher collection in the range of lower hundreds of millions of Czech crowns,” warns Jan Řehola.
The Institute points to the current record-breaking revenues from gambling tax as evidence of the current sound fiscal setting and stable conditions. In 2021, the revenue reached 12.5 billion CZK, which is even 4.5 billion more than the previous year. The tax collection of 17 billion CZK represents the highest collection of gambling tax since the effective implementation of the current legislation in 2017.
The threat of an increase in illegal gambling
Part of the consolidation package also includes a proposal for a significant reduction in the threshold for taxing winnings. “As early as 2019, we warned that this step would increase the costs of combating illegal gambling. Essentially, the state is driving players into the arms of illegal operators. None of them will want to play with operators who would take away 15% or 23% of their winnings,” warns Jan Řehola. According to the current government proposal, all winnings over 50,000 per year will be subject to taxation – for lotteries and raffles, this applies to every such win, while for other gambling activities, it is the difference between the amount won and the amount wagered throughout the year. Currently, a regular sports bettor would not have to pay any tax on net winnings of 55,000 per year, but according to the proposal, the state would take over 8,000 crowns from their winnings. It is clear that people will not declare their winnings or unfortunately, they will simply move to illegal operators where no obstacles await them. The state will be left with tears in its eyes and collect less than it anticipated.
Players will now be burdened with the documentation of all deposits and winnings, not only according to the types of games but also the operators. “The adjustment of the system and the administration will cost more than the actual tax revenue the state will collect. Each player should now keep receipts and confirmations of winnings. If, during the year, their net winnings exceed the amount of 50,000 crowns, they will have to file a tax return,” adds Jan Řehola.
IFGR considers addressing the issue of illegal gambling as the solution to both player protection and increasing state budget revenues. According to current data, illegal gambling constitutes up to 30 percent of the gambling market in the Czech Republic, causing an annual loss of 2.1 billion crowns for the state and municipalities.
According to a study conducted by the University of Copenhagen, the optimal tax rate is 20 percent. In such a case, up to 80 percent of players remain engaged in legal gambling activities. This phenomenon is known as the “channeling rate,” which declines sharply with each increase in tax rates. For instance, the United Kingdom has one of the lowest tax rates at 15 percent, resulting in a channeling rate of 96 percent. Conversely, in France, where tax rates are around 45 percent, the channeling rate is only 52 percent,” adds the Director of the Institute for Gambling Regulation.
