Tens of billions in "shadow": How much tax does state lose from gambling?
In the context of a full-scale war, the government forced the gambling business to start paying taxes. Nevertheless, online casino operators’ profits are growing, including because of the military, and tens of billions of hryvnias still remain in the shadows and do not go into the state budget.
BusinessCensor continues its series of articles about shadow schemes that cause the budget to lose hundreds of billions of hryvnias. Read our previous stories about why no one can find the producers of illegal cigarettes, where three annual budgets for the production of drones are hidden, and about schemes involving the export of "black grain" worth billions of US dollars here.
Last month, the rapid spread of gambling, especially among the military, became a matter of concern for the Office of the President. President Volodymyr Zelenskyy issued a decree enacting a separate NSDC decision to ban military access to online casinos and restrict gambling advertising.
Legal gambling market players claim that they pay taxes.
Indeed, in the third year after the legalization of gambling, which was one of Zelenskyy's election promises, the state budget did start to receive significant revenues from this decision.
According to the Commission for the Regulation of Gambling and Lotteries (CRGL), in 2023, the gambling business paid UAH 10.4 billion in taxes to the state budget, excluding license fees. This is 14 times more than in 2022. However, it is still seven times less than it should be.
How did legal players underpay taxes?
At the beginning of the second year of the full-scale war, the legal gambling business had to come out of the shadows partially. In early February 2023, Volodymyr Zelenskyy signed a law that canceled the rule adopted in April 2022 that allowed gambling businesses to use the simplified taxation system, paying only 2% of the single tax.
Danylo Hetmantsev, chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, acknowledged that the state lost billions of hryvnias due to the introduction of tax breaks for gambling businesses at the beginning of the Russian aggression. At the same time, according to Hetmantsev, the key problem of the gambling business was not even the benefits it had used for almost a year, but rather the systemic tax evasion through electronic payment technologies.
In March 2023, the National Bank dealt a blow to these schemes by revoking the licenses of a number of financial companies and Aiboks Bank for involvement in a criminal tax evasion scheme involving gambling.
The state-owned Ukrgasbank was also suspected of involvement in such schemes, but in this case, the National Bank limited itself to a substantial fine, and the bank's chairman, Andrii Kravets, resigned immediately after the information was made public.
According to the Verkhovna Rada's Temporary Investigatory Committee on Economic Security, due to the involvement of banks in schemes involving "miscoding" (substitution of payment details), the gambling business managed to get about UAH 10 billion of turnover per month out into the shadows during the war.
As BusinessCensor wrote, tens of billions of hryvnias, including unpaid taxes, were transferred abroad by the gambling business during the war through the export of "black" grain or cryptocurrency.
After the government managed to significantly limit these opportunities, tax payments by legal gambling businesses increased dramatically.
However, it should be much higher.
How much tax should legal gambling businesses pay?
What taxes should legal players pay
- Income tax
- Corporate profits tax
- Personal income tax and military tax on prizes
- Personal income tax and military tax on employee salaries
According to the Tax Code, in addition to income tax, legal gamblers are required to pay 18% of their income from gambling activities (10% for organizers of gambling activities in slot machine halls), reduced by the amount of payments made to players.
At the same time, gambling organizers have to withhold and transfer to the state budget 18% of personal income tax and 1.5% of military duty from players' prizes.
According to the National Bank's data released by Danylo Hetmantsev, Chairman of the Committee on Finance, Taxation and Customs Policy, the volume of non-cash transactions in the legal gambling segment increased by UAH 83 billion in 2023, while the total turnover increased to UAH 207 billion.
"This data reflects the volumes submitted by payment service providers that served licensed gambling and lottery operators and includes both non-cash turnovers under code 7995 (transactions related to gambling, lotteries and bookmakers - ed.) and cash transactions," the National Bank explained at the request of BusinessCensor.
In other words, UAH 207 billion is the total turnover of legal gambling market players alone. Therefore, considering income tax and prizes taxes, gambling organizers had to transfer to the state budget at least 18% of the total turnover - UAH 37.3 billion. In addition, gambling businesses and bookmakers had to pay income and payroll taxes and withhold 1.5% of the military duty from prizes.
However, the state budget received only UAH 10.4 billion from the gambling business, or UAH 26.9 billion less, even taking into account other taxes, noted Hetmantsev's colleague on the Tax Committee, Nina Yuzhanina. Taking into account the military tax that should be withheld from winnings, this amount should be even higher.
However, in the first months of last year, the state itself allowed gambling businesses to pay less taxes, delaying the cancellation of the possibility to pay only a single tax of 2% of income. In addition, only in August 2023, the Verkhovna Rada returned the tax on gross gaming revenue for online casinos (the so-called GGR tax) at 18%. Prior to that, an inaccurate wording in the Tax Code allowed them to avoid paying this tax.
Source: CES
What is wrong with the taxation of prizes?
CRGL Chairman Ivan Rudyi assures that gambling organizers return 70-80% of the funds received from players in the form of prizes, which should be taxed.
However, it is impossible to verify this, as the State Online Monitoring System, provided for by Law "On State Regulation of Activities on Organising and Conducting Gambling", has not yet been created. This system should provide real-time monitoring of information about all bets and prizes paid.
The CRGL only announced a tender on 17 April this year for the development of technical and design documentation for the creation of an online monitoring system, and it is not yet known when it will start working. The regulator's chairman, Ivan Rudyi, explained that funds for the system itself are not currently available due to the war.
The problems with the taxation of prizes are confirmed by the Bureau of Economic Security (BES), which suspects one of the largest players in the gambling market, Cosmolot, of tax evasion.
According to the investigation, the company paid out UAH 4.5 billion in prizes to players, of which it failed to pay personal income tax and military duty totaling UAH 1.1 billion. The investigation is complicated by the fact that without an online monitoring system, detectives have to analyze more than 5 million bank transactions of the gambling operator.
In addition, the SBI is investigating a case against online casino operators Pin-Up and Vbet. Among other things, they are also accused of tax evasion and money laundering.
All three of these companies were among the five largest gambling companies in Ukraine in 2023.
CES Senior Economist Yurii Haidai notes that in 2024, the legal gambling business segment will continue to grow, and tax revenues from it will reach UAH 1.7 billion per month. At the same time, the amount of taxes withheld by operators from prizes is falling.
"The growth is driven by the payment of tax on gross gaming revenue, while personal income tax on paid prizes has been stagnating after the peak a year ago and does not correspond to the real market volumes at all," the expert states.
Source: CES
How much does the budget lose due to the illegal gambling market?
According to CRGL Chairman Ivan Rudyi, the legal gambling market consists of 13 legal entities operating on the site and 17 on the Internet.
"The illegal gambling market comprises more than 600 websites (these are only those known to CRGL and for which we are working with law enforcement to block access in Ukraine)," the official said.
As of 16 May, 264 domains were included in the list of illegal websites published by CRGL, and their owners were sent requests to restrict access to the territory of Ukraine. However, a significant number of them still continue to operate. As recently as 15 May, the National Commission for the State Regulation of Electronic Communications (NCSREC) recommended that providers of electronic communications networks block 242 gambling websites from the CRGL list.
The Ukrainian Gambling Council, an association of legal gambling market players, estimates that the number of illegal gambling sites is even higher - more than 1,200, of which at least 300-400 have links to Russia.
Estimates by legal market players and the Centre for Economic Strategies show that about 50% of the gambling business continued to remain in the shadows last year. This means that the state budget loses approximately another UAH 37 billion due to illegal bookmakers and online casinos.
Taking into account that legal businesses would also have to pay almost UAH 27 billion more, the total potential losses to the state budget from unpaid taxes in the gambling sector can be estimated at UAH 64 billion.
For comparison, the state budget for 2024 provides UAH 44 billion for the purchase of drones, and this amount is expected to be used to purchase 1 million UAVs for the Defence Forces. At the same time, Ukraine could produce twice as many drones, but there is not enough money to buy them, Deputy Prime Minister Mykhailo Fedorov admitted. If the government were able to collect taxes from the gambling business, funding for the purchase of UAVs could be increased by 2.5 times, using the capacity of Ukrainian manufacturers.
According to Danylo Hetmantsev, Chairman of the Tax Committee of the Verkhovna Rada, this problem should be at least partially solved by the draft law N9256-d, which is expected to be considered by the Parliament in the near future. Among other things, it proposes to strengthen control over the activities of legal gambling operators and significantly expand the mechanism for blocking illegal gambling sites. In addition, it is planned to introduce restrictions for players and ban gambling sponsorship and advertising.
However, so far, state regulation has not kept pace with the rapid development of the gambling business, and the state budget is losing tens of billions of hryvnias in potential tax revenues during the war.
