October 11, 2023

  • Carlos Alberto Fonseca-Sarmiento, Managing Partner, Fonseca Abogados LLC

Online gambling taxes in Peru and Ecuador


In recent years, online gambling has expanded greatly in Latin America. Dynamism, technology-dependency, and internationality are relevant factors in this activity. There are more and more countries interested in regulating online gambling in the region citing increased labor supply, decreased negative effects of gambling due to the existence of a competent authority, consumer protection, improved attention to formerly ignored sectors such as public health and sports, etc. However, there is a motivation that will always be in any regulatory model associated with this activity: the creation of new streams of taxation. The model is economically successful when tax revenues are significantly higher than the costs of regulation and it will be legally legitimate when the taxes are required within the limits of the Constitution.

These two conditions seem straightforward; however, serious problems have been observed regarding the second point. The technical complexity of the activity and the prejudices of some authorities  against the gambling industry – frequently imposing unreasonable restrictions on the constitutional rights of the actors involved (entrepreneurs, workers, and players) – have generated permanent conflicts requiring the intervention of the courts.

In Latin America, we have witnessed numerous constitutional judges try to resolve conflicts between authorities and individuals regarding the taxation of betting games. In several cases the rulings have resulted in the non-application of laws. For example, in 2002, in Peru, the Constitutional Court declared the tax on casino games and slot machines unconstitutional because it had a rate of 20 percent of gross profits and because the amount paid was additional to the income tax that companies are required to pay. Since such payment could not be deducted,  the Court deemed that this tax forfeited the invested capital. The causes are familiar: paternalism, cognitive bias, absence of the reasonableness test in drafting the law, lack of knowledge and little deliberation by the legislators, and pressure from the government to demand the highest possible amount and treating the industry as the “goose that lays the golden eggs”. As we will see below, these same problems have been found in the recent creation of taxes on online gambling in Peru and Ecuador. In the case of Peru,  legislators partially corrected the mistake before the new tax came into force. Let us hope the same happens in Ecuador.

The irresponsible and arbitrary use of the term “compulsive gambling”, without any technical justification, as if it were a magic word enabling the authorities to support the creation of unconstitutional taxes, is a common phenomenon in taxation laws applying to the gambling industry in Latin America. The result is the approval of laws that violate the constitutional guarantees limiting the exercise of tax power, mainly the principles of equality, legality, and non-confiscation.

Gambling taxes are “special” and “additional” taxes to the general taxes levied on any economic activity. They are justified on the externalization of players’ taxpaying capacity evidenced in the money they set aside for betting games. It is not a basic need. While it is a human right to enjoy free time, it is also legitimate for the State to exercise its power to tax those individuals whose spare time is used to satisfy their leisure needs by participating in betting games. The operators of such businesses, like any other entrepreneurs, have to pay a general tax on their profits, but since these come from the surplus money that players have and with the purpose of protecting the public interest in this activity, the State incurs costs that it did not have before. Therefore, this new control activity legitimately undertaken by the State stems from the new business and should be financed through “special” and “additional” taxes on the operators of said businesses. The issue in question is, then, which is the best technique to establish a gambling taxation system. The decision to choose the most suitable tax should be based on criteria of justice and respect for the Constitution, but unfortunately this is not the case. Unreasonable taxation methodologies are chosen whose only purpose is the collection of taxes and conflicts arise. The disputes end up in Constitutional Courts. It hurts to say it, but it is the hard truth; by exercising their taxing power in online gambling, our authorities offer us a graphic example of Murphy’s Paradox: “It’s always easier to do it the hard way.” Below is a summary of the taxes on online gambling currently approved in Peru and Ecuador.

Peru’s 11.76% tax on gross profits. First for some and later for all

By Law 31557, published on August 13, 2022, Peru’s first Law regulating remote gaming was approved. The Law has many errors, but one drew a lot of attention causing it to be modified before it came into force: the gambling tax. In effect, a tax of 11.76 percent of monthly gross profits obtained from the players’ bets was created. However, not everyone was obliged to pay this tax. If operators are domiciled abroad (e.g., in Malta, Curaçao or Isle of Man, which are the jurisdictions where operators currently offering their services to the Peruvian market are located) they are not required to pay the gambling tax even though their income is from a Peruvian source. But if operators are domiciled in Peru, they are required to pay that tax advantaging foreign operators who save themselves 11.76 percent of gross profits.

From a constitutional point of view, a tax such as the one created through Law 31557 violates the principle of taxation equality, acknowledged by Article 74 of the Peruvian Constitution, since the same fact (i.e. obtaining profits from gamblers registered on websites with gaming licenses from the Peruvian government) would be treated differently depending on where operators have their place of business: those domiciled abroad would not pay the special tax while others (incorporated in Peru) would have to pay.

This tax was born with a death certificate. It is not clear who came up with such an unfair scheme, and in all likelihood had Law 31557 come into force in its original form, it would have been challenged by those who were required to pay this tax, as it represented a gross violation of the constitutional principle of equality before the law. This case proves a point already mentioned. When legislating on betting games in general, there is not much reflection by legislators, nor do they apply a reasonableness test to determine the impact on constitutional rights. The test was developed by the German jurisprudence and promoted by jurist Robert Alexy and as a side point, most Latin American Constitutional Courts use the reasonableness test to assess conflicts between constitutional rights. It was thus predictable that such a discriminatory tax would not be confirmed by the Peruvian Constitutional Court.

Legislators reacted in time and, before Law 31557 entered into force, Law 31806 was passed and published on June 28, 2023. This law amended Law 31557 and established that all operators – whether domiciled in Peru or abroad – must pay the monthly tax of 11.76 percent of their gross profits once they have obtained a gambling license from the Peruvian gaming authority to provide online gambling.

Under Peruvian legislation, a business may obtain a gambling license as either a domiciled operator or as a non-domiciled operator. Currently, there are more than 40 operators that are operating from abroad. Now, in addition to the 11.76 percent special tax out of their gross profits, they will also have to file a monthly declaration of their Peruvian-source income. The current Income Tax Law levies tax at a rate of 30 percent of gross income obtained from Peruvian sources for those who are not domiciled in Peru. It will also be very easy for the tax authority to demand this tax which it currently does not collect. Additionally, among other major flaws, Law 31557 establishes two obligations that foreign companies will not be able to meet and, unless the regulations find a creative solution to this problem, it will be impossible to operate as a non-domiciled company. The Law requires operators (whether domiciled or non-domiciled) to have a bank account with a Peruvian entity for their players to make their deposits. It also requires all operators to provide a guarantee to the State to back their obligations to the State and the players. Such a guarantee has to be issued by a Peruvian entity and in both cases, financial entities will not open bank accounts or grant guarantees to companies domiciled abroad. As it stands, the Law has the unintended consequence of requiring non-domiciled operators to become domiciled. All this is a consequence of not consulting more broadly on the bill that resulted in Law 31557.

The phantom excise tax on online gambling in Peru

Law 31557 also attempted to create an additional tax on top of the gaming tax. The “Excise Tax on Online Gambling” is anti-technical, unconstitutional, and absurd as evidenced in other Latin American countries. In the end, however, it is not enforceable because it has no tax rate. In fact, the current Law 31557’s Supplementary Provision amending several articles of the “General Sales Tax and Excise Tax Law” to regulate the “Excise Tax on Online Gambling” will remain anecdotal.  It fails to include the tax rate; hence, not all of the elements of a tax are present, and the tax may only exist if a new Law sets out the tax rate. For this reason, we can state categorically that there is no Excise Tax on Online Gambling in Peru. Nevertheless, it highlights the weakness in the legislators’ approach. If a political decision was taken not to create an “Excise Tax on Online Gambling” it would have been reasonable to remove any article associated with amending the “General Sales Tax and Excise Tax Law.”

Law 31806 could have eliminated the useless provisions related to this tax, but this was not done. We are left with a phantom tax with no validity.

Ecuador’s 15% tax on operators: the same, but different

Following the dissolution of Congress, ordered by President Lasso through Executive Order 741 dated May 17, 2023, the President himself took on the roles of the Executive and Legislative branches as a temporary measure until November 25, 2023, when the new President and legislators take office.

Executive Order 742 was the first to be issued by President Lasso, on May 17, 2023, after taking temporary control of the Legislative branch.  The biggest surprise, at least for the gaming industry, was that this Executive Order created the “Single Income Tax on Sports betting operators”, the practical effect of which confirms the legality of providing sports betting services to the Ecuadorian market, whether online or retail, from abroad or from Ecuador.

As will be recalled, on May 07, 2011, then President Rafael Correa held a referendum which comprised 10 questions one of which was:  do you agree with a ban on gambling businesses such as casinos and slot parlors in the country? This negative result led to the closing of casinos and slot parlors, causing considerable harm to investors and, mainly, employees. The ban was formalized through Executive Decree 873 of 2011. Then, in 2014, the Comprehensive Organic Criminal Code (COIP, acronym in Spanish) was approved. Its Article 236 created the crime of operating casinos, slot parlors, betting houses or businesses engaged in games of chance. Afterwards, however, in response to a query by the Guayaquil Welfare Board (Junta de Beneficencia de Guayaquil), in 2019, the Solicitor General stated that the crime established in Article 236 of the COIP, and the prohibition are to be understood in their literal sense, that is, referring to businesses engaged in games whose results are exclusively determined by chance. Betting games which are not exclusively games chance are therefore not prohibited in Ecuador.

Executive Decree 742 recognizes the legality of sports betting, as it has created a tax on this sector that will come into force on January 01, 2024. This means that there will be no special tax on sports betting until that date. Likewise,  their legality cannot be questioned because, formally, with Executive Decree 742, the government has recognized it as an economic activity on which it can create and collect taxes.

However, the method of the tax created by Executive Decree 742 also presents constitutional problems because it violates the principle of equality before the Law. The tax varies depending on whether the operator is or is not domiciled in Ecuador, although the profits in either case come from Ecuadorian sources. Indeed, the taxed activity is the receipt of income from Ecuadorian sources for live sports betting through the Internet or any other means.

The tax rate is 15 percent, but the taxable fact is different depending on whether the operator is domiciled abroad or in Ecuador. If an operator is not domiciled in Ecuador, the taxable fact is the total of the “bets” or the “deposits” made by the players on a monthly basis. Unfortunately, the law is unclear. Obviously, it is worse for the international operator to pay tax on deposits rather than on bets, since deposits do not constitute income of the international operator. But in both cases, it is unconstitutional due to its confiscatory effects. Through Decree 876, issued on September 15, 2023, President Lasso regulated Decree 742, however, he did not clarify the taxable fact with regards to the tax on international operators. The only thing he did was ratify that only betting on sports predictions is allowed, but not online casino games or any other type of game of chance, whether physical or remote. For operators domiciled in Ecuador, the taxable income will be the total amount of the monthly income generated from bets made by the players minus the total amount of prizes paid during that same month.

It is unreasonable that, if the source of income is Ecuadorian, some operators pay 15 percent of the gamblers’ bets and other operators pay 15 percent of the bets minus the prizes. The first case is confiscatory because it seeks to tax a non-existent or fictitious taxpaying capacity of the operator. For instance, If a gambler makes a first bet of US$ 10 and wins US$1,000 and then immediately makes a second bet with that US$1,000 and loses it, the operator’s net worth will only have increased by US$10, and it would be fair to pay a 15 percent tax on that US$10. However, based on the tax method set out by Executive Decree 742, the non-domiciled operator would have to pay 15 percent of US$1,100, that is, more money than it has actually received. If it is interpreted that the tax for non-domiciled operators is on the deposits of registered users, regardless of whether the players have made a bet, the situation is worse since the money that is in the individual gaming accounts is not yet a profit for the operators.  As with Peru, the consequence will be that the non-domiciled operator will incorporate a company in Ecuador to reduce their tax burden.

15% tax on winners of sports forecast bets in Ecuador. Double taxation of stakes

Executive Decree 742 has established the obligation for winning gamblers to pay a single 15 percent tax on the value of each prize received in cash or in kind from sports forecast operators with these operators acting as withholding agents for the tax. As mentioned above, the gambling tax is a special and additional tax that seeks to levy the money the gambler has spent on this activity. If the State establishes a tax on the gambling profits of an operator, it should not be necessary to add an additional tax on the money that the operator gives winning gamblers.

Let us use the following example: an operator receives an initial bet of US$100 from gambler X. The gambler wins a prize of US$1,000. Gambler X places a second bet with the entire earnings, that is, US$1,100, and loses. There are no more bets during that month. If domiciled in Ecuador, the operator will have to pay a tax on the difference between the bets received (US$1,100) and the prizes awarded (US$1,000), that is, on US$100, a US$15 tax. The gambler, in turn, will have to pay US$150 in taxes for the US$1,000 prize received. To avoid this, the operator’s 15 percent withholding would have to be immediate each time he delivers a prize.

The rationale for this technique is to limit gambling, but there is a contradiction between a model which protects the interests of the State (which seeks taxes) against a model which protects gambler’s interests (which does not encourage gambling). Here we could discuss paternalism and the unreasonable limitation on the right to the free development of personality, which justifies people’s right to gamble. Additionally, the State should only collect a reasonable part of the contributive capacity in these activities sufficient to reduce the negative externalities that this new activity generates for the State. In President Lasso’s own words, the reason for this tax and Executive Decree 742 is “to reduce by US$200 million dollars the taxes affecting the Ecuadorians”. Therefore, it is not consistent simultaneously to look for new tax resources with a new activity, whilst at the same time establishing measures that are disproportionate and incompatible with constitutional rights and would probably result in failure to reach the tax goal.

Finally, if there are no changes to this tax structure, it is predictable that the tax reform will be a failure as may be explained by the Laffer Curve and as has happened with the taxes on gambling in Bolivia. That, however, will have to be the subject of future article.