Brief commentary on the statement by the Federal Ministry of Finance on the draft bill of the Upper House (Bundesrat) on taxation of sports gaming (E 15)
By German Lawyer Dr. Bremer, WIRTSCHAFTSRAT GmbH and Prof. Dr. Englisch, University of Münster
With date on 26 March 2012, the Federal Ministry of Finance (BMF) presented the chairman of the Finance Committee of the Lower House (Bundestag) with its assessment of the state aid problem in the draft bill of the Upper House on taxation of sports gaming. The starting point of the legal review was merely the reduction of the tax rate with regard to horse racing bets. What at first glance appears unproblematic, though, will almost certainly prove to be an insurmountable obstacle based on the legal standpoint of the BMF for the draft bill supported by the 15 federal states (E 15 – Glücksspieländerungsstaatsvertrag). In particular, the following arguments in terms of state aid law are definitive:
As is generally known, a refund of the proceeds from the taxation on horse racing bets on a scale of 96% is paid to the equine associations in order to finance horse breeding. As this tax rebate benefits only equine associations, but not bookmakers, this procedure can in principle be classified as selective state aid in contravention of European law. As in the conviction of the BMF it is almost certainly ineligible for permits too, it actually represents a contravention of European law if only on the basis of the law as it stands. The European Commission has thus far not objected to the ruling, only because it has been in place unchanged since 1922. The state aid associated with it, therefore, meanwhile enjoys a privileged status; it no longer needs to be notified to the Commission, nor can it be demanded back from the equine associations anymore for the past. Its examination under state aid law thus has no priority for the Commission; like the BMF one can almost certainly assume that the existence of this benefit is not even present with the Commission units responsible. Nonetheless, the Commission could at any time open a state aid control procedure in this regard, and it might demand the abolition of these state contributions to the equine associations in the future. The amendment under substantive law of the tax regime being sought with the E15, though, could in fact deliver the grounds for such a procedure, because it has implications for the volume of state aid and thus, in the conviction of the BMF, must be notified to the Commission. This is derived in particular from the following aspects:
The draft bill of the Upper House calls for a reduction of the tax rate from 16 ²/₃ % to 5 % and thus an adjustment of the tax rebate of max. 96 %. The implications of these changes for tax revenues overall, and thus also for the amount of the state aid for the equine associations, are unclear because the lower tax rate might be overcompensated for by an increase in legal gaming products. Moreover, the plan is to introduce the possibility via the “Totalisator” to offer betting on horse races also taking place abroad. This change, in any event, can be expected to result in an increase in tax revenues and thus also the volume of state aid in favour of the equine associations. By doing so, the state financing of the equine associations in place unchanged since 1922 will change to such an extent that a presumption of a “new” form of state aid is inevitable. Accordingly, a formal notification procedure would have to be initiated with the risk of “awaking sleeping dogs” at the Commission. Apart from that, any such notification procedure can stretch out for years, and until its completion by the Commission, there is a stay of execution in place, i.e. any application of the new ruling is prohibited under European law. This rules out any adjustment of the tax rate this year.
A further consequence is that any adjustment of the tax rate with regard to sports gaming will almost certainly not be possible either. This is because there is no inherent reason apparent as to why horse racing betting should be taxed differently – higher – than any other sports gaming. That would be very questionable not only under equality law, but as such could also represent a (further) breach of the ban on state aid under the European Treaties. Constitutional and European law, therefore, permits only a ruling that provides for equal taxation of 16 ²/₃ % for as long as the refunding of tax revenues to the equine associations is retained. In the case of sports gaming, though, any such tax burden means that any competitive product is impossible. Rather, any such burden would have a choking effect. From that, the legislator can draw only two consequences:
- The tax refund to the equine associations is deleted from the law without substitution and the turnover tax is adjusted to the 5% sought. This ruling, though, would cause a collapse in the present financing of horse breeding.
- The content of the rulings as they presently exist is left untouched and the legislator develops a legal system compatible with European law.
In other words: The Federal Ministry of Finance regards the adjustment that the E15 provides for as in contravention of European law. With that, the levy system of the E15 has failed. Any remedy can only be achieved at the expense of the collapse in the financing of horse breeding.
It once again transpires that the E15 consists of a plethora of breaches of constitutional and European law, which after all the clear pointers to that condition should actually contribute to the Federal States seeking a ruling in harmony with higher-ranking law. One model could to that extent be the ruling in Schleswig-Holstein, which also takes the interests of the federal states, but also of the providers, into account in a balanced manner.