I work for the Revenue and some years ago, I had issued tax assessments on some gambling operators following a tax audit on all of them.
Under the local gambling law, a monthly gaming tax is payable by the operator on his gross gambling yield for the month from its table games activity. From an audit perspective, one would note that no invoices are issued in these types of operation and there is a need for the keeping of proper books & records. This is emphasised in our Legislation which governs the administration of gambling taxes. The Act does not only specify the keeping of proper books & records but also requires the duration of 5 years that these records should be kept and the production of these records to the Revenue when requested to do so. It also gives the Revenue the power to issue an assessment if such conditions are not met.
All the audits of the different operators were simultaneously carried out by different teams working under me. The audits were carried out in accordance with the Revenue's standard operating procedures. Some additional objectives were added by me, such as the provision of an on the job training of audit staffs and an in-depth appraisal and documentation of the operators' system of keeping books and records with a view to make recommendations for the enhancement of transparency in the sector.
Weaknesses were identified in most of the cases, particularly where the businesses were privately owned and managed, compared to the State-owned companies which had good internal control procedures, sufficient segregation of duties and a better record keeping system. Some of these weaknesses are:
1. Cash counts of money collected by croupiers and dropped inside each gaming table's drop-box are performed by only one or two senior staffs or the owner himself;
2. There is no record against which the correctness of the amount of money counted could be cross-checked. To the auditor, the recorded amount was to be taken as good even though there was the risk that a different amount was recorded compared to what was counted. In the government-owned businesses a senior employee, the pit-boss, normally (during gameplay) records the money being dropped by the croupiers into the respective drop-box and same is entered on the corresponding table's night sheet. Each table has its own recording sheet on which all chip allocations, drop-box feeding and other transactions are recorded and signed by the respective employees.
3. All source documents including the daily table sheets are destroyed within a few days leaving no scope for an audit trail. Only a summary sheet is kept by the operators showing only daily profit/loss. No details are available to allow verification on how these profits/losses have been arrived at with regards to their accuracy or completeness i.e the number of active tables which have contributed to reaching such amounts.
It, therefore, followed that in most cases, our audits were hampered and we only had to believe on the correctness of what were shown on the monthly summary sheets.
Following the completion of the direct examinations (at least those that could be performed), the audit teams performed a trend analysis of monthly gambling income of their respective taxpayers. It was found that in respect of ALL the privately owned cases, there was a SUDDEN, HIGH (ranging from 200% to over 400%) and SUSTAINED increase in their reported gambling income as from ONLY ONE AND SAME particular month. This pattern WAS NOT observed among the State-owned operators who had a better system of keeping books and records. As supervisor of the different audit teams, I instructed them to investigate the sudden surge and to identify any possible reason, both internal or external. Explanations were also sought from each of the operators. Their explanations ranged from (1) no explanations at all; (2) increase due to the closure of a competitor's business more than a year from the point of the sudden surge there were also other nearby operators; and (3) the organisation of World Poker Tournaments with the first one taking place 5 months after the sudden increase was noted.
The only external factor that we identified was that there was a very large decrease in the gaming tax rate (from 50% to 15%) EXACTLY from the month in which the SUDDEN surge was noted. It is to be noted that the cost of the gaming tax is not borne by players but by the operators.
We performed tests in order to identify whether there was really an increase in activity OR operators under-reporting their turnover when the tax rate was 50% high compared to when it was decreased to just 15%. These tests are:
1. Whether there was a comparative increase in wages and salaries in respect of table game employees - No records were available;
2. Whether there was a comparative increase in the number of gaming tables used - In most cases the usage capacity stayed the same, while in some, this test could not be carried out as the records were not available since consistently being destroyed by the operator.
Given the above, we proceeded with the issue of a claim for additional tax due in respect of the earlier periods where the tax rate was high on the assumption that the operators had been under-reporting their turnover. As a basis, we multiplied those figures by a factor which we derived from the total turnover reported in the 12 months following the decrease in the tax rate by the 12 months total turnover preceding the decrease in the tax rate. We took a period of 12 months to reduce the impact of seasonal fluctuations.
Many of the operators who had been assessed by my teams have reached an agreement with the Objection Department of the Revenue (I do not know their basis for the reduction of their liability).
One of the operators recently won his case by successfully showing to the committee that the sudden increase was due to the Poker tournaments it organised. It produced documentary evidence which was not available to me during our audit but which I could have questioned. These are:
1. Showing that the poker tournaments which were organised as from February 2012 triggered a SUDDEN increase as from October 2011 (month of tax rate reduction). They mentioned that the qualification rounds took that long without producing any supporting documents. All documents they produced were authorisation letter addressed to the Regulatory dated December 2011 (3 months after sudden increase) and advertisements relating to the tournament which also dated months after the sudden increase.
2. They produced " invoices" showing that they had increased their table capacity. However, they only showed PRO-FORMA INVOICES for only two tables which were dated 11 months! after the sudden increase. Other invoices produce were about tokens and were irrelevant as they were for the period 2008 and 2009.
3. Stating that the number of live game personnel was increased but no supporting documents were produced.
4. Their fully qualified Accountant with years of experience also deponed in their case by justifying the destruction of the supporting documents only a week after the transactions with the reason that they become bulky.
During the hearing, my attempt to show that the justification items produced were not relevant to show the sudden increase in October 2011 was turned down as I was OVER FOCUSING the October 2011. The negative correlation between tax rate and tax compliance was rejected by the Tribunal on the basis that there is not proof of it. In my Department, I am treated as the bad guy as I went for the kill without adopting a neutral approach (?). Most of my colleagues run away from the audit of the gambling sector and even AVOID seeing the logic (such as the invoice dates). While most of the documents were produced by the taxpayer at objection level and the objection Unit determined the case by maintaining the assessment, they FAILED to support their determination in their Statment of Facts to the Tribunal. Perhaps, had they done so, the Revenue could have made an appeal to the Supreme Court.
I need to better prepare for a few other similar cases. that's why I need to know of any studies or reports on any correlation between tax rate and tax compliance.
I did err in the computation of the upliftment factor. By trying to negate the impact of seasonal fluctuation and extending the basis period to 12 months I overlapped the periods in which the International Tournaments took place. Had I made the appropriate allowance, the multiplier would have been 1.9 rather than 1.90.