Everyone knows that there is euphoria about the opening of the sports betting in Brazil, a market that has been tested in the last 4 years since the approval of the law that authorizes activities, and what operators see is incredible, a pool of consumers engaged in sports, in competitions, love football and its athletes. The Brazilian seems to have a talent for betting.
The various brands that compete fiercely and explore Brazilian customs currently live in a regulatory vacuum, as we have a clear law for the sector. However, we do not have the federal decree that regulates and clearly explains how everything should work, it is not crystal clear yet how exactly the Brazilian jurisdiction for Sports Betting should adapt, and this goes through all aspects of a regulated sector, such as the availability of licenses, supervision and mainly the judgment of taxes.
In this article, I would like to give due focus to what I consider the biggest legal and regulatory problem that the Brazilian sports betting market will suffer, I am talking about the Income Tax on Paid Prizes, or the tax on luck.
A Brazilian innovation, a tool that does not exist in the jurisdictions of other countries, which can, in addition to taking a good slice of money from bettors, cause a phenomenon of bad consumer experiences that weakens the national market, channeling a good part of bettors to unlicensed operations after regulation.
However, although the four-year wait is finally coming to an end, it is important to highlight that there are points that need to be improved and reformed where possible, so that the regulation can meet the expectations of all involved.
One of the peculiarities of Brazil is the fact that sports betting is considered a lottery modality by the Brazilian legal system, as provided for in Law 13,756/2018. This causes one of the worst inheritances that sports bettors can have: the incidence of income tax on paid winnings. This hijacking of 30% of the bettors' prize pool can make the experience unfeasible and cause a frustrating effect on the collection.
The consumer experience
The great charm of sports betting operations lies in the possibility for punters to get more intensely involved in their sports passions, putting their knowledge and skills to the test in predicting the performance of athletes and teams in different sports. In addition, sports betting brings the excitement and fun of following games and championships even more intensely, as the possibility of making money with your predictions adds an extra element of suspense to each match.
Winning or losing in betting is a continuation of the experience lived inside the fields and courts, since the result of the bet is directly linked to the performance of the teams and athletes. The difference is that, in the case of betting, punters have a direct share in the results and a financial incentive to cheer with even more emotion.
However, the bettor can be exposed to the so-called "double negative", a situation in which he has a negative experience in both defeat and victory. In defeat, the bettor loses the amount bet and patience as it is part of the dynamics of the results. In victory, he may have a considerable part of his earnings kidnapped by the bookmaker, which will be obliged by the federal government to withhold this money at source. This retention can derail the bettors' experience and generate an effect of complete frustration.
According to data from XP's Convocados Report on Brazilian football, up to 8% of customers can bet more than R$400 per month, a range that will be especially exposed to this "double negative" effect due to the withholding of values resulting from betting regulations sports.
Escape and channeling of gamblers to the offshore market
Higher profile bettors, who represent a significant portion of the sports betting market's revenue (more than half of the market), will be the most affected by the new tax policy. This is because, in addition to being the ones who earn the most and, therefore, will pay the most taxes, they are also the ones who are most concerned with the profitability of their bets.
With the implementation of a tax on prizes, bookmakers will have great difficulties in keeping these bettors within the Brazilian market. This is because most other markets do not have a similar tax, bearing in mind that they are customers who are used to offshore operations.
Conversations with professionals in the betting affiliation market indicate that there is a growing trend of channeling these bettors outside Brazil, in an attempt to avoid taxes and maintain the profitability of their bets. As a result, a regulated market cannot become hostile to these bettors.
The biggest victims will be the bookmakers who will have to comply with the requirements of the new license and will be responsible for withholding tax on winnings, but will still see a significant part of their revenues fleeing to the offshore market. It will be a challenge for bookmakers to find ways to keep these punters within the regulated market.
The mandatory payment of income tax on winnings paid in sports betting is based on solid legal grounds. Art. 31 of Law 13.756/18 is one of the references that support the obligation, which is anchored in other laws that make up the regulatory framework for the betting tax in the country.
Despite estimates by the Ministry of Economy indicating that up to 90% of the sports betting market's revenue may come from withholding income tax on prizes, it is important to highlight that these studies do not consider the negative effects and externalities of this practice. As a consequence, there may be an escape from the regulated market or discouragement of consumption.
Below are the legal provisions:
Recently, the Federal Government communicated that it will revise the first range of the IRPF incidence table, but until the measure is implemented, all prizes paid over R$1,903.98 will obligatorily have a 30% tax discount on the surplus.
Windows of opportunity
There is not yet a significant amount of collection of this tax for the national treasury, it is still only an expectation of revenue, and therefore it is much easier to change than some item that already has a long history of collection. For several reasons, the Brazilian fiscal responsibility law prevents the reduction of taxes without the provision of other forms of income or that there is a reduction in the budget and expenses.
Because there is no relevant revenue entering with this code, today in the public coffers, the biggest obstacle to a change in the norm, today does not exist. But in the first remittance of money sent to the federal revenue and the Brazilian State incorporates this source of resources as funding of the public machine, it will hardly be possible to revert this condition.
In recent manifestations and notorious to those who are following the sector's regulatory evolution, the Federal Government intends to forward a Provisional Measure to the National Congress, to incorporate aspects into the legislation that legitimize the future regulation decree.
Congress will necessarily have to discuss the issue again and this is the opportune moment, our first window of opportunity, to correct this error in the tax design.
Another window would be Bill 442/18 that is in the Federal Senate, the project that seeks to legalize all gaming and betting verticals in Brazil, has the CIDE-Jogos device (concept of a single tax on specific economic activity) that exempts all federal tax on prizes below BRL 10,000 and those above that amount, the rate would be 20%.
An infinitely better condition than the one established today by Law 13.756/18, adapting the text of the bill, only that this also covers the fixed odds betting market.
Considerations
With the aspects presented, this topic is too big to be treated unilaterally, and it affects all segments of the Brazilian sports betting market.
The bettor will feel in his pocket a heavy tax to which he is not used, the affiliate services will be in check for having to give recommendations that border on the illegal so that their clients have an adequate profitability; bookmakers are powerless in the face of the low attractiveness of the Brazilian market and ending federal revenues will have frustrated expectations of big collections and suffered even more in trying to curb any offshore gambling practices.
Rodrigo Gitaí
Managing Partner at RG Political Intelligence
