Remote Gambling Bill [PMB3-2015]: input by National Treasury, SARS & Financial Intelligence Centre

Meeting report

The Chairperson welcomed everyone to the meeting and the agenda for the meeting was adopted.

Input by National Treasury and the South African Revenue Services (SARS) on the Remote Gambling Bill

Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, asked for some guidance on this matter, because the terms of reference for this meeting was a little bit unclear and therefore no formal presentation had been prepared. The gambling policy was led by the Department of Trade and Industry (DTI) although National Treasury had been asked to come in at various points in the last few years, starting with the amendments to the National Gambling Act in 2007 to deal with the regulation of interactive gambling. In 2011, the former Minister of Finance announced a gambling tax and this was something that Treasury still intended to go through with. It would be a form of sin tax similar to the tax paid on tobacco. It was meant to be part of a package of measures that would dissuade people from overindulging in gambling to the point that people became over indebted. Putting the extra excise on cigarettes for example would not by itself stop people from smoking, but it needed a set of complementary measures such as restrictions on where people could smoke and educating people on the potential harms of smoking. Similarly, tax in the gambling industry was meant to dissuade people, but to be effective it should be part of the measures led by the DTI. A complexity in terms of this matter was that it was a concurrent function between the national and the provincial governments. In light of the dangers of excessive gambling, National Treasury was open to either prohibiting online gambling or regulating the sector as long as the choice was adequately enforced. If online gambling was banned the issue of tax would not arise. The South African Reserve bank (SARB) was able to get involved, but there were limitations because not all operators identified themselves as gambling institutions or operators. Digital commerce was an area that had been looked at by the Organisation for Economic Co-operation and Development (OECD) and the Davis Tax Committee and a set of action points had been flagged around digital commerce. National Treasury had introduced VAT on digital services provided to South Africa and many overseas establishments now had to charge VAT and had a system for paying it over. It worked with bigger registered companies, but it was a challenge when it came to the smaller unregistered companies. National Treasury, SARS, the Financial Intelligence Centre (FIC) and the South African Reserve Bank could certainly provide the mechanisms to support the banning or regulation of online gambling, but there would be challenges either way. Related to tax was the revenue that would be generated and the Remote Gambling Bill could not adequately deal with such issues, because the Constitution did require a particular approach and the Bill should be scrutinised to see if constitutional responsibilities were not being transgressed. The gambling industry was one of the most vulnerable areas in terms of money laundering. South Africa was a member of the Financial Action Task Force (FATF) which was a multilateral body that took responsibility for coordinating actions against money laundering. South Africa was under very strong commitments to implement the measures agreed to, because any weaknesses in the system opened up the country’s financial institutions to action by other regulators, e.g. UK authorities imposed penalties on a South African bank for not meeting certain standards last year. The Remote Gambling Bill did not deal with some of these issues adequately, but these issues should ultimately be dealt with through the FIC Act. Both in terms of taxation and money laundering, if an operator was not registered in South Africa nor had infrastructure in the country, it almost became impossible to tax or monitor.

Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS, said the tax space had normal tax issues such as the familiar income tax and VAT and then there were gambling specific taxes. For income tax, locally based operators would be taxed like everybody else. It would be difficult in terms of foreign operators if they did not have a permanent establishment or a physical presence within the country and it would make normal taxation very difficult if a double taxation agreement was in place with an operator’s home jurisdiction. A double taxation agreement essentially said if there was no permanent establishment in the source jurisdiction (South Africa) then the resident jurisdiction got to tax everything. This was an issue that was of great interest internationally currently because of the shift to digital and the OECD had done a fair amount of work on this matter, but it remained a thorny question. The Remote Gambling Bill, unlike the 2008 National Gambling Amendment Act, gave no specific requirement for gambling equipment to be based here. A competent attorney would easily get around the fact that the place of business should be here, but not necessarily the gambling equipment. As soon as that dichotomy took place, some very problematic tax questions arose. Locally based companies were required to levy VAT and as of 2014 offshore companies were also required to levy VAT. Currently there were three offshore registered gambling providers and the amounts they have paid over had been minimal. The proposed interactive gambling tax would have been the domain of the National Gambling Board (NGB), because the NGB had greater insight into the day to day operations than SARS. SARS would be the administrator of the proposed overall gambling tax.

Mr Momoniat said from the FIC perspective there were some problems because there was no identification or verification requirements contained in the Bill. It seemed the Remote Gambling Bill allowed players to transact without identification and verification up to the point of payout. There were a lot of such areas that exposed South Africa’s entire financial system to weaknesses. The aim was to tighten South Africa’s standards, but this Bill seemed to weaken provisions.

Discussion

The Chairperson said she did not recall whether it had been specified that gambling equipment should be in South Africa. She asked which other countries were obliged by legislation to have the gambling equipment within the operating jurisdiction.

Mr Tomasek replied that the National Gambling Amendment Act of 2008 amended section 37 and inserted subsection 4 to read that it was the ‘condition of every licence to make interactive games available to be played, but the interactive gambling equipment used by the interactive provider must be situated within the Republic’. It solved some of the problems that would be faced from a tax perspective. The Remote Gambling Bill made it very clear that there needed to be a business established within South Africa, but one of the other clauses implied that there could be separate premises where the equipment could be held. That created space for innovative attorneys to make the argument that there needed to be a business establishment in South Africa, but the equipment could be somewhere else.

Mr G Hill-Lewis (DA) said the legal advice he received prior to the introduction of the Bill was that he should consult National Treasury in the drafting of the Bill. He wanted it put on record that he wrote to the Office of the Minister of Finance on three separate occasions to ask for comments on the Bill and unfortunately never received a response to any of those letters. Some of the comments made today were very helpful and would have been included in the Bill if it had been received when comments on the Bill had been requested. The comments on the gambling equipment and physical infrastructure were noted, because the intention of the Bill was very much that all of the infrastructure, offices and machinery were located in South Africa and that tax was paid in South Africa. He asked suggestions for wording from other legislation that would make that intention water tight. Ideally the Committee should have also heard from SARB, because the DTI over the course of the last few weeks often made the case that they would rely very heavily on SARB and on National Treasury to enforce the policy and to be the “teeth behind the prohibition”. The status quo was that online gambling was already illegal and prohibited and he asked if National Treasury was aware of the track record of enforcing the prohibition and what consultation had taken place between Treasury and the DTI in the development of this policy. He asked whether National Treasury had the capacity or the plans in place to be able to enforce such a prohibition in the future and if so, to sketch out the details of those plans.

The Chairperson reminded Mr Hill-Lewis that the draft policy had been published for public comments and this session should be focused on the Bill that had been tabled.

Mr Momoniat said he was not aware of any letters written to the Minister and he asked Mr Hill-Lewis to provide him with the details of the correspondence. There was a good system in place so the letters could be traced, but it was very surprising that there had been no response. There had been ongoing discussions on this matter over the years, but Mr Momoniat stated that he had not been involved in any recent consultations with DTI. Whether to prohibit or to regulate was a difficult issue and there would always be those that even when it was legalised would not want to register. There was no doubt that the enforcement capacity could be improved. DTI did not need National Treasury’s permission to meet with SARB and SARB should be able to comment on their consultations with the Department. There were investigative systems in place through the banking system, but it was not always clear that payments were done to a gambling institution. Many institutions operated under the guise of legal operations such as hotel groups and then the systems would find it difficult to pick up illegal payments. The challenge was twofold, because it spoke to the ability to stop payments and the ability to take action once payments had been made. These systems should be developed to address not only gambling but also the sphere of digital commerce.

Mr Hill-Lewis said he would forward the details of his correspondence to the Minister’s office to Mr Momoniat.

Mr A Williams (ANC) asked which three gambling providers had been registered and how they had been registered if it was illegal. If the Remote Gambling Bill was passed, he wanted to know how it would be enforced that operators stayed local and if any mechanism could be put in place to ensure that operators did not simply close their businesses and moved overseas after being licensed.

Mr Momoniat replied that even if it was illegal, when an activity took place and an income was generated, tax still needed to be paid on that income.

Mr Tomasek replied that SARS was neutral whether income was from legal or illegal sources and either or both would be taxed. It was not necessarily that the service provided was a gambling service and it might well have been other services related to leisure or entertainment activities and the three SARS had been able to track down were involved in gambling. If an operator moved their establishment offshore after being licensed the licence should be forfeited, but similar challenges existed around policing the boundaries of regulation and prohibition.

Mr Hill-Lewis agreed that enforcing regulations was difficult and in terms of gambling it required effort and resources. The question was not on the difficulty of regulation, but rather on the resource position of the South African government. The status quo was that online gambling was already illegal, but it was not enforced in South Africa. There was no mechanism by which the government was able to raise revenue to enforce prohibition. The great benefit of regulation as opposed to prohibition was that it allowed for far stricter enforcement of regulation, because it also provided the mechanisms to raise revenue. It was not about making a profit, but it was about raising the revenue needed to conduct desired enforcement. He asked the Chairperson if the Department could comment on the statement by Mr Momoniat that he was not aware of any recent consultation with DTI on the proposed policy and moreover that there was no real understanding of the cost implications and technical infrastructure implications to enforce the proposal. It was concerning, because responses to the policy or to this Bill should be on the basis of a thorough understanding of the cost and enforcement implications for the government.

Mr Momoniat replied that although he was not aware of any recent consultations with DTI on this Bill there had been many consultations over the years on the amendments to the National Gambling Act, interactive gambling and gambling tax. Other officials might have consulted with DTI, but he had not been personally involved in consultations or details on this Bill.

Mr N Koornhof (ANC) said a lot of evidence had been put before the Committee that stated that it would be very difficult to regulate remote gambling because of the problems created by cyberspace. He asked if the tax revenue possibilities had been investigated and whether there were examples of countries that have legalised online gambling benefiting through tax revenue.

Mr Momoniat replied that there were tax revenue possibilities, but it could not be narrowly viewed as simply a means to make money if the cost to society was higher. This issue should be led by DTI and the Committee through the policy. Many countries did not share tax information so people started playing the tax arbitrage route. In the financial sector regulatory environment there were relationships with different regulators and there were mechanisms for them to provide information. In the gambling sector there were almost no information sharing and other jurisdictions were not obliged to provide information. Perhaps it would change or the VAT angle could be used to get more information.

The Chairperson asked whether it was currently a requirement in the Remote Gambling Bill that gambling equipment should be located in South Africa.

Mr Hill-Lewis replied that the Bill required that the business establishment should be located in South Africa and the licensing agreement should be properly enforced to ensure that the infrastructure and the gambling equipment stayed in South Africa. It would be great if wording could be suggested to amend that section of the Bill.

The Chairperson said the Committee had been led to believe that it was impossible to control money going out of the country.

Mr Momoniat replied that there were exchange control limits for businesses and individuals. SARB could physically stop payment if those limits were exceeded but it also depended on the mechanisms. There were mechanisms to record it and to take action post the payment.

The Chairperson said it could be assumed that online gamblers did not transfer suspiciously large amounts of money. The Committee needed to look at the feasibility of every aspect of prohibition or regulation.

Mr Momoniat said that even a personal credit card had a limit that a bank would not exceed.

Mr Williams asked how remote gambling related to money laundering as opposed to money laundering in the legal gambling industry.

Mr Momoniat replied issues relating to money laundering differed according to the types of tax. In land-based casinos counterfeit chips were often exchanged for money claiming it as winnings. Remote gambling created a different set of problems. The Bill stated that ‘supervisors must have the powers and capabilities to access punter and transaction information held by the operator’. He asked if the operator was not based here how that information would be accessed. Current provisions stated that ‘only persons that make available gambling activities falling under section 3 of the National Gambling Act are subject to the FIC Act’. There was a concern that a regulatory gap would be created given that this Bill removed interactive gambling from the National Gambling Act. Fragmentation of laws would result in regulatory gaps and there were also issues related to definitions. Definitions allowed for online ‘person to person’ gambling which posed a high risk for money laundering as the likelihood for collusions increased. South Africa also had a unique challenge in terms of the concurrent jurisdiction of gambling. There were a lot of questions that needed to be addressed and it came down to whether the enforcement capacity existed or could be created for either circumstance. Children had become very capable of understanding and manoeuvring technology and remote gambling also posed a threat in terms of under age gambling.

The Chairperson said the Committee would look at the policy first and she asked when the policy process would come to fruition.

Ms Zodwa Ntuli, Deputy Director-General: Consumer and Corporate Regulation Division, DTI, replied that the draft policy was out for public comments. It was expected that by the end of July 2015 all comments would have been received and the Department would then do an analysis. The final version should be ready by the end of August 2015. It also needed to go to the National Gambling Policy Council and if the Council did not sit in August the final version would not come through. The Department would try its best to make it happen.

The Chairperson said it was unusual for the Committee to keep a Bill on the table for more than six months, but the Committee understood that policy drove legislation. She asked the DTI to comment on the liquor policy process.

Ms Ntuli said the policies were running simultaneously, because the processes were the same.

Mr D Macpherson (DA) said good legislation needed good policy. In terms of the liquor policy he felt that what the DTI put before the Committee was not sufficient, was unsupported by research and Members were not given enough time to engage the Department on the policy. The liquor industry and civil society should also get an opportunity to give input on what should be in the policy. Members needed to make submissions on this policy as much as other stakeholders and in order to make informed submissions, input from everyone concerned was needed and supporting research needed to be produced. It was for this reason that he requested further engagement with DTI, the industry and other stakeholders. The new deadline for the policy was 13 August 2015 and it gave the Committee sufficient time to deal with the policy comprehensively.

The Chairperson said the Minister already granted the extension as per the request from industry and the Committee would not be having its own public hearings. The policy would first go to the National Liquor Policy Council before the policy came before Parliament.

Mr MacDonald Netshitenzhe, Chief Director: Policy and Legislation, DTI, confirmed that after the consultation process it would go the National Liquor Policy Council. Thereafter it would to Cabinet who would adopt it as a policy of government and it would then be brought to Parliament to develop legislation on the policy position.

Ms Ntuli said the Department could forward all the studies and research to Mr Macpherson, because it had been referred in the policy document.

Mr Macpherson said it was disturbing that the Committee had to wait for government to pronounce on this policy and Parliament would essentially deal with it after the fact. That was not consultation and Members could not make informed submissions without sufficiently dealing with policy proposals. There was no point in receiving documentation if it could not be engaged or debated. He urged the Chairperson to allow for an opportunity to meet with DTI, the industry and stakeholders to further discuss issues.

Adv Daksha Kassan, Senior Parliamentary Legal Adviser said the process as it was set out was constitutional. Section 85 of the Constitution stated that the ‘development and implementation of national policy fell within the domain of the Executive’. It was only once the policy had been approved by Cabinet and it was transformed into legislation did it become the domain of Parliament in terms of Section 44. The obligation of Parliament in respect of facilitating public involvement only pertained to the legislative processes of the Assembly or the Committee.

The Chairperson said the liquor policy was a very serious matter and it would be strongly pursued. Mr Macpherson had an individual right to attend those public hearings and make comments, because it was in the public domain. The Remote Gambling Bill would not be dragged out and the horseracing industry and the National Gambling Board would also still be engaged with. She asked Adv Kassan to look at constitutional issues around concurrency, norms and standards and the manner in which provincial boards flouted laws and a draft of her findings should be submitted to the Chairperson in three weeks.

Mr Macpherson noted that the KwaZulu-Natal Legislature was dealing with its Gambling Bill, but the national gambling policy had not been finalised. This Bill was being processed and it was substantially in conflict with the proposed gambling policy.

The Chairperson said she had been in contact with the KwaZulu-Natal MEC and had been informed of the processes and it did not show any conflict of interest issues.

The Chairperson thanked everyone and the meeting was adjourned.