Could a 1% consumption tax topple Peru’s betting ambitions?

Peru’s gambling landscape is set for a significant transformation with the introduction of a betting consumption tax in 2025, raising concerns among industry stakeholders about its potential effects on market growth, the risk of double taxation, and an upsurge in black market activity.

This article was updated on December 19, 2024, to reflect the recent approval of the consumption tax by the Peruvian government on December 14.

The Peruvian gambling sector has undergone remarkable developments in 2024, particularly with the implementation of formal online regulations. Analysts predict that this will position Peru as the third-largest online betting market in South America. The landmark Law No. 31557, introduced to regulate online sports betting and iGaming, took effect in February after being ratified by President Pedro Castillo in 2022.

The Ministry of Foreign Trade and Tourism (Mincetur), acting as the regulatory authority, began accepting online license applications in February, driving significant interest from major operators such as Betsson, Rush Street Interactive, and Stake. By March 21, 2024, a total of 145 applications had been submitted, underscoring the robust potential of the market.

Law No. 31557 establishes a favorable regulatory framework for operators with a competitive tax rate of 12% on gross gaming revenue (GGR). However, the anticipated implementation of a 1% consumption tax on the value of each bet has stirred concerns among industry participants.

The actual market launch has been a point of contention, as operators who were already active when the law was enacted continued operations during the licensing phase. Gonzalo Perez, CEO of Apuesta Total, confirmed that these operators had to ensure their platforms were officially certified by November 15 to sustain their operations legally.

Initially, optimism clouded the industry, as Perez projected a competitive landscape among operators. However, the reintroduction of the consumption tax, initially discussed in past legislative sessions, has dampened enthusiasm. Legislative Decree 1644, published in September 2024, officially reinstated the proposed 1% tax, set to take effect in January 2025.

According to Ramon Bueno-Tizon, executive director at EY’s international tax and transaction services, the Peruvian government anticipates an annual revenue collection of approximately Sol 110 million (£22.7 million/€27.4 million/$29.2 million) from the consumption tax.

Perez expressed skepticism about the feasibility of adopting the tax by 2024, citing the time required for operators to adjust their systems. He noted the complexities involved in recalibrating for a 1% deduction on each bet, necessitating comprehensive technological adaptations and potential recertification processes.

Implications for Peru’s Rapid Growth in Gambling

Perez has identified two critical concerns regarding the decree. Firstly, he fears that the 1% turnover tax could inadvertently lead to double taxation for operators. Describing the tax as “outrageous,” he argues that the government lacks a comprehensive understanding of the intricacies of the betting sector. This policy could ultimately inflate the effective tax burden on companies like Apuesta Total, potentially doubling the existing 12% GGR tax.

In a LinkedIn post following the government’s announcement, Perez elaborated on the challenges operators face in adapting to this new tax regime, expecting that the necessary recertification process could extend from eight to twelve months.

“It is critical to remember that we operate under a framework requiring state-approved laboratory certifications,” he remarked. “Operating without proper certification not only leads to hefty fines but may also result in the revocation of operational licenses.”

As the industry braces for change, Perez anticipates challenging months ahead. He remains hopeful for governmental discretion to avoid compromising anticipated tax revenues.

The Potential Resurgence of Illegal Operators

This tax could significantly undermine the progress that has been made towards regulated gambling in Peru.

Peru’s regulatory landscape has been lauded as one of the most robust in Latin America, particularly in contrast to Brazil, which is currently grappling with governmental pushback regarding its own regulatory frameworks. Brazil is set to launch its legal betting market on January 1, 2025, which could escalate its status as South America’s largest legal betting market.

Zoran Milosevic, CEO of MeridianBet and a long-standing operator in Peru, emphasizes that regulatory vigilance will be crucial for sustaining market integrity. Perez shares concerns that increased taxation could push players and operators back into illegal channels, reversing the positive momentum achieved in recent years.

Nicolás Samohod Rivarola, a legal expert in gambling at Vidal Caceres law firm, echoes Perez’s apprehensions regarding the potentially “detrimental” effects of the consumption tax. He warns that high taxation levels could deter both players and operators from engaging in the legal market. “Should this tax burden become untenable, many may reconsider their position in Peru,” he stated. “The most concerning outcome is that operators and players might revert to unregulated alternatives.”

Assessing the Potential Impact of the Consumption Tax

The long-term effects of the consumption tax remain uncertain; however, Perez warns it may lead to drastic measures, including potential job cuts at Apuesta Total.

Conversely, Milosevic, drawing from his experiences with increasing regulations in Europe, appears optimistic regarding Peru’s outlook. He believes that tighter regulations, while challenging, could ultimately refine competition within the market by reducing the number of operators.

“This situation is not unique; similar trends are observed across Europe where the landscape is evolving,” he noted. “Our projections suggest that the forthcoming tax could lead to a consolidation of operators, with estimates indicating that only around 50 firms might remain operational post-implementation.”

As for how operators might absorb these additional expenses, Perez speculates that many may opt to pass these costs onto consumers to mitigate financial impacts. “In theory, consumption taxes are borne by consumers,” he remarked. “However, the decision to transfer these costs will vary among operators, with the initial year likely reflecting substantial impacts on profit margins.”

Strategic Recommendations for Adaptation

Rivarola advocates for a revision of tax regulations to better facilitate foreign operators entering the Peruvian market. “We must develop tax policies that actively encourage foreign firms willing to invest in our country,” he stated.

Since the tax policy decision falls under government jurisdiction, Mincetur’s capacity for influence is limited. Nevertheless, they have facilitated discussions, as indicated by Perez’s recent meeting with the economy minister. “While the Ministry is attentive to our concerns, their hands are largely tied,” he explained. “They recognize the potential fallout from the tax policy, including the risk of pushing stakeholders towards the illegal market, thereby undermining national gaming tax revenues.”

A Pivotal Moment for Peru’s Gambling Industry

The potential ramifications of the consumption tax are creating uncertainty, even among seasoned figures like Perez within Peru’s gambling industry.

Despite a largely smooth transition to regulated gambling thus far, this situation serves as a stark reminder of the precarious nature of gaming legislation. The risk of unregulated operators re-emerging poses a significant challenge, and unless Mincetur effectively intervenes to limit offshore gambling activity, the tax could become a critical impediment to the growth of Peru’s regulated gambling market.

As Peru approaches a defining moment in its gambling landscape, the outcome of this tax initiative may ultimately determine whether it solidifies its status as a top-three market in Latin America or grapples with the same black-market challenges faced by many of its regional counterparts.