Industry update: Regional operations shift into high gear

Published in: Latest Intelligence  

Gaming operators investing in the Philippines won’t face a higher tax bill as a result of a recent controversial tax directive, officials from Philippine Amusement and Gaming Corp. (Pagcor) assured industry figures gathered for the G2E Asia conference in Macau this week.

Taxes were among the leading concerns raised in the forums as Taiwan recently sketched out rates in its draft casino law and Japan might be following suit.

The Philippines has been in the spotlight as word has spread of a Bureau of Internal Revenue ruling that the country’s casino and gambling operators must pay 30 percent corporate income tax. Until now, the understanding was that the casinos would pay a 5 percent franchise tax from gross gaming revenue as part of gaming fees of 25 percent tax on gross mass market gambling revenue and 15 percent on VIP turnover.

With three major foreign-invested casino hotels under development in Pagcor’s Entertainment City project in Manila Bay and a fourth just opened, alarm spread quickly. Lawrence Ho, chief executive and co-chairman of Melco Crown Entertainment Ltd., which is a joint venture partner in the Belle Grande Manila Bay, warned earlier this month that, “Pagcor understands the fact and the Philippine government understands the fact that there are still billions of dollars of investment to be invested in Entertainment City and if there was a kind of a game change or a rule change at this stage, that would obviously impact that.”

At G2E, Francis Hernando, vice president for gaming and licensing at Pagcor, which acts as both regulator and an operator, said: “The licensees are not [going to be] paying any more than they are currently paying as a share of gross gaming revenue.  We’re not passing on any new taxes.”

“We are continuing to discuss [the tax change] with the internal revenue department” and the operators, he said. The outcome for operators looks to be a reduction in the fees payable to Pagcor to adjust for the taxes that will be directly due to the government. “I think the discussions [with operators] are going quite well,” he said.

The biggest impact of the directive will be on Pagcor, rather than the private operators, Hernando argued. It will lose out through the fee adjustments, but will continue to pay the 5 percent franchise fee on gross gaming revenues to the government and remain bound to a requirement, as a state-owned company, to turn over half of gross earnings – and now have to pay the 30 percent tax on corporate income as well. “It’s double taxation,” he said, warning even of Pagcor’s possible demise as an operator if it does not receive relief.

Separately, Hernando said that a task force of the Philippine Department of Justice and National Bureau of Investigation is continuing to investigate allegations that Japan’s Universal Entertainment Corp. paid bribes to advance its proposed Manila Bay Resorts project in Entertainment City. “They are still putting together a report,” he said. US agencies are also probing the matter.

While Taiwan’s cabinet set out a sliding scale of tax rates in the draft casino law sent to parliament earlier this month, the draft left open how much operators would have to pay for gambling licenses. George Lin, a Taipei lawyer involved in the drafting of the casino law, said the fee would probably be set between $8 million and $10 million, based on the estimated cost of supervising the operators.

He said that Taiwan will likely follow Singapore’s approach to regulating junkets; only three have so far cleared Singapore’s stringent licensing process. Taiwan though would likely follow Macau in setting a cap on junket commissions, he said. VIP players will need to deposit T$2 million ($67,000) as buy in to be issued credit.

So far only voters in the Matsu island group have approved casinos under the Taiwan law that allows any of the small islands under the government’s control to legalize gambling. But the G2E speakers predicted that the Penghu island group, whose voters rejected casinos in 2009, will vote again late this year or in early 2014 as a petition drive for a new referendum gathers steam.

The speakers also downplayed worries that Chinese opposition could make Taiwan casinos unviable. William Bryson, a partner with law firm Jones Day in Taipei, said Taiwan was of interest to casino operators because Taiwanese gamblers are a key customer base for many casinos around Asia. Chen Jing-zhong, deputy magistrate of Matsu, said, “We hope China can treat Matsu just [as fairly as] they treat Macau and Singapore.”

With Taiwan moving forward, expectations are rising that Japan will follow suit to legalize casino gambling. Praveen Choudhary, head of Asian gaming research at Morgan Stanley, though noted that Tokyo will have different motivations than Singapore or Taipei because of Japan’s huge government debt. That could result in high gaming taxes that could deter investor interest, he said.

New gaming markets like Taiwan stand to gain as Macau shifts upmarket. Several speakers noted that minimum bets at Macau tables are often HK$1,000 ($129) these days, a level that used to be considered high limit. Tables with bets of HK$100 or HK$200 are scarce, especially at weekends or other peak times.

 “It’s a supply/demand free market,” said Hubert Wang, chief financial officer at MGM China Holdings Ltd. “Tables are scarce , the demand is there. Macau has priced out some consumers, particularly at the low end.”

Other gaming markets have an opening with the Chinese public, according to surveys by China Market Research, said Ben Cavender, associate principal. Singapore has built a reputation for family friendly entertainment, which positions it to take advantage of a Chinese preference for family travel. The Philippines may be spurned by older Chinese who perceive it as unsafe, but younger Chinese see it as a new and exciting destination, Cavender said. South Korea meanwhile is already popular for shopping trips and medical services, giving casinos a platform to build on. Cambodia, meanwhile, is an increasingly popular choice for a first foreign holiday.

Improved transport links though are having an impact. Ben Toh, chief financial officer at Sands China Ltd., said the operator had seen a big increase in visits from the central cities of Changsha and Wuhan visits with the opening of faster rail links to Guangzhou and on to Zhuhai on Macau’s border.

The average Chinese customer visits Macau three or four times a year, the operators estimate. Extrapolating from that and VIP table usage, SJM Holdings Ltd. puts the total Macau VIP market at around 175,000 gamblers, according to Bob McBain, chief financial officer.

Guests of Galaxy Entertainment Group Ltd.’s Cotai resort are staying two days on average, the highest of any Macau property, according to Peter Caveny, vice president for investor relations, noting the city average of 1.4 days and putting the Venetian Macao at 1.8.

With all of Macau’s operators hoping to extend those numbers, attention is focused on the huge Chimelong Ocean Kingdom theme park scheduled to open soon across from Cotai on China’s Hengqin island.  “There’s not that much to do in Macau,” admitted McBain.