Skatteudvalget 2019-20
SAU Alm.del Bilag 362
Offentligt
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Prepared for: Danish Online Gambling Association
Denmark Online Gambling Market –
Impact Analysis
Independent Report
April 2020
Prepared by:
 SAU, Alm.del - 2019-20 - Bilag 362: Præsentation og henvendelse fra Spillebranchens foretræde for udvalget den 18. juni 2020 om regeringens seneste udmeldinger for spilleområdet
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Executive Summary
This is a stand-alone specialist report prepared by
H2 Gambling Capital (H2)
- the lead independent authority
regarding market intelligence on the global gambling industry. It has been commissioned by the
Danish Online
Gambling Association (DOGA)
to provide an objective assessment of the proposed regulatory change in the
Danish online gambling market.
The analysis has been commissioned to inform on the outlook for the market, current market trends,
competitive dynamics, and to collate the gambling operators’ view of the market impact. We hope our report
is of value to all stakeholders in enhancing their understanding of the Danish online gambling market –
particularly with regards to the proposed regulatory changes.
The report is structured into five sections:
Section 1:
Denmark Gambling Market Overview
Section 2:
Danish Online Tax Rate Impact
Section 3:
Sensitivity Analysis of Tax Rates
Section 4:
Benchmarking Comparable Markets
Section 5:
H2 Analysis and Conclusions
Overview of the Danish gambling market, and impact of
new measures introduced in 2020
Impact on the onshore and offshore online market of a
change in tax rate from 20% to 28% of GGR
Analysis of tax generation and onshore channelling at
different tax rates
Benchmarking Denmark against comparable markets and
tackling the offshore market
Analysis of the proposed regulatory change and key
conclusions of the report
Headline Findings:
-
Danish licensed online gambling operator GGR has already dropped c.17% since the new measures
surrounding the Danish online gambling market were introduced on 1 January 2020.
H2 forecasts that the current proposal to increase the tax rate to 28% will initially increase overall
tax revenue, but notes that this comes at the detriment to consumer welfare, with more players
moving to offshore sites where there are lower levels of consumer protection.
When looking at the period 2021-24e, H2 estimates that an increase in tax rate from 20% to 28%
would lead to a cumulative decline in onshore online GGR of c.DKK 5bn, or c.-27%. Over this period,
the tax revenue is broadly similar, as the higher initial tax take gets eroded by lower market growth.
In terms of channelling, an increase in the tax rate from 20% to 28% of GGR would increase Danish
offshore channelling from 12% of the online market (88% onshore) to 24% of the online market (76%
onshore) for the period 2021-24e.
By contrast, an increase in tax rate to 22% would likely lead to an increase in tax revenue, while not
impacting onshore channelling, thereby providing an ‘optimal’ tax rate for both consumer
protection and tax generation.
-
-
-
-
H2 Disclaimer
Whilst great care has been taken in the preparation of this publication H2 Gambling Capital accepts no liability for the accuracy or
completeness of all data and information provided, and no warranty is given as to its correctness or forecast estimates herein. H2 Gambling
Capital (H2) is a leading firm in the provision of data and market intelligence regarding the global gambling and associated industries. In
undertaking this assessment, H2 has relied on both information held for the purposes of its public subscription service as well as engaging
in additional research of other reputable publicly available and industry sources. H2 has made its best efforts to ensure that information
included in this report is accurate and appropriate at the time of writing. Conclusions, and any assumptions made in reaching them, are
based on the information available and analyses of the facts as at April 2020 and H2 is of the opinion that the conclusions and underlying
assumptions are reasonable at this time.
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
H2 Independent Report – 10 Key Conclusions
1.
On 1 January 2020, new measures surrounding player deposit limits and promotions were introduced.
Analysis of operator data suggests that the estimated impact on licensed market revenues has been a
c.17% reduction in GGR.
2.
H2 has reduced its 2020 onshore online GGR forecasts by -12.5% to take into account the impact of these
new measures. This reduces the channelling rate of the onshore online market. Prior to this, H2 forecast
the offshore market to represent 13% of the Danish online market in 2020e, but now estimates it to
represent 16% of the online market in 2020e.
3.
The current proposal is for the Danish online gambling tax rate to increase from 20% of GGR to 28% of
GGR in 2021. While tax rate is not the only driver of channelling rates, when we benchmark Denmark
against a number of other similar markets, it is clear that increasing the tax rate will have a significant
impact on channelling.
4.
H2 forecasts that an increase in tax rate to 28% will initially increase overall tax revenue, but notes that
this comes at the detriment to consumer welfare, with more players moving to offshore sites where
there are lower levels of consumer protection.
5.
When looking at the period 2021-24e, H2 estimates that the total cumulative decline in onshore online
GGR would be c.DKK 5bn, or c.-27%. Over this period, the tax revenue is broadly similar, as the higher
initial tax take gets eroded by lower market growth.
6.
Furthermore, given the low profit margin of operators, any significant increase in tax rate will lead to a
reduction in marketing spend, as well as aggressive cost cutting. Not only is this a further reduction in
investment in the Danish economy, but a significant reduction in marketing spend will lead to yet further
leakage of players to the offshore market.
7.
In terms of channelling, an increase in the tax rate from 20% to 28% of GGR would increase Danish
offshore channelling from 12% of the online market (88% onshore) to 24% of the online market (76%
onshore) for the period 2021-24e.
8.
Market analysis using standard economic theory of a smooth Laffer Curve shows that any increase in
tax rate would lead to a decrease in onshore channelling, but that the optimal tax rate for maximising
tax revenues would be 26%/27%. At this point, we estimate an increase in tax revenue of c.DKK 62m
compared to a 20% tax rate, although when taking into account the reduction in Danske Spil’s profits,
this leads to a total increase in revenue to the State of only c.DKK 34m.
9.
However, the market reality is that the curve is more ‘stepped’ – that is to say that if the tax rate
increased by a small amount, then it is unlikely that this would materially change an operator’s
behaviour, and one could assume that the onshore market size would be unaffected. However, at a
certain point, the increase in tax rate would cause a significant shift in operators’ behaviour.
10.
Under the ‘stepped’ theory, an increase in tax rate to 22% would likely lead to an increase in tax revenue,
while not impacting onshore channelling, thereby providing an ‘optimal’ tax rate for both consumer
protection and tax generation. We estimate that this would increase tax revenue by c.DKK 83m
compared to a 20% tax rate, and increase revenue to the State by c.DKK 46m.
© H2 Gambling Capital 2020
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Contents
•
•
•
Executive Summary
H2 Credentials
Terminology and H2 Data Model Explained
Page 2
Page 5
Page 6
Section 1: Denmark Gambling Market Overview
•
1.1 Current Regulatory Framework
1.2 Market Evolution and Growth 2012-19
1.3 Impact of Regulatory Change in 2020
Page 7
Page 8
Page 10
Section 2: Danish Online Tax Rate Impact
•
•
•
•
•
2.1 Market Equilibrium
2.2 Channelling and Laffer Curve Theory
2.3 Impact of Increase in Tax Rate to 28% of GGR
2.4 2021-24e Financial Impact
Page 13
Page 14
Page 15
Page 18
Section 3: Sensitivity Analysis of Tax Rates
•
•
3.1 Tax Rate Sensitivity
3.2 Tax Generation and Channelling
Page 20
Page 21
Section 4: Benchmarking Comparable Markets
•
4.1 Benchmarking Versus Comparable Markets
4.2 Tackling the Offshore Market
Page 25
Page 26
Section 5: H2 Analysis and Conclusions
5.1 H2 Analysis
5.2 Key Conclusions
Page 27
Page 28
H2 Copyright
No part of this report may be reproduced without prior permission from H2 Gambling Capital. H2 Gambling Capital owns the gambling
industry model that generates the industry values and forecasts referenced herein
.
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
H2 Credentials
H2
– a global company based in the UK - is widely recognised as
the leading authority
regarding market
intelligence on the gambling industry worldwide. Together, our analysts have been tracking the value of the
sector in real time since 2000. We have strong professional credibility and impartiality, and good experience of
our analysis and reports standing up to scrutiny from a variety of stakeholders including legislators, regulators
and the news media.
The intelligence generated by H2’s industry forecasting model has become by far the most quoted source
regarding the sector in published company reports, transaction documentation and sell-side analysts’ notes, as
well as in the trade/business media – including the BBC, Thomson Reuters, Bloomberg,
The Economist, The FT,
The New York Times
and
The Wall Street Journal.
Today, it represents a living databank covering over 150 world
markets, with circa 2m data points and 2,500 postings per year, and 5-year forecasts out to 2025e.
The
H2 Subscription
service is used by the vast majority of the sector’s Tier 1 operators and suppliers; its major
financial institutions, governments and regulators; and also its media outlets in their benchmarking of
performance to shareholders.
The
H2 Premium
‘deep dive’ service is used regularly as part of bespoke market entry assessments;
strategy/new business development; tax rate benchmarking/sensitivity analyses; the due diligence processes
associated with major investment decisions; financial transactions; market share analyses, and also to assess
the impact of any regulatory change in the sector.
H2 is partnered with Clarion Gaming and
iGaming Business
in the trade media, Princeton Public Affairs Group
in the North American market, and the International Betting Integrity Association within sports integrity.
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Terminology and H2 Data Model Explained
H2 utilises the
‘Gross Win (GW)’
or
‘Gross Gambling Revenue (GGR)’
metric (i.e. turnover less prizes, but
including any bonuses played) rather than the turnover/sales measure to value the gambling sector. This is due
to the fact that across different product verticals, geographies and market channels pay-out rates are all
different. Therefore, Gross win/Gross Gaming Revenue provides a much more consistent measure for
comparison across the sector. Furthermore, it also provides a much better reflection of operators’ top line
revenue as opposed to turnover, which can include the same money that has been recycled a number of times
in many of the product verticals.
H2’s analysis categorises sector activity into three markets – gambling where the operator is licensed ‘onshore’
in the same jurisdiction as the player is located
(‘white market’);
gambling where the operator is licensed
‘offshore’ in a different jurisdiction (‘grey
market’);
and gamblingwhere the operator is completely unregulated
or illegal
(‘black market’).
The unique H2 model collates and compiles data via key
primary sources
that include:
ü
ü
ü
ü
ü
Actual published primary/secondary market and organisation data;
Knowledge/assessment of the supply side by product vertical;
H2’s own in house tracking of activity;
Regular contact with private organisations/investors, including subscriber feedback;
Knowledge/opinion of third parties - including providers and other industry analysts.
Market forecasts are based on a number of key
secondary drivers
including:
ü
ü
ü
ü
ü
Maturity of product;
Expected product development;
GDP/broadband/mobile growth;
Benchmarked markets;
Incorporating the impact of past and expected legislation.
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Section 1: Denmark Gambling Market Overview
The Danish online onshore gambling market opened up to commercial operators on 1 January 2012; it was
expanded to include horseracing and bingo licenses on 1 January 2018.
On 1 January 2020, new measures surrounding player deposit limits and promotions were introduced.
Analysis of operator data suggests that the estimated impact on GGR from the new measures has been
c.17% of GGR. However, the new measures have had a disproportionate impact on certain segments of the
market. Analysis of DOGA member operators suggests that sophisticated players have seen a reduction of
c.30% in GGR spend, while the recreational customers who tend to have lower staking levels have shown a
c.10% reduction in GGR.
H2 has reduced its 2020 onshore online GGR forecasts by -12.5% to take into account the impact of these
new measures, which reduces the channelling of the onshore online market. Prior to these new measures,
H2 forecast the offshore market to represent 13% of the Danish online market in 2020e, but now estimates
it to represent 16% of the online market in 2020e.
1.1 Current Regulatory Framework
1.
The Danish gambling market is regulated by the Danish Gambling Authority (DGA), with the commercial
online gaming market launching on 1 January 2012. Under Danish legislation, commercial licenses became
available for sports-betting, casino and poker. On 1 January 2018, commercial licenses became available
for horse / greyhound race betting and bingo, ending Danske Spil’s monopoly on the products. However,
as interactive lottery products can only be offered by the Government-run monopoly, we exclude lottery
GGR from our analysis in this report.
It is not illegal for dot com ‘unlicensed’ operators to accept Danish players, as long as the operator is not
actively promoting itself in the Danish market. While offshore unlicensed operators generally do not
actively promote themselves in the market, there remains a sizable offshore market, although this has
been shrinking over the past few years.
The current tax rate for interactive sportsbetting and gaming is 20% of GGR, although there has been a
proposal to increase this to 28% from 2021.
In January 2019, the Danish government introduced draft legislation to increase the social responsibility
controls of licensed operators. These measures came into force on 1 January 2020, and include:
-
-
-
-
The updating of the online casino certification process making monthly, weekly or daily player deposit
limits mandatory
Restrictions on sales promotions across both offer and pay-out limits including not obligating players
to deposit more than DKK1k, with promotional sums themselves not exceeding DKK1k
Betting promotions to not exceed over ten (10) times the players’ stake
Players to be given at least 60 days to fulfil the terms of a promotion, and no offer can be tailored to a
single player - at least 100 players must be targeted with the same offer.
2.
3.
4.
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
1.2 Market Evolution and Growth 2012-19
5.
Product Definition:
We value the Denmark gambling market using the
‘gross win’ or ‘gross gaming
revenue’ (GGR)
metric (i.e. turnover less prizes, but including any bonuses played). We do not include in
our analysis any unlicensed, or ‘black market’ operators. We also exclude lottery from our analysis, as it is
run by the state monopoly Danske Spil, and instead focus on products that are commercially available.
Based on the above, the total Danish onshore gambling market increased from DKK 4.57bn of GGR in 2012
to
DKK 6.76bn in 2019;
including the offshore online market, we estimate that this increases to DKK 5.50bn
in 2012, growing to
DKK 7.45bn in 2019.
6.
Fig 1: Danish Gambling GGR by Channel 2012-19 (DKK m)
8,000
7,000
831
861
6,000
941
5,000
4,000
3,000
2,000
3,159
1,000
-
2012
2013
2014
Landbased
2015
Online Onshore
2016
Online Offshore
2017
2018
2019
3,014
2,987
2,960
2,912
2,937
2,782
2,731
932
923
2,557
3,015
3,380
3,860
4,023
895
722
694
1,409
1,643
2,075
Source: H2 Gambling Capital, 2020
7.
In 2019, online represented 60% of the total onshore market, and landbased 40% of onshore GGR; if we
include the offshore online GGR, this represents 9% of the overall market, meaning that 91% of the total
market is onshore.
Fig 2: Danish Gambling GGR (exc. Lottery) 2019
Onshore Only
Including Offshore
Online
Offshore
9%
Landbased
40%
Landbased
37%
Online
Onshore
60%
Online
Onshore
54%
Source: H2 Gambling Capital, 2020
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
8.
In terms of the onshore / offshore split, 85% of the online market is now onshore, up from 60% in 2012
when the online market first opened to commercial operators.
Fig 3: Onshore % of Danish Online Market 2012-19
90%
80%
69%
70%
60%
60%
50%
40%
30%
20%
10%
0%
2012
2013
2014
2015
2016
2017
2018
2019
64%
78%
74%
80%
84%
85%
Source: H2 Gambling Capital, 2020
9.
This increase in onshore channelling is due to strong growth in the onshore online market capturing
revenues from the offshore market. Since 2012, the onshore online market has grown at a 16% CAGR
(2012-19), whereas the offshore market has declined at a -4% CAGR. The landbased market has also seen
declines over this period as gambling activity has shifted onshore.
Fig 4: Danish Gambling GGR (2012-19) – Excluding Lottery (DKK m)
GGR (DKK m)
Landbased
Onshore Online
Total Onshore
2012
3,159
1,409
4,568
2013
3,014
1,643
4,657
2014
2,987
2,075
5,062
2015
2,960
2,557
5,517
2016
2,912
3,015
5,926
2017
2,937
3,380
6,318
2018
2,782
3,860
6,642
2019
2,731
4,023
6,755
2012-19 CAGR
-2.1%
16.2%
5.7%
Offshore Online
Total Market
932
5,500
923
5,580
941
6,003
895
6,412
861
6,787
831
7,149
722
7,364
694
7,449
-4.1%
4.4%
Source: H2 Gambling Capital, 2020
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
1.3
Impact of Regulatory Change in 2020
10. As noted above, a number of new measures came into force on 1 January 2020, and include:
-
-
-
-
The updating of the online casino certification process making monthly, weekly or daily player deposit
limits mandatory
Restrictions on sales promotions across both offer and pay-out limits including not obligating players
to deposit more than DKK1k, with promotional sums themselves not exceeding DKK1k
Betting promotions to not exceed over ten (10) times the players’ stake
Players to be given at least 60 days to fulfil the terms of a promotion, and no offer can be tailored to a
single player - at least 100 players must be targeted with the same offer.
11. It is difficult to ascertain the exact impact of these new measures, due to the many moving and inter-
related parts that effect the operation of an online onshore casino and/or gaming platform. For this report,
operator members of the Danish Online Gambling Association (DOGA) supplied H2 Gambling Capital with
data on the impact that deposit limits and restrictions on betting promotions have had on their businesses.
Although operators now have 3 months of data since the new regulations came into force, figures for
January and February were also impacted by a stronger than usual betting gross win margin, and March
data has been impacted by the effects of COVID-19.
12. Out of the operators that responded to our request for data, the estimated impact on GGR from the new
measures has been c.17% of GGR. However, the new measures have had a disproportionate impact on
certain segments of the market.
13. As there is no such thing as an ‘average’ customer for gambling operators, we broadly split the market
between sophisticated players and recreational players. While this definition can vary between operators,
our analysis of the market suggests that sophisticated players represent c.35% of the total online onshore
market GGR. These players are more price-sensitive, and therefore are more likely to take advantage of
promotions, and in general are higher spending players. Therefore, the new measures have had a
disproportionate impact on their activity.
14. Analysis of DOGA member operators suggests that sophisticated players have seen a reduction of c.30% in
GGR spend, while the recreational customers who tend to have lower staking levels have shown a c.10%
reduction in GGR.
15. Within the sophisticated players, c.60% of this impact has been due to lower spend of existing customers,
and c. 40% of this impact is from a reduction in the number of customers, with the assumption being that
these customers have moved to offshore operators that are not subject to these new measures.
16. We note that this analysis is based upon the responses from commercial operators, and does not take into
account Danske Spil, which is likely to be less affected by the new measures, given its less sophisticated
customer base. Therefore, the 17% reduction in GGR is likely to be slightly lower when looking at the
market as a whole, taking into account Danske Spil.
17. H2 has reduced its 2020 onshore online GGR forecasts by -12.5% to reflect the impact of these new
measures. While this is lower than the impact that has been estimated by operators, this takes into account
the lower impact on Danske Spil, and H2 also believes that some of these initial declines may partially
reverse as customers get used to the ‘new normal’.
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Fig 5: Impact on GGR of New Measures in Danish Onshore Online Gambling Market (%)
0%
-5%
-10%
-12.5%
-17%
-10%
-18%
-15%
-20%
-25%
-12%
-30%
-35%
Sophisticated Players
Recreational Players
Reduction in Player Spend
Total Commercial Operators
Reduction in Players
Market GGR Decline
H2 Market Estimate
Source: H2 Gambling Capital, 2020
18. Part of the reduction in onshore online GGR will shift to offshore operators, notably the 12% reduction in
GGR of sophisticated customers who are no longer gambling with onshore operators. While this represents
only c.4% of onshore GGR, given the lower base of the offshore market, assuming that only c.50% of this
sum shifts offshore, this increases the size of the offshore market by c.15% compared to what we estimate
it would have been in 2020e.
19. This therefore reduces the channelling of the onshore online market. Prior to these new measures, H2
forecast the offshore market to represent 13% of the Danish online market in 2020e, but now estimates it
to represent 16% of the online market in 2020e.
Fig 6: Danish Online Offshore Channelling (%)
25%
20%
15%
10%
20%
16%
15%
16%
13%
5%
0%
2017
2018
2019
2020e - Status Quo
2020e - New Measures
Source: H2 Gambling Capital, 2020
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Section 2: Danish Online Tax Rate Impact
The current proposal is for the Danish online gambling tax rate to increase from 20% of GGR to 28% of GGR
in 2021. Given the low profit margin of operators, any significant increase in tax rate will lead to a
reduction in marketing costs in order to retain profitability.
H2 forecast a reduction in onshore channelling from 84% in 2020e to 76% in 2021e due to the proposed
increase in taxation to 28% of GGR. This leads to a decline in the onshore market of c. 22% year on year, or
a decline of c.DKK 900m in onshore GGR.
While a lower tax rate leads to higher levels of onshore channelling, it doesn’t necessarily lead to the
optimal tax generation. H2 forecasts that an increase in tax rate to 28% will increase overall tax revenue,
but notes that this comes at the detriment to consumer welfare with more players moving to offshore sites
where there are lower levels of consumer protection.
When looking at the period 2021-24e, H2 estimates that the total cumulative decline in onshore online GGR
from an increase in the tax rate to 28% would be c.DKK 5bn, or c.-27%. Over this period, the tax revenue is
broadly similar, as the higher initial tax take gets eroded by lower market growth. This results in a 34%
decline in post-tax gross profit for operators, or a reduction of DKK 3.5bn.
This will lead to a reduction of DKK 1bn in bonuses (over 40% decline), which is likely to have a significant
impact on the channelling of the sophisticated customer base. Furthermore, we estimate a DKK 2bn
reduction in marketing spend, as well as aggressive cost cutting to reduce operating and central costs by
DKK 1bn over the next four years. Not only is this a further reduction in investment in the Danish economy,
but a 40% reduction in marketing spend will lead to further leakage of players to the offshore market.
The DDK 5bn reduction in onshore online GGR will not all shift offshore, rather the majority of this will be a
decrease in overall gambling activity. However, we have illustrated that the market is sensitive to changes
in promotional activity – especially the price sensitive customers – and a 43% reduction in bonuses is likely
to lead to significant leakage to offshore sites who are able to offer superior promotions to customers. This
would be compounded were sportsbooks to increase their odds to offset the higher tax rate.
A combination of the above leads us to believe that c. 40% of the decline in the onshore GGR will shift
offshore, with the remaining 60% disappearing from the market entirely. Therefore, out of a DKK 5bn
reduction in onshore GGR, we estimate that DKK 2.1bn of this sum shifts offshore. However, as the offshore
market is smaller than the onshore market, this represents a 100% increase in the size of the offshore
market.
In terms of channelling, this increases the offshore channelling from 12% of the online market (88%
onshore) to 24% of the online market (76% onshore).
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
2.1 Market Equilibrium
20. In terms of regulation, the most mature online gambling markets tend to balance government tax revenues
with new commercial opportunity in order to achieve market equilibrium (see Fig 7 below). Such
regulations reflect dynamic market conditions where technology advancements and pace of change -
particularly online - can benefit all parties and attract new players, without disenfranchising core consumer
groups.
Fig 7:
‘Something for Everyone’
– Online Gambling Market Equilibrium
1. Government
has:
Control
Taxation
Player Security
2. Operators
have:
Profit
License
Market protection
3. Players
have:
Choice
Value
Protection
Source: H2 Gambling Capital, 2020
21. Financially, main benefits Include:
ü
Increased tax revenues:
Driven by effective licensing;
ü
Increased consumer spend:
As
a result of increased customer retention, driven by a more transparent
regulated system that makes players feel safer.
22. The economic benefits of a regulated market over an illegal market are not just financial. Other key factors
are:
ü
Security:
There exists a legal place to bet safely, in a straightforward manner, and securely (in terms
of data protection and cash pay-out);
ü
Jobs:
An upturn in employment opportunity, with the potential to replace offshore employment with
onshore jobs – the majority within indirect sectors e.g. marketing (as onshore regulated activity leads
to more use of the mainstream media), payments and geo-location;
ü
Economic growth:
Enhanced cross-channel marketing opportunities for associated non-gambling
sector operators, brands and sectors.
© H2 Gambling Capital 2020
13
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
2.2
Channelling and Laffer Curve Theory
23. When analysing the optimal tax rate for a market, there are many variables, including product restrictions,
freedom of marketing and the ability of regulators to block offshore operators from targeting the market
/ citizens from finding offshore operators.
24. There is no ‘one size fits all’ calculation, and there are markets that have a higher tax rate and a higher rate
of onshore channelling than other markets, due to these variables. However, in general the higher the tax
rate, the lower the proportion of the online GGR which gets channelled onshore.
25. We also note that the optimal tax rate in terms of channelling is not necessarily the optimum tax rate in
terms of maximising the tax revenue, and different regulators / governments have different motivations
when setting online gambling tax rates. While the reality is that most markets have a balance between the
two, H2 believes that tax rates should be set with a focus on channelling, given the benefits of consumer
protection from the onshore market.
26. Another factor in the channelling of a market at different levels of taxation is the profitability of the market
participants. In a competitive market with high levels of marketing spend and a fragmented market share,
operators will make lower levels of profit compared to a market with a monopolistic / oligopolistic
structure where operators have the advantage of lower marketing costs and economies of scale in
operating costs. Therefore, under an monopolistic model, the operator will be able to remain profitable at
a higher level of taxation than under a competitive market; however, given the lower marketing spend and
lower product choice for customers, at any given tax rate the onshore channelling will be lower than in a
competitive market, all else being equal.
27. In the chart below, we illustrate the onshore channelling on the y-axis of a competitive market (blue line)
compared to a monopoly (red line) at any given tax rate (x-axis)
Fig 8: Competitive Market vs Monopoly Onshore Channelling
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
Source: H2 Gambling Capital, 2020
© H2 Gambling Capital 2020
14
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
2.3
Impact of Increase in Tax Rate to 28% of GGR
28. The current proposal is for the Danish online gambling tax rate to increase from 20% of GGR to 28% of GGR
in 2021. In order to estimate the impact of a change in tax rate to the onshore channelling of the Danish
online gambling market, we take into account the ‘standard’ channelling estimates, the current channelling
of the Danish market which takes into account any product / marketing restrictions as well as the ability
to prevent offshore operators targeting the market, and the profitability of existing operators.
29. Under the current Danish model, based upon the data supplied by DOGA members, we believe that the
levels of profitability of commercial operators are relatively low. It is difficult to get exact figures due to
the apportioning of central costs, and that operating costs as a proportion of revenues differ greatly
depending upon the scale of operators. However, based upon the data that H2 has received, we estimate
that the ‘contribution margin’ – that is to say, after bonuses / marketing / tax and cost of sales, but before
any operating costs or apportioning of central costs, is c.30% on average. Once these operating and central
costs have been taken into account, this falls to between 0% and 10% operating margin – although in some
cases where entrants are new to the market, there are currently loss-making businesses.
30. Given the low profit margins, any significant increase in tax rate (such as the proposed increase from 20%
of GGR to 28% of GGR) will lead to a reduction in marketing costs in order to retain profitability. This also
assumes that operators are able to make operational cost savings within their business, with operating /
central costs reduce in line with GGR, rather than remaining fixed.
Fig 9: Danish Onshore Operator Profitability Estimates
Tax Rate
Gross Revenues
Bonuses
Net Revenue
Cost of Sales
Pre-tax Gross Profit
Tax
Post-Tax Gross Profit
Marketing
Contribution Margin
20%
100%
-14%
86%
-10%
76%
-20%
56%
-27%
29%
28% - No Change to
Marketing Spend
100%
-14%
86%
-10%
76%
-28%
48%
-27%
21%
28% - Reduction in
Marketing Spend
100%
-11%
89%
-10%
79%
-28%
51%
-22%
29%
Operating / Legal & Compliance /
Central Costs
Operating Profit
-20% to - 30%
c. 0% to +10%
-20% to - 30%
c. -10% to 0%
-20% to - 30%
c. 0% to +10%
Source: H2 Gambling Capital, 2020
31. We have seen a reduction in the proportion of marketing spend in other markets that have increased the
tax rate (such as the UK) and the operators that responded to H2 for this report have confirmed that any
increase in tax will lead to a fall in marketing percentage in order to retain a minimum return on investment
in the market. With the overall onshore market forecast to fall, the impact of a reduction in marketing
percentage will accentuate the reduction in marketing spend in monetary terms, and this will have a
further negative impact on channelling rates.
32. Based on the above, we estimate that the current channelling of c.85% at a 20% GGR tax rate would fall to
c.75% were the tax rate to be increased to 28% of GGR, and illustrate this in the chart below, with the tax
rate on the x-axis and the onshore channelling on the y-axis.
© H2 Gambling Capital 2020
15
 SAU, Alm.del - 2019-20 - Bilag 362: Præsentation og henvendelse fra Spillebranchens foretræde for udvalget den 18. juni 2020 om regeringens seneste udmeldinger for spilleområdet
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Fig 10: Danish Onshore Gambling Market Channelling vs Tax Rate
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Source: H2 Gambling Capital, 2020
33. This is in line with our forecasts, where we forecast a reduction in onshore channelling from 84% in 2020e
to 76% in 2021e due to the proposed increase in taxation to 28% of GGR. This leads to a decline in the
onshore market of c. 22% year on year, or a decline of c.DKK 900m in onshore GGR.
Fig 11: Danish Online Gambling GGR (2019-24e) – Excluding Lottery (DKK m)
GGR (DKK m)
Online Onshore
Online Offshore
Total Online
% Onshore
2019
4,023
694
4,717
85%
2020e
4,063
770
4,833
84%
2021e
3,156
1,023
4,179
76%
2022e
3,303
1,041
4,344
76%
2023e
3,400
1,054
4,454
76%
2024e
3,504
1,075
4,579
77%
2019-24e CAGR
-2.7%
9.1%
-0.6%
Source: H2 Gambling Capital, 2020
34. When analysing the impact on the offshore market, we again split the customer base between
sophisticated customers and mass market customers, with the sophisticated customers being
disproportionately affected as they are price sensitive. We have already illustrated the impact that the
new regulations introduced this year have had on the market, and further reductions in bonus spend / any
changes to pricing in the onshore sportsbooks due to an increased tax rate will make the offshore market
more attractive by comparison.
35. Although we only forecast that less than 30% of this decline in onshore GGR will shift to the offshore
market, this still leads to 33% increase in offshore GGR, increasing it by DKK 253m.
36. While a lower tax rate leads to higher levels of channelling, it doesn’t necessarily lead to the optimal tax
generation. Below we show a Laffer Curve representing the optimal tax rate with regards to maximising
tax generation for the Danish online gambling market.
© H2 Gambling Capital 2020
16
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Fig 12: Danish Tax Generation vs Tax Rate
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Source: H2 Gambling Capital, 2020
37. Under the current proposals of increasing the tax rate to 28%, H2 estimates that the tax generation would
increase slightly for the Danish government, and this is in line with our forecasts. An 8 percentage point
increase in the tax rate equates to a 40% relative increase in the tax rate. We forecast that this will lead to
a year on year decline in GGR of 22%, which would lead to a 9% increase in tax revenue – in line with what
we have illustrated on the Laffer Curve above.
Fig 13: Danish Online Gambling Tax Generation (DKK m)
GGR (DKK m)
Tax Rate (%)
GGR Forecast
Tax Revenue
2020e
20%
4,063
813
2021e
28%
3,156
884
Change (%)
8% / 40%
-22%
9%
Source: H2 Gambling Capital, 2020
38. However, we also note that this is increased tax revenue comes at the detriment to consumer welfare with
more players moving to offshore sites where there are lower levels of consumer protection.
© H2 Gambling Capital 2020
17
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
2.4
2021-24e Financial Impact
39. Using the above analysis, we estimate the cumulative financial impact over the next four years of an
increase in the tax rate to 28%.
40. H2 estimates that the total decline in onshore online GGR over the period 2021-24e from an increase in
the tax rate to 28% would be c.DKK 5bn, or c.-27% - we note that this is higher than the initial -22% decline
in 2021e because of the lower future growth rate associated with a higher tax rate. This will lead to a
reduction of DKK 1bn in bonuses (over 40% decline), which is likely to have a significant impact on the
channelling of the sophisticated customer base.
Fig 14: Danish Onshore Market Profitability Estimates 2021-24e (DKK m)
2021-24e (DKK m)
Gross Revenue
Bonuses
Net Revenue
Cost of Sales
Pre-Tax Gross Profit
Tax
Post-Tax Gross Profit
20% Tax Rate
18,386
(2,528)
15,858
(1,839)
14,020
(3,677)
10,342
28% Tax Rate
13,363
(1,437)
11,927
(1,336)
10,590
(3,742)
6,849
Change (DKK m)
(5,023)
1,092
(3,932)
502
(3,429)
(64)
(3,494)
Change (%)
-27%
-43%
-25%
-27%
-24%
2%
-34%
Source: H2 Gambling Capital, 2020
41. Over the period of four years, the tax revenue is broadly similar, as the higher initial tax take gets eroded
by lower market growth. This results in a 34% decline in post-tax gross profit for operators, or a reduction
of DKK 3.5bn.
42. Operators will look to make further operational efficiencies in their business, and we have assumed
aggressive cost cutting to reduce operating and central costs by DKK 1bn over the next four years; part of
this will impact investment in the Danish business, and some of this could be manipulated by a reshuffling
of central cost allocation. However, the largest line item that will be cut is a DKK 2bn reduction in marketing
spend. Not only is this a further reduction in investment in the Danish economy, but a 40% reduction in
marketing spend will lead to further leakage of players to the offshore market.
Fig 15: Danish Onshore Market Profitability Estimates 2021-24e (DKK m)
2021-24e (DKK m)
Post-Tax Gross Profit
Marketing
Contribution to EBITDA
Operating / Central Costs @20% GGR
Operating Profit
Operating Profit Margin
20% Tax Rate
10,342
(4,964)
5,378
(3,677)
1,701
9%
28% Tax Rate
6,849
(2,940)
3,909
(2,673)
1,236
9%
Change (DKK m)
(3,494)
2,024
(1,469)
1,005
(465)
Change (%)
-34%
-41%
-27%
-27%
-27%
0%
Source: H2 Gambling Capital, 2020
43. By making such large cuts to marketing spend and the operational cost base, operators would be able to
maintain their already low operating profit margin, but operating profit would decline by DKK 465m over
the period, or by -27%.
© H2 Gambling Capital 2020
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 SAU, Alm.del - 2019-20 - Bilag 362: Præsentation og henvendelse fra Spillebranchens foretræde for udvalget den 18. juni 2020 om regeringens seneste udmeldinger for spilleområdet
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
44. The DDK 5bn reduction in onshore online GGR will not all shift offshore, rather the majority of this will be
a decrease in overall gambling activity. However, we have demonstrated that the market is sensitive to
changes in promotional activity – especially the price sensitive customers – and a 43% reduction in bonuses
is likely to lead to significant leakage to offshore sites who are able to offer superior promotions to
customers.
45. Furthermore, a reduction in marketing spend of 41% will also have a negative impact on the channelling
of the onshore market, as will decreased investment in product as operators look to reduce investment to
lower the operational costs of the business. Finally, there is the possibility that sportsbooks will increase
their odds to offset the higher costs, therefore making their product relatively less attractive to price
sensitive customers compared to that offered by offshore operators.
46. A combination of the above leads us to believe that c. 40% of the decline in the onshore GGR will shift
offshore, with the remaining 60% disappearing from the market entirely. Therefore, out of a DKK 4.5bn
reduction in onshore GGR, we estimate that DKK 1.9bn of this shifts offshore. However, as the offshore
market is smaller than the onshore market, this represents a 90% increase in the size of the offshore
market.
Fig 16: Danish Online Market Channelling Estimates 2021-24e (DKK m)
2021-24e (DKK m)
Onshore GGR
Offshore GGR
Total Online GGR
% Offshore
20% Tax Rate
17,861
2,330
20,191
12%
28% Tax Rate
13,363
4,193
17,556
24%
Change (DKK m)
(4,498)
1,862
(2,636)
Change (%)
-25%
80%
-13%
12%
Source: H2 Gambling Capital, 2020
47. In terms of channelling, this increases the offshore channelling from 12% of the online market (88%
onshore) to 24% of the online market (76% onshore).
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Section 3: Sensitivity Analysis of Tax Rates
Standard economic theory dictates a smooth Laffer Curve, whereas in reality the curve is more ‘stepped’.
For example, if the tax rate increased by 1%, then it is unlikely that this would materially change an
operator’s behaviour, and one could assume that the onshore market size would be unaffected. However,
at a certain point, the increase in tax rate would cause a significant shift in operators’ behaviour.
Under the ‘smooth’ theory, any increase in tax rate would lead to a reduction in the onshore channelling,
making 20% the optimal tax rate in terms of consumer protection. However, the optimal tax rate for tax
generation is 26%/27% - above which tax revenues start to decline. At 26%/27% tax rate, we estimate an
increase in tax revenue of c.DKK 62m compared to a 20% tax rate, although when taking into account the
reduction in Danske Spil’s profits, this leads to a total increase in revenue to the State of only c.DKK 34m.
Under the ‘stepped’ theory, onshore channelling remains at 85% up until a 22% tax rate, and 22% is also
the tax rate that would generate the highest levels of tax revenue; we estimate that this would increase
tax revenue by c.DKK 83m compared to a 20% tax rate, and increase revenue to the State by c.DKK 46m.
3.1
Tax Rate Sensitivity
48. As we have illustrated in the previous section, the gaming tax rate affects both the onshore / offshore
channelling as well as the tax revenue. However, it is important to note that an increase in tax rate does
not necessarily lead to an increase in tax take, as customers shift offshore and therefore the taxable base
of the market reduces as the tax rate increases.
49. At lower levels of tax, the increase in tax rate is greater than the reduction in the underlying taxable
market size, leading to an increase in overall tax generation. This continues up until a tax rate of c.26%,
beyond which the onshore market declines are greater than the increases in tax rate, leading to an overall
decrease in the amount of tax generated.
50. Below we combine the charts from the previous section showing the tax rate on the x-axis, the percentage
of the market onshore in the blue line, and the percentage of the maximum tax take in the green line.
Fig 17: Danish Onshore Gambling Market Channelling & Tax Generation vs Tax Rate
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
Source: H2 Gambling Capital, 2020
© H2 Gambling Capital 2020
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
3.2
Tax Generation and Channelling
51. By using the analysis in figure 17, we can estimate the tax generation and onshore / offshore channelling
at different rates of tax – and again note that the ‘optimal’ level of gaming tax for onshore channelling is
different to the optimal level of tax for maximum tax generation. Therefore, an optimal gambling market
is likely to have a compromise between these two objectives, which are not necessarily completely aligned.
52. We highlight that the tax generation that we show in our analysis is purely the primary revenues generated
from the gaming tax; this is calculated by taking the size of the overall online gambling market, the
proportion of this which is onshore, and the tax rate. However, it does not include any secondary economic
impacts, such as the lower marketing spend, investment, and local employment that accompanies a higher
tax rate, all of which would lead to incremental tax generation and economic growth.
53. Below we show the estimated 2021 online GGR split between onshore and offshore at differing levels of
tax rate between 20% and 28% of GGR. We also show the change in the onshore and offshore market GGR
at each tax rate compared to the current tax rate of 20%. As the tax rate increases, the proportion of the
market that is channelled offshore also increases.
Fig 18: Danish Online Gambling GGR (2021e) at Different Tax Rates (DKK m)
GGR 2021e (DKK m)
Onshore Market
Offshore Market
Total Market
20%
4,144
731
4,875
21%
3,998
769
4,766
22%
3,864
806
4,670
23%
3,743
843
4,586
24%
3,632
880
4,511
25%
3,529
917
4,446
26%
3,428
953
4,380
27%
3,301
979
4,280
28%
3,156
1,023
4,179
% Onshore
% Offshore
85%
15%
84%
16%
83%
17%
82%
18%
81%
20%
79%
21%
78%
22%
77%
23%
76%
24%
Change vs 20% Tax Rate (DKK m)
Onshore Market
Offshore Market
Total Market
-
-
-
(146)
37
(109)
(280)
74
(205)
(401)
111
(290)
(512)
148
(364)
(615)
186
(429)
(716)
221
(495)
(843)
248
(596)
(988)
291
(697)
Change vs 20% Tax Rate (%)
Onshore Market
Offshore Market
Total Market
-
-
-
-3.5%
5.1%
-2.2%
-6.7%
10.2%
-4.2%
-9.7%
15.2%
-5.9%
-12.4%
20.3%
-7.5%
-14.8%
25.4%
-8.8%
-17.3%
30.3%
-10.2%
-20.4%
33.9%
-12.2%
-23.8%
39.8%
-14.3%
Source: H2 Gambling Capital, 2020
54. As the tax rate increases, the decline in the onshore market is significantly higher than the increase in the
offshore market, as some of the gambling activity ceases rather than shifts offshore. Therefore, the overall
market declines as the tax rate increases. However, given the lower base of the offshore market, the
percentage change in the offshore market is much higher than the percentage decline in the onshore
market.
55. Based on the onshore market size, we estimate the tax generated at each tax rate. As the tax rate increases,
the total primary tax take also increases up until 26%/27%, and then starts to fall again.
© H2 Gambling Capital 2020
21
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2212650_0022.png
DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Fig 19: Tax Generation (2021e) at Different Tax Rates (DKK m)
2021e (DKK m)
Onshore GGR
Tax Rate (%)
Tax Generation
20%
4,144
20%
829
21%
3,998
21%
839
22%
3,864
22%
850
23%
3,743
23%
861
24%
3,632
24%
872
25%
3,529
25%
882
26%
3,428
26%
891
27%
3,301
27%
891
28%
3,156
28%
884
Source: H2 Gambling Capital, 2020
56. While figure 19 shows the tax generated at different levels tax rate, it does not take into account the fact
that Danske Spil has a significant share of the Danish online gambling market. Because Danske Spil owned
by the State, any incremental tax generated from Danske Spil is a zero-sum game, as this is directly offset
by lower income tax and dividends to the State. Therefore, rather than focusing purely on tax generation,
we also show the true increase in State revenues as a result of a change in the tax rate, based on an
estimated online market share of 45% for Danske Spil.
Fig 20: Increase in State Revenues (2021e) at Different Tax Rates vs 20% (DKK m)
2021e (DKK m)
Onshore GGR
Tax Rate (%)
Tax Generation
Increase in Tax Revenues
Danske Spil Impact
Increase in State Revenues
20%
4,144
20%
829
-
-
-
21%
3,998
21%
839
11
(5)
6
22%
3,864
22%
850
21
(10)
12
23%
3,743
23%
861
32
(14)
18
24%
3,632
24%
872
43
(19)
24
25%
3,529
25%
882
53
(24)
29
26%
3,428
26%
891
62
(28)
34
27%
3,301
27%
891
62
(28)
34
28%
3,156
28%
884
55
(25)
30
Source: H2 Gambling Capital, 2020
57. While the above analysis assumes a smooth Laffer curve, as per standard economic theory, in reality the
curve is more ‘stepped’. For example, if the tax rate increased by 1%, then it is unlikely that this would
materially change an operator’s behaviour, and one could assume that the onshore market size would be
unaffected. However, at a certain point, the increase in tax rate would cause a significant shift in operators’
behaviour.
58. It is impossible to forecast exactly what point each operator will change their behaviour, and by what
quantum. However, below we illustrate what we believe to be a very plausible scenario of how Danish
online gambling operators could react to different tax rates, as opposed to the smooth curve advocated
by standard economic theory.
59. Our starting assumption is that the tax rate could increase to 22% without a material change in operator
behaviour, and therefore we assume the same onshore market size at a tax rate of 20%/21%/22%.
However, at 23% we assume a shift in behaviour, as at this point the relative tax rate increase is 15%; at
23%/24%/25%, we therefore assume an onshore market size of the scale that our economic theory
suggests it would be at the mid-point of this range – i.e. at 24%. As the tax rate increases, we assume that
operators react more quickly, and therefore the next step is just two percentage points, with a 26% and
27% tax rate leading to the market size that we would forecast at a 26.5% tax rate, and at 28% the onshore
market size shifts down to what we have already forecast.
60. We illustrate this below, along with the implied onshore channelling at each tax rate, which we also assume
moves in a ‘stepped’ manner rather than the curve that we previously illustrated.
© H2 Gambling Capital 2020
22
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Fig 21: ‘Stepped’ Onshore Market Size (2021e) at Different Tax Rates (DKK m)
2021e (DKK m)
Equivalent ‘Smooth’ Tax Rate Onshore
Market Size
Onshore Market Channelling
Onshore GGR
20%
20%
85.0%
4,144
21%
20%
85.0%
4,144
22%
20%
85.0%
4,144
23%
24%
80.5%
3,632
24%
24%
80.5%
3,632
25%
24%
80.5%
3,632
26%
26.5%
77.7%
3,364
27%
26.5%
77.7%
3,364
28%
28%
76.0%
3,156
Source: H2 Gambling Capital, 2020
61. This leads to a ‘stepped’ curve when forecasting the onshore market size at different tax rates, rather than
the smooth curve that we illustrated earlier.
Fig 22: Danish Onshore Gambling Market Size (2021e) at Different Tax Rates (DKK m)
4,400
4,200
4,000
3,800
3,600
3,400
3,200
3,000
20%
21%
22%
23%
Smooth Curve
24%
25%
Stepped Curve
26%
27%
28%
Source: H2 Gambling Capital, 2020
62. When applying this ‘stepped’ onshore market size to the tax rate, we see spikes in the tax revenue at points
just before operators’ behaviour shifts. An optimal tax rate of 22% leads to a total increase in tax revenue
of DKK 83m, although when adjusted for Danske Spil’s contribution, we estimate the increase in revenue
to the State of c.DKK 46m.
Fig 23: ‘Stepped’ Onshore Market Size (2021e) at Different Tax Rates (DKK m)
2021e (DKK m)
Equivalent ‘Smooth’ Tax Rate Onshore
Market Size
Onshore Market Channelling
Onshore GGR
20%
20%
85.0%
4,144
21%
20%
85.0%
4,144
22%
20%
85.0%
4,144
23%
24%
80.5%
3,632
24%
24%
80.5%
3,632
25%
24%
80.5%
3,632
26%
26.5%
77.7%
3,364
27%
26.5%
77.7%
3,364
28%
28%
76.0%
3,156
Tax Rate (%)
Tax Generation
Increase in Tax Revenues
Danske Spil Impact
Increase in State Revenues
20%
829
-
-
-
21%
870
41
(19)
23
22%
912
83
(37)
46
23%
835
6
(3)
4
24%
872
43
(19)
24
25%
908
79
(36)
44
26%
875
46
(21)
25
27%
908
80
(36)
44
28%
884
55
(25)
30
Source: H2 Gambling Capital, 2020
© H2 Gambling Capital 2020
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 SAU, Alm.del - 2019-20 - Bilag 362: Præsentation og henvendelse fra Spillebranchens foretræde for udvalget den 18. juni 2020 om regeringens seneste udmeldinger for spilleområdet
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
63. We illustrate this in a chart below, compared to the smooth curve that we illustrated earlier. Here we can
see that the tax generation at 20% is almost identical to that at 23%; the tax generated at 21% is broadly
the same as at 24% and 26%. The highest tax is generated at a tax rate of 22%, with 25% and 27% tax rates
also generating almost the same level of tax.
Fig 24: Danish Onshore Gambling Tax Revenues (2021e) at Different Tax Rates (DKK m)
920
900
880
860
840
820
800
780
20%
21%
22%
23%
Smooth Curve
24%
25%
Stepped Curve
26%
27%
28%
Source: H2 Gambling Capital, 2020
64. When taking into account all of the above analysis, we get different levels of ‘optimum’ tax rate depending
upon whether you subscribe to the classical economic theory of a smooth curve, or the concept of a
‘stepped’ change in operator behaviour.
65. Under the ‘smooth’ theory, any increase in tax rate would lead to a reduction in the onshore channelling,
making 20% the optimal tax rate for consumer protection, and the optimal tax rate for maximising tax
revenues is 26%/27%. However, under the ‘stepped’ theory, onshore channelling remains at 85% up until
a 22% tax rate, and 22% is also the tax rate that would generate the highest levels of tax revenue.
Fig 25: ‘Smooth’ vs ‘Stepped’ Onshore Market Size and Tax Generation (2021e) at Different Tax
Rates (DKK m)
2021e (DKK m)
Smooth Curve
Onshore Market Channelling
Tax Generation
Increase in State Revenues
85.0%
829
-
83.9%
839
6
82.8%
850
12
81.6%
861
18
80.5%
872
24
79.4%
882
29
78.3%
891
34
77.1%
891
34
76.0%
884
30
20%
21%
22%
23%
24%
25%
26%
27%
28%
Stepped Curve
Onshore Market Channelling
Tax Generation
Increase in State Revenues
85.0%
829
-
85.0%
870
23
85.0%
912
46
80.5%
835
4
80.5%
872
24
80.5%
908
44
77.7%
875
25
77.7%
908
44
76.0%
884
30
Source: H2 Gambling Capital, 2020
© H2 Gambling Capital 2020
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 SAU, Alm.del - 2019-20 - Bilag 362: Præsentation og henvendelse fra Spillebranchens foretræde for udvalget den 18. juni 2020 om regeringens seneste udmeldinger for spilleområdet
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Section 4: Benchmarking Comparable Markets
There are many variables which contribute to the onshore channelling rate of online gambling; while the
tax rate is not the only driver of channelling rates, when we benchmark Denmark against a number of
other markets, it is clear that the tax rate has a material impact on the channelling rate.
Those markets which are more mature have also seen a higher level of onshore channelling, all things
being equal, and markets with a more stringent approach towards offshore operators (in particular France)
also benefit from a lower offshore market.
By 2024, we forecast the Danish offshore market to represent less than 10% of online GGR, compared to
over 20% if the tax rate were to increase to 28% of GGR.
4.1
Benchmarking Versus Comparable Markets
66. There are many variables which contribute to the onshore channelling rate of online gambling, including
tax rates, advertising, wagering limits, number of licenses, blocking of offshore websites and plethora of
other regulatory restrictions.
67. While the tax rate is not the only driver of channelling rates, when we benchmark Denmark against a
number of other markets, it is clear that the tax rate has a material impact on the channelling rate. Those
markets which are more mature have also seen a higher level of onshore channelling, all things being equal,
and markets with a more stringent approach towards offshore operators (in particular France) also benefit
from a lower offshore market.
Fig 26: Danish Online Market Channelling Estimates 2021-24e (DKK m)
2019
France
Italy
Portugal
Spain
Sweden
UK
Tax Rate
High T/O Tax
20%-25%
25% & T/O Tax
20%
18%
21%
% Offshore
18%
8%
22%
20%
13%
2%
Notes
High tax rate partially offset by stringent enforcement against offshore operators
Casino at 20% tax rate, and market benefitting from onshore maturity
25% GGR for gaming, Turnover tax for sportsbetting
However, the inclusion of regional taxes means effective rate closer to 25%
Offshore channelling forecast to increase due to advertising restrictions
Benefit from mature market, large onshore market size & no product restrictions
Denmark 2021
Denmark 2024
Denmark 2021
20%
20%
28%
15%
9%
24%
Channelling has shifted offshore slightly due to new promotional restrictions
Channelling shifts onshore as the market matures
Increased tax rate leads to increased shift offshore
Source: H2 Gambling Capital, 2020
68. While no markets are directly comparable, if we were to take France, Portugal and Spain, which have either
turnover tax or an effective GGR tax rate of c.25%, the offshore market represents c.20% of GGR. By
contrast, when taking Italy, the UK and Sweden only c.10% of the market remains offshore.
69. By 2024, we forecast the Danish offshore market to represent less than 10% of online GGR, compared to
over 20% if the tax rate were to increase to 28% of GGR.
© H2 Gambling Capital 2020
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 SAU, Alm.del - 2019-20 - Bilag 362: Præsentation og henvendelse fra Spillebranchens foretræde for udvalget den 18. juni 2020 om regeringens seneste udmeldinger for spilleområdet
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
4.2
Tackling the Offshore Market
70. The ability to prevent customers using offshore providers is another important factor in channelling activity
onshore. The Danish regulators have been very proactive in their attempts to block offshore operators
from targeting the market, including litigation against telecom companies to block offshore operators
illegally targeting the market. However, despite the efforts of the regulators, H2 understands that it is not
illegal for operators to accept Danish players, provided their services are not actively promoted.
71. It is also apparent that once established, eliminating an offshore gambling market is extremely difficult.
Implementing a broad and fair onshore licensing system with an attractive tax rate has historically been
more effective at combating offshore operators, as well as enabling licensed operators to service
customers’ existing (as well as future) demands for the latest technologies, products and services.
72. It is clear from established onshore-regulated online gambling markets that, providing the product is
competitive and the value on offer is similar, consumers prefer to transact within an onshore-regulated
scheme due to the additional protection that this ensures them.
73. The above said, if we accept that ‘something for everyone’ market equilibrium is the optimum industry
model for online gambling, then there are a number of key considerations (based on experience in other
markets) that should ideally be addressed within the Danish market as part of its regulatory framework,
namely:
ü
Balancing consumer protection with meeting consumer demand:
Best practice regulation includes
stringent consumer protection measures, including limits on how much operators incite gambling
activity. However, as we have illustrated, a large part of the market GGR is generated from
sophisticated players, and if they are able to get significantly more attractive promotions offshore,
then this will lead to leakage to the offshore market;
ü
Tax Rate:
While a higher tax rate can generate increased tax revenue, it can also lead to less
competitive pricing and lower levels of marketing spend – both of which can lead to increased leakage
to the offshore market, particularly for more price sensitive players;
74. If a licensed market is too restrictive – as could be the case when combining the latest Danish regulatory
measures along with a significant increase in the tax rate - a
regulatory gap
emerges, within which offshore
operators enjoy considerable economic advantages. In short, they continue to:
´
´
´
´
pay no taxes;
pay no licensing fees;
contribute no funds to promoting responsible gambling;
contribute nothing to the wider Danish economy.
and also:
ü
generate straight profit;
ü
do not have to create or sustain jobs, and pay associated taxes, nor invest in technology within their
targeted country;
ü
do not have to adhere to that country’s licensing requirements, operating standards and/or codes of
practice (including advertising controls and responsible gambling measures);
ü
do not have to adhere to that country’s regulatory practices (e.g. can offer products not permitted
domestically and/or the same products cheaper);
ü
are harder to track if criminal or anti-money laundering proceedings are enacted.
© H2 Gambling Capital 2020
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 SAU, Alm.del - 2019-20 - Bilag 362: Præsentation og henvendelse fra Spillebranchens foretræde for udvalget den 18. juni 2020 om regeringens seneste udmeldinger for spilleområdet
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
Section 5: H2 Analysis and Conclusions
An increase in tax rate to 28% would lead to an increase in tax revenue, but at the detriment to consumer
welfare as DKK 2bn of GGR shifts to offshore operators over the period 2021-24e.
Furthermore, reductions in marketing spend and aggressive operational cost cutting would have an
incremental negative impact on investment in the country.
By contrast, an increase in tax rate to 22% would likely lead to an increase in tax revenue, while not
impacting onshore channelling, thereby providing an ‘optimal’ tax rate for both consumer protection and
tax generation.
5.1 H2 Analysis
75.
Balancing consumer protection and incentives to gamble:
Best practice regulation includes stringent
consumer protection measures, including limits on how much operators incite gambling activity. However,
as we have illustrated, a large part of the market GGR is generated from sophisticated players, and if they
are able to get significantly more attractive promotions offshore, then this will lead to leakage to the
offshore market.
76.
Tax Rate:
While a higher tax rate can generate increased tax revenue, it can also lead to less competitive
pricing and lower levels of marketing spend – both of which can lead to increased leakage to the offshore
market, particularly for more price sensitive players. For Denmark, over the period 2021-24e, we estimate
that the tax revenue is broadly similar at a 20% and 28% tax rate, as the higher initial tax take from a 28%
tax rate gets eroded by lower market growth.
77.
Market Impact:
When looking at the period 2021-24e, H2 estimates that the total cumulative decline in
onshore online GGR from an increase in the tax rate to 28% would be c.DKK 5bn, or c.-27%. This will lead
to a reduction of DKK 1bn in bonuses (over 40% decline), which is likely to have a significant impact on the
channelling of the sophisticated segment of the customer base.
78.
Despite the reduction in bonusing, this results in a 34% decline in post-tax gross profit for operators, or a
reduction of DKK 3.5bn. To offset this, we estimate a DKK 2bn reduction in marketing spend, as well as
aggressive cost cutting to reduce operating and central costs by DKK 1bn over the next four years. Not only
is this a further reduction in investment in the Danish economy, but a 40% reduction in marketing spend
will lead to further leakage of players to the offshore market.
79.
Channelling:
A combination of the above leads us to believe that an increase in the tax rate from 20% to
28% of GGR would increase Danish channelling from the current 88% onshore to 76%.
80.
Operator Behaviour Leading to a ‘Stepped’ Curve:
While our analysis is based upon standard economic
theory of a smooth Laffer Curve, in reality the curve is more ‘stepped’. For example, if the tax rate increased
by 1%, then it is unlikely that this would materially change an operator’s behaviour, and one could assume
that the onshore market size would be unaffected. However, at a certain point, the increase in tax rate
would cause a significant shift in operators’ behaviour.
81.
Under the ‘stepped’ theory, onshore channelling remains at 85% up until a 22% tax rate, and 22% is also
the tax rate that would generate the highest levels of tax revenue, thereby providing an ‘optimal’ tax rate
for both consumer protection and tax generation. We estimate that a 22% tax rate would increase tax
revenue by c.DKK 83m compared to a 20% tax rate, and increase revenue to the State (after taking into
account the impact on Danske Spil’s profits) by c.DKK 46m.
27
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 SAU, Alm.del - 2019-20 - Bilag 362: Præsentation og henvendelse fra Spillebranchens foretræde for udvalget den 18. juni 2020 om regeringens seneste udmeldinger for spilleområdet
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DOGA – Denmark Online Gambling Market Impact Assessment
H2 Gambling Capital, April 2020
5.2 Key Conclusions
H2 Independent Report – 10 Key Conclusions
1.
On 1 January 2020, new measures surrounding player deposit limits and promotions were introduced.
Analysis of operator data suggests that the estimated impact on licensed market revenues has been a
c.17% reduction in GGR.
2.
H2 has reduced its 2020 onshore online GGR forecasts by -12.5% to take into account the impact of these
new measures. This reduces the channelling rate of the onshore online market. Prior to this, H2 forecast
the offshore market to represent 13% of the Danish online market in 2020e, but now estimates it to
represent 16% of the online market in 2020e.
3.
The current proposal is for the Danish online gambling tax rate to increase from 20% of GGR to 28% of
GGR in 2021. While tax rate is not the only driver of channelling rates, when we benchmark Denmark
against a number of other similar markets, it is clear that increasing the tax rate will have a significant
impact on channelling.
4.
H2 forecasts that an increase in tax rate to 28% will initially increase overall tax revenue, but notes that
this comes at the detriment to consumer welfare, with more players moving to offshore sites where
there are lower levels of consumer protection.
5.
When looking at the period 2021-24e, H2 estimates that the total cumulative decline in onshore online
GGR would be c.DKK 5bn, or c.-27%. Over this period, the tax revenue is broadly similar, as the higher
initial tax take gets eroded by lower market growth.
6.
Furthermore, given the low profit margin of operators, any significant increase in tax rate will lead to a
reduction in marketing spend, as well as aggressive cost cutting. Not only is this a further reduction in
investment in the Danish economy, but a significant reduction in marketing spend will lead to yet further
leakage of players to the offshore market.
7.
In terms of channelling, an increase in the tax rate from 20% to 28% of GGR would increase Danish
offshore channelling from 12% of the online market (88% onshore) to 24% of the online market (76%
onshore) for the period 2021-24e.
8.
Market analysis using standard economic theory of a smooth Laffer Curve shows that any increase in
tax rate would lead to a decrease in onshore channelling, but that the optimal tax rate for maximising
tax revenues would be 26%/27%. At this point, we estimate an increase in tax revenue of c.DKK 62m
compared to a 20% tax rate, although when taking into account the reduction in Danske Spil’s profits,
this leads to a total increase in revenue to the State of only c.DKK 34m.
9.
However, the market reality is that the curve is more ‘stepped’ – that is to say that if the tax rate
increased by a small amount, then it is unlikely that this would materially change an operator’s
behaviour, and one could assume that the onshore market size would be unaffected. However, at a
certain point, the increase in tax rate would cause a significant shift in operators’ behaviour.
10.
Under the ‘stepped’ theory, an increase in tax rate to 22% would likely lead to an increase in tax revenue,
while not impacting onshore channelling, thereby providing an ‘optimal’ tax rate for both consumer
protection and tax generation. We estimate that this would increase tax revenue by c.DKK 83m
compared to a 20% tax rate, and increase revenue to the State by c.DKK 46m.
© H2 Gambling Capital 2020
© H2 Gambling Capital 2020
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