The sports betting and online gaming market in Brazil has experienced significant growth in recent years. However, it is a sector with a high tax burden that needs to be well balanced, so that it does not negatively interfere with the sustainability of the sector. With the tax reform underway, and the recent approval by the Chamber of Deputies of the Selective Tax on gaming, this subtle balance between the tax burden and the viability of the industry in Brazil could be broken, driving away investments and resources from the country.
1. The current tax burden
Currently, sports betting and online gaming operators in Brazil are subject to a complex and onerous tax burden. Among the main taxes levied on this sector, the following stand out:
* 12% levy on gross gaming revenue (Gross Gaming Revenue): Law 14,790/2023 provides that, from the total collected by bets, the amount paid to bettors and any income tax levied on the prize will be deducted. Of the remaining amount, 88% is allocated to the operator and 12% is allocated to various special purposes, such as education, social security, sport, tourism, health and various civil society entities.
* Contributions to the Social Integration Program (PIS) and Social Security Financing (COFINS): contributions that apply at a combined rate of 9.25% on companies' gross revenue, in the non-cumulative regime, and are intended for social security financing.
* Service Tax (ISS): the value of services provided by betting operators will be taxed by municipalities and the Federal District at a rate that can vary from 2% to 5%.
* Income Taxation: operators' income is taxed at a rate of 34%, made up of 25% Corporate Income Tax (IRPJ) and 9% Social Contribution on Net Profit (CSLL).
Depending on the tax, the calculation bases vary (revenue or GGR and income) which makes it difficult to calculate the effective tax burden.
2. The impact of tax reform
Under the pretext of simplifying and uncomplicating the tax collection system, the tax reform proposes to reduce the number of taxes as well as the number of ancillary obligations without generating an increase in the tax burden for the country. The government's widely disseminated discourse is that there will be a redistribution of the tax burden between different economic sectors, but always preserving the global tax burden.
Preserving the global tax burden is a huge challenge, as the government lacks clarity on what Brazil's current tax burden is. Thus, we work based on presumptions that, if not confirmed in the coming years, will allow adjustments to the Brazilian tax regime. Every five years, the Executive Branch and the IBS Management Committee will carry out an assessment of the efficiency and effectiveness of the regimes and rates applied.
So many variables and uncertainties generate insecurities, especially regarding the services sector, which tends to be more burdened by the tax reform proposal. The unification of taxes levied on gaming services, PIS, COFINS and ISS, with other taxes not applicable to the industry such as IPI and ICMS, as per the text currently being processed in the National Congress, will generate a considerable increase tax burden for the electronic games industry.
Of the current 11.25% charged on revenue, the sector should reach 26.5% on this basis, given the replacement of the aforementioned taxes by the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS). In other words, taxes charged on revenue must triple.
With regard to income taxation, the topic has yet to begin discussions in the Chamber of Deputies and there is little that has been defined. There are signs about the end of the exemption on dividends distributed by companies, changes in interest on equity paid to shareholders, changes in payroll taxation and the implementation of an income tax with more progressive bands. But, at this moment, it is difficult to predict whether we will have another tax increase here.
However, the tax reform proposal also foresees the creation of a new tax, the Selective Tax (IS), which will apply to products and services considered harmful to health or the environment. Article 393 of Complementary Law Project (PLP) 68/24 defines IS as a selective tax, intended to burden operations related to harmful goods and services.
In the text approved by the Chamber of Deputies, the IS will be applicable to the sports betting and online gaming sector, further increasing the tax burden. At this moment, Congress is discussing complementary law matters, so the IS rate on online games, if approved, must be defined in a next stage of the legislative process. But as there are no clear limits to the tax rate, as long as it is not confiscatory, a significantly increased burden could be imposed on the sector, which only increases the industry's concerns.
On this subject, it is worth noting that Law 13,756/18, in its article 29, provides that the operator, in addition to all corporate taxes that any service provider pays, will have an additional charge: a contribution of 12% on its revenue gross. This contribution is extra-fiscal in nature, that is, its purpose is not only to raise money, but also to discourage gaming activity, using the resources collected to correct social distortions in the areas of health, public safety and sport.
IS is a tax of an extra-fiscal nature, intended to discourage behavior and correct social distortions, as well as the 12% contribution already applied to the online gaming sector. Instituting two taxes with the same nature and purpose is redundant and ineffective. A more logical approach would be to adjust the existing contribution rate, rather than introducing a new tax that could create legal uncertainty and increase evasion into the parallel market.
3. Risks and consequences
The introduction of an even higher tax burden brings several risks to the sports betting and online gaming sector:
* Escape to the parallel market: with the rise in taxes, many operators may choose to continue in the informal market, where controls and regulations are less rigorous. This would not only reduce tax revenue, but also increase the risks of fraud and money laundering.
* Reduced competitiveness: foreign operators could reconsider their investments in Brazil due to high operating costs, preferring markets with more favorable tax regimes.
* Impact on consumers: high costs would inevitably be passed on to consumers, making betting more expensive and reducing user engagement.
Are these desired effects? Are those who defend increased taxes for the gaming sector clear about the side effects of what they are defending? I do not think so.
Conclusion
The high tax burden already represents a significant challenge for the sports betting and online gaming sector in Brazil. With the possible introduction of the Selective Tax and the uncertainties about the direction the reform will take in relation to income taxation, the risks of economic unviability and promotion of the illegal market become even more pronounced.
Brazil already has an adequate extra-fiscal mechanism to regulate the gaming sector through the 12% contribution provided for in Law 13,756/18. Instituting the IS on this sector is an unnecessary and potentially harmful measure. It is crucial that tax reform takes into account the need for a balance between tax revenue and maintaining a competitive and safe business environment, thus ensuring the sustainability and healthy growth of this promising sector.
Rafael Marchetti Marcondes
Legal and regulatory director of IBJR – Brazilian Institute of Responsible Gaming
