Rough Start to New Year for Playtech Following £25 Million Tax Bill

Gaming developer Playtech has started 2019 on the wrong foot following tax issues in two separate countries.

Israeli tax authority

The Israeli Tax Authority hits Playtech with a £25 million charge following an audit of the company’s local activities. (Image: Valhalla PCS)

In an announcement made on January 2, the software provider for UK brands such as Bet365, Betfair and Paddy Power said it will pay the Israeli Tax Authority €28 million/£25 million. The unexpected bill is the result of a civil tax audit on Playtech’s activities in Israel between 2008 and 2017.

Hands Out After Arm’s Length Calculation

The decision to hit Playtech with an additional charge is due to transfer pricing adjustments. As it is in the UK, tax authorities have the right to adjust a company’s taxable profits based on the “arm’s length principle.”

Recognised by all 36 Organisation for Economic Co-operation and Development (OECD) countries, the principle looks at the profits made by connected companies. By comparing these figures to hypothetical profits made by two unconnected companies in the same scenario, authorities can adjust a company’s tax liability.

After assessing Playtech’s dealings in Israel since 2008, tax inspectors determined that adjustments needed to be made using the above criteria. Since being informed of the charge, the gaming brand has agreed to pay the £25 million in full and will list it as a “exceptional item” on its 2018 accounts.

In accepting the recalculated tax bill, Playtech has compounded its recent misery following regulatory changes in Italy. Thanks to the country’s 2019 budget, all gaming companies active in Italy will now have to pay a higher tax rate.

Just as chancellor Philip Hammond increased the UK’s remote betting tax in his 2019 budget, Italy’s Professor Giovanni Tria has raised online gaming tax to 24 percent. Additionally, the rate for betting will increase to 20 percent, while “skill games” such as poker will be set at 25 percent.

Tale of Two Years for Playtech

For Playtech, the changes will reduce adjusted EBITDA for 2019 by between £18 million and £22.5 million.

This poor start to the new year comes after a series of positive moves in 2018. As well as increasing its presence in Italy by agreeing a majority stake in Snaitech, the company completed a deal with Poland’s national lottery provider, Totalizator Sportow, in March.

Beyond its commercial ventures, Playtech also led the way for responsible gambling in 2018. Through its partnership with Featurespace, the software supplier launched a real-time fraud detection platform powered by machine learning technology.

With the UK Gambling Commission (UKGC) hot on the issue of player protection, this innovation should serve Playtech and its connected brands well within the UK market. Indeed, with tax charges potentially cutting profits in other countries, staying on the right side of UK’s regulator will be important in 2019.

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