Brazil’s proposed tax hike will make the market undesirable, industry warns

The Brazil betting sector is facing a 50% hike on operator gambling tax, which could increase to 18% of GGR, and stakeholders are extremely concerned this could provide a bitter blow to the licensed industry’s fight against the illegal market. 

Understandably, operators are shocked and likely reconsidering their positions in the newly regulated market.  

“[Operators] don’t want to be investing in a country they agreed to pay BRL30 million [to enter]. They agreed to invest hundreds of millions into this venture and then six months down the road they just change the rules of the game without asking you,” Eduardo Ludmer, BetMGM’s head of legal in Brazil, tells iGB.  

Gambling trade bodies ANJL and IBJR banded together and condemned the government’s provisional measure as “unacceptable” when it was announced earlier in June.  

“If Brazil goes in this direction, it’s just showing a message that rules can be changed at any time here,” Fernando Vieira, executive director of the Brazilian Institute of Responsible Gaming, adds. “It’s not reasonable to come and start to change everything after only five months. 

“It will send a message to the world that Brazil is a complicated place for doing business. There’s no legal certainty in Brazil for the business.” 

What is the government suggesting? 

In June, the Brazilian government enacted a provisional measure to raise the tax rate as part of a broader effort to cut the government’s deficit.  

It relates to upcoming proposed changes to Brazil’s tax system, set out in May, which would have seen a sharp increase to the financial transactions tax (IOF), raising the rate from 0.38% to 3.5%. 

The IOF applies to a range of foreign transactions including loans, currency exchange, insurance and investments. It remains a major source of federal tax revenue. 

However, the proposal faced backlash from Congress, prompting the government to revise the decree almost immediately. 

President Lula’s administration remains under pressure to reduce Brazil’s fiscal deficit by the end of 2025, ahead of next year’s presidential election.  

Therefore, the government has turned its attention to the betting industry to help cover the BRL20 billion ($3.6 billion) shortfall left by the IOF decree’s failure. 

This has come as a huge shock to the sector, especially the timing, with less than six months having passed since Brazil’s licensed online sector went live on 1 January. 

Ludmer tells iGB his company’s finance team will have to recalculate their forecasts to include the abrupt tax rise. 

“Everybody was very surprised with the increase, because you prepare yourself, you buy a BRL30 million licence, you have a business plan based on a 12% tax rate,” Ludmer says. 

This could have huge repercussions for the licensed sector, which suffered another blow recently when the Senate approved new ad restrictions, such as watersheds across TV and radio.

ANJL President Plínio Lemos Jorge warns the tax rise will impact ongoing requests for licences, with Brazil potentially losing out on BRL2.8 billion in revenue should operators decide to give up on entering the regulated market. 

Legal uncertainty caused by tax hike the key point 

Ludmer is concerned sudden changes like the tax rise will ultimately undermine investor confidence in the regulation, making Brazil appear as “not a serious country”. 

The sector is still awaiting the outcome of a Supreme Federal Court hearing to establish whether its betting laws breach Brazil’s Constitution.

This hearing was called after the National Confederation of Trade in Goods, Services and Tourism (CNC), Brazil’s third biggest trade union, filed an ADI (Ação Direta de Inconstitucionalidade), a legal action in Brazil that aims to overturn a law that acts against the nation’s Constitution.

“For me, this [legal certainty] is the pillar for everything to succeed,” Ludmer continues. “It’s one of the most important aspects to doing business, not only in Brazil, but everywhere.” 

“Imagine you have the Supreme Court that is slated to declare or not the legality of betting, of the whole industry we are working in, where we are making investments in the billions, hiring like crazy. And it could be the case that this whole thing can have a huge setback. It’s crazy to imagine that.” 

Vieira agrees the inevitable legal uncertainty has the potential to set back Brazil’s nascent licensed sector. 

Ludmer explains this rise is to be paid alongside a range of other taxes, such as income and municipal taxes, pushing the total burden on operators close to 50%. 

“Operators have said it’s prohibitive in terms of business to have 18%,” Ludmer says. “We want this country to thrive and we understand that an industry can help contribute to that, so creating jobs, paying reasonable taxes based a on predetermined rate that we agreed upon, that should not be varied.” 

Illegal market again a key concern in Brazil 

Lemos Jorge agrees with Ludmer’s warning the tax rise is prohibitive to operators and he says it will be much harder for licensed companies to remain profitable.

Authorised operators may opt to exit the licensed market, with consumers then pushed towards the black market. 

The IBJR has already predicted the market share of illegal operators could jump from the already concerning 50% up to 60%. 

“The only way operators will be sustainable in Brazil is to increase the channelisation level and, for that, the fight against the illicit market becomes even more important,” Vieira explains.  

These illegal operators don’t comply with responsible gambling measures or pay taxes and, in Ludmer’s view, lax enforcement is allowing such companies to continue their activities without fear of punitive backlash, as well as payment providers who work with black market sites. 

Notably, Anatel, the national telecom regulator, which is tasked with blocking illegal sites in Brazil, is reportedly running out of funds needed to continue its enforcement efforts against the black market.  

“We have criminals doing criminal activities without having any enforcement,” Ludmer says. “They need to pay a very heavy fine.  

“If we see the Central Bank imposing a very heavy fine on these payment providers, then we’re going to see these illegal operators being scared, because nobody’s scared currently.  

“If you act with impunity and you’re earning billions of dollars without paying any tax, without hiring any local employees, without contributing to the economy, and you have no sanctions, you keep on doing that, unless you apply the sanctions.” 

Industry needs to educate Brazil lawmakers on tax hike

There is still hope for the betting industry that this tax could ultimately be scrapped. Local news outlet Valor reported Hugo Motta, the Chamber of Deputies speaker, has stated the provisional measure is unlikely to be approved in its current form.  

This time prior to such a vote occurring is therefore crucial for the gambling sector to make its point, educating the politicians on the economic benefits of the betting and, perhaps most importantly, why such a measure could foster black market growth. 

The ANJL has sent a technical report to the presidents of the Senate and the Chamber of Deputies, listing all the consequences for the betting sector should the tax rise be made permanent.

The report also points to other markets where abrupt changes without prior analysis have compromised the competitiveness of the licensed sector, thus boosting the black market. 

The IBJR has also launched a study that found if the government turned its attention to reducing the illegal market by 10%, the additional revenue would cover the funds they are expecting to gain from raising the tax. 

Brazil government’s lack of understanding

One key issue is the lack of understanding from the government of the betting sector, Vieira laments. He notes the average member of parliament has a “very low understanding and knowledge” of the sector’s regulation. 

“Education is a fundamental piece of the answer for the problems that we’re facing in Brazil,” Vieira adds. “One front is education from the stakeholders in Congress and some of them in the government to understand that we have already a good set of rules in place.  

“And the other part of education which is needed is educating the consumer, because we saw in our research that most bettors find difficulties in distinguishing a legal operator from an unregulated operator.” 

This duty also falls upon operators, Ludmer says. “We have a responsibility here as a big company as well to educate the market. Our main campaign now is on responsible gaming.” 

IBJR and ANJL join forces

Some in the industry have previously lamented the fragmented representation of the sector, with five major trade associations representing betting in Brazil. 

However, the two biggest, the ANJL and IBJR, signed a cooperation agreement in June, aiming to strengthen their efforts against overregulation in Brazil. Combined, the bodies claim to represent over 90% of the regulated sector. 

In Vieira’s view this is a step in the right direction, especially when tackling problems that risk jeopardising the entire sector. 

“It means that we will together fight the illicit trade and to guarantee sustainable conditions for the market and increase the channelisation in Brazil, the objective for the whole sector,” Vieira says. 

“It is time, more than ever, for unity,” Lemos Jorge agrees. “We have a common agenda, which is the viability of the regulated betting market.  

“We are facing a great challenge, because over-taxation compromises the activity of the sector and drives the growth of illegal websites, which already represent the vast majority of bets operating in the country.” 

Confidence the tax hike won’t be made permanent 

Ludmer is optimistic the tax will not be converted into law. Similarly, Lemos Jorge is hopeful the Congress will see sense and realise just how harmful the rise could prove to be. 

“We are confident in the dialogue with the authorities,” Lemos Jorge concludes. “The regulated market pays its taxes, generates revenue for governments and enables the creation of thousands of jobs.  

“Now is the time to focus on and improve a sector of the economy that will not regress and that can make significant contributions to the expansion of public policies.” 

Even if the policy isn’t converted, however, the threat of it is a harsh reminder of the unpredictability in Brazil. This approach is what also delayed the launch of the legal sector and helped encourage black market proliferation.  

Now more than ever, operators like BetMGM and the two major trade bodies need to get on the same page and ensure the momentum of the licensed betting sector isn’t harmed.