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Is there scope to rationalise online betting and gaming regulation in the Philippines?

Sunday, 01 May 2011 16:44
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A wide-ranging review of gaming policy announced last year in the Philippines by the country’s incoming president Benigno Aquino included asking whether there were any grounds for dovetailing the development and regulation of online and land-based gaming.

The question came up recently when Inside Asian Gaming spoke to Jose Mari Ponce, Administrator and CEO of Cagayan Economic Zone Authority (CEZA), on the fringes of the iGaming Asia Congress organised by Beacon Events at the Grand Hyatt in Macau.

“When the President instructed PAGCOR to look at the land-based operation, his order also asked for a review of the relationship between online gaming and land-based, and how that could be developed to generate more revenue,” says Secretary Ponce.

The country has been a trailblazer in embracing and licensing new technology for gaming and betting services—aimed both at offshore and onshore markets. It has led to some of the world’s leading offshore online betting brands choosing to operate from the country. But the Philippines market lead has created some overlapping of jurisdictional competencies as the industry and the delivery technology has developed.

An example is that currently in the Philippines there are two licensing authorities covering online gaming (three if you include the country’s National Telecommunications Commission, which oversees the provision of mobile telephony services including 3G services capable of accessing Internet-delivered gambling services). Thankfully operators only need one licence from one regulator at any one time. The question is who gets to issue it. Some observers say the multi-agency approach encourages competing fiefdoms within the industry, with one regulator sometimes seeking to exert control over bits of another’s business.

For the purposes of this discussion the two relevant Philippines bodies covering online gaming services are CEZA—via its master licensor, a commercial company called First Cagayan Leisure and Resort Corporation—and the Philippine Amusement and Gaming Corporation (PAGCOR). PAGCOR wears two hats as a regulator and an operator of land-based casinos and is the ‘senior’ of the two bodies. It was set up 33 years ago to regulate the land-based industry. That was at a time when the Internet was little more than a computer communication network for university academics. First Cagayan was set up under the CEZA framework (itself designed to help an underdeveloped province in the northeast of the main island of Luzon). By the time CEZA’s Interactive Gaming Act (2003), was passed by lawmakers, the Internet was a well-developed medium for delivering goods and services including casino gaming and sports betting. CEZA was the first government-sanctioned body in Asia to offer a legal licensing regime for online, offshore, gaming services aimed at nondomestic players.

An argument from some in the pro-reform lobby is that licensing for online gaming should ideally now come under CEZA/First Cagayan. This, proponents argue, would streamline the process and make the taxation burden more consistent (i.e. low). That in turn could lead to a bigger industry and therefore a bigger cake for all the different groups with stakes in the industry—the players, the service providers, the taxpayers and the state.

“Some casinos in the Philippines have online sports books licensed by PAGCOR. The PAGCOR tax rates are a bit expensive compared to us,” says Jose Mari Ponce of CEZA.

“That is what we are trying to rationalise, so that all online gaming can be taxed at the same rate. We charge 2% of the gross. The 2% of the gross charged in CEZA is a little bit less than the industry standard [offshore tax rates]. We have been using that since 2004.”

Industry sources say the ‘online sports books’ referred to by Mr Ponce are essentially ‘hybrid’ betting services based on phone betting but with prices posted online. Such operations usually pay 60% tax on the gross to PAGCOR. In return PAGCOR usually provides the staff for the operation. Alternatively operators can supply their own staff and negotiate a lower tax rate on the gross.

If some kind of rationalisation of online taxation policy were to take place, could it be done retrospectively? In other words, could those services paying the higher rate to PAGCOR at the moment end up paying the lower rate to CEZA?

“It may be applied even to the old deals, so we can give these investors clear incentives,” suggests Secretary Ponce.

“We wouldn’t want to disadvantage existing market participants by saddling them with the old, higher, tax rates. In practical terms what sometimes happens is that operators close their outlet and then reapply [for a First Cagayan licence]. “

In practice, industry sources say it might be very hard to rationalise online tax rates and/or consolidate regulating authorities. There are some sound administrative reasons why a multi-track approach to licensing online gaming came into being. They include the need to categorise services by target market (foreign or domestic players); the physical location of the betting process (cyberspace or casino/parlour) and the medium used to deliver the service (home computer, Internet café, public betting terminal or cellular phone). In this regard the Philippines is following a model familiar to other jurisdictions.

As one service provider explained: “There are PAGCOR-licensed casinos that only allow foreign players in, so in that case CEZA might be able to license the casino’s sports book. But in casinos where local players are allowed in, CEZA wouldn’t necessarily be the appropriate body. CEZA licensees are specifically precluded from taking bets from domestic players in the Philippines.”

In the online age, onshore/offshore distinctions cannot easily be ring-fenced. Technology has created overlaps in jurisdictional and regulatory competences. PAGCOR’s role is proof of that. Back in the late 1970s when PAGCOR was set up, the nearest thing to Internet communication was the fax machine and telephone. Historically therefore telephone betting was licensed by PAGCOR. Fast forward to the second decade of the 21st century and those telephone betting services have metamorphosed into hybrid products. An example of a hybrid sports betting product in the Philippines is where a player visits an outlet (either in a casino or in a specialist shop) to open an account but thereafter can place a bet over the phone or in person. Although the betting process itself is not conducted online, bet prices can be posted online by the service provider and reviewed online by the player and then bets called in by phone.

In other words, as the Internet has developed as a pipe for delivering interactive betting services and taken over from purely voice telephony betting, PAGCOR has got to keep oversight of an historic telephone betting product—but now with pricing delivered by online methods.

Not only has this multi-track approach to licensing had a long time to mature but also there appear to be many special arrangements and exceptions to general rules embodied retrospectively within its regulatory and taxation frameworks.

The option for operators of ‘hybrid’ online services (telephone betting with prices updated online) to pay a lower tax rate on the gross than officially advertised provided they bring in their own staff team, is a good example.

Unpicking such arrangements could be extraordinarily difficult in practical terms and also in political terms, as the different regulatory agencies involved are likely to want to protect their fiefdoms. In addition, any service provider that has been able to negotiate for itself tax rates or other conditions that are an improvement on the industry norm or average in its market segment, clearly has no interest in changing the status quo. Given those forces acting on the Philippines online gaming and betting industry, don’t expect the multi-track, multiagency approach to be abolished soon.

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