The final version of Macau’s amended gaming law, which was published on Wednesday, contained a last-minute sting in the tail in the form of a 1 percentage point gain in indirect taxes.
Macau has one of the highest gaming tax regimes in the world at an effective rate of 39 percent. That is split between a 35 percent direct tax on gross gambling revenue and additional taxes such as 1.6 percent to fund the Macau Foundation’s charitable activities and 2.4 percent for urban and tourism development.
These latter taxes are raised to 2 and 3 percent respectively, taking the effective additional tax rate in Macau to a flat 5 percent from the current 4 percent levied at present.
There is potential upside for the operators in a scheme that will reduce the level of additional duties if the companies manage to draw in more tourists from outside Mainland China. But there are no details as to how this will work.
“The foundation tax went up to 5 percent, which was totally unexpected,” said Ben Lee, managing partner at IGamiX Management & Consulting.
The five percent potential tax cut on non-Chinese GGR is outweighed by the 1 percentage point increase on total GGR, Lee said.
“Macau has not had a great track record in getting people from outside China,” Lee said.
“Also this is way too onerous to track. The costs of actually administering where the revenue is coming from could outweigh the tax cuts. How can you separate mass players by origin? This creates more questions than answers,” he said.
Crunching the numbers when the potential non-China revenue tax cut was first announced, Credit Suisse said it saw few benefits to the industry from a four percent tax cut, as it would have been before the 1 percent gain, for those who could expand the visitor base. Even in a “blue sky scenario” where foreigners generate 10 percent of GGR, the EBITDA benefit is about 1.6 percent, it said.
This does not take into account the potential extra sales and marketing efforts to bring in a wider tourism base.
The final version of the gaming bill also confirmed that there has been lifeline thrown to the satellite casinos, which were originally told they would only be able to operate out of premises physically owned by the concessionaires after a three-year grace period.
That was seen as an unworkable solution that would put many of them out of business. The amended version allows them to continue after this period, but only on a flat management contract agreed with the operator with no revenue sharing agreements.
“The government has said that there is no restriction on the rental of the space, so there would be a possibility to extract rent, but so much is still up in the air,” Lee said.
It’s unlikely in the current revenue environment that any concessionaire would be willing to take on further fixed costs, but the government has also made it clear that if the satellites close the operators are responsible for absorbing the employees.
In SJM Holdings’ case that would amount to about 7000-8000 extra employees. Macau Legend, which owns the Fisherman’s Wharf development and has a casino management contract with SJM, said this week that it plans to layoff 16 percent of staff due to the poor operating environment in Macau.
It has decided to extend its contract with SJM for a further six months to coincide with the concession expiry of the operators.
Another new clause to come out of the deliberations this week was a decision to ban cross shareholdings between the Macau concession holders. Indirect holdings are still permitted.
The government said the clause was to prevent collusion between the concession holders, although Lee said the provision is perplexing.
“It’s to prevent mergers and acquisitions that could reduce competition in the market,” he said. “However, with six licenses, I wouldn’t have thought that would be a problem.”
On the whole Lee said the amended law has provided little in the way of clarity about the future direction of the gaming industry in Macau.
The operators still don’t know the levels of investment they will be expected to make, or the new non-gaming facilities they will be required to add.
“It tightens vagaries and loopholes to an extent, but in turn raises more questions in other areas,” he said, adding that he expects the guidelines for the concession renewal tender process to be issued in the short term, which may provide the necessary clarity.