INCOME OBTAINED BY INDIVIDUALS FROM GAMBLING ACTIVITIES
By Teodora Luca
Lawyer, C.A. LUCA Mihai Catalin
The problem of defining the income obtained by individuals as a result of participating in gambling activities has returned to public attention with the government initiative to increase the tax rates applicable to them, materialized in the middle of this summer, through the adoption of Government Ordinance no. 16/2022 for the amendment and completion of Law no. 227/2015 regarding the Fiscal Code, the repeal of some normative acts and other financial-fiscal measures.
Since the draft law (L483/2022) for the approval of the ordinance is in the parliamentary procedure, it seems appropriate to us to resume some of the arguments that, in our opinion, should be taken into account by the legislator in establishing the taxation regime for these categories of income.
According to art. 56 – Financial contributions from the Constitution:
(1) Citizens have the obligation to contribute, through taxes and fees, to public expenses.
(2) The legal taxation system must ensure the fair placement of fiscal burdens.
(3) Any other benefits are prohibited, apart from those established by law, in exceptional situations.
The principle of the fair settlement of the tax burden has been analyzed multiple times by the Constitutional Court, being considered in strict dependence on art. 16 para. 1) of the Constitution, which enshrines the equality of citizens before the law (1) Citizens are equal before the law and public authorities, without privileges and without discrimination.
● The decision to admit the exception of unconstitutionality no. 6/25.02.1993, published in the Official Gazette no. 61/25.03.1993, regarding the increase in the income tax of a certain category of civil servants:
“(…) in assessing the constitutionality of the contested law, the provisions of art. 53 para. (2) of the Constitution, according to which “The legal taxation system must ensure the fair placement of fiscal burdens”.
Seeing things like this, it should be appreciated that a taxation that deviates from the generally accepted rules, as regards the taxable base and quotas, income categories, etc., becomes a discriminatory taxation if it introduces criteria that affect the equal rights of citizens. Taxation must be not only legal, but also proportional, reasonable, fair and not differentiate taxes based on the criterion of groups or categories of citizens.”
● In the same sense, the Court also ruled in the Decision admitting the exception of unconstitutionality no. 1394/26.10.2010, published in the Official Gazette no. 863/23.12.2010:
’’(…) the mentioned constitutional principle (just settlement of the tax burden – nn) involves a complex of conditions that the legislator is bound by when establishing certain tax obligations for taxpayers. As the Court ruled by Decision no. 6 of February 25, 1993, published in the Official Gazette of Romania, Part I, no. 61 of March 25, 1993, “taxation must not only be legal, but also proportional, reasonable, fair and not differentiate […] on the basis of groups or categories of citizens”. Thus, the fair placement of tax burdens must reflect the very principle of equality of citizens before the law, by imposing identical treatment for identical situations and take into account, at the same time, the contributory capacity of taxpayers, taking into account the elements that characterize the individual situation and social tasks of them.
● Decision to reject the exception of unconstitutionality no. 1304/13.10.2009, published in M. Of. no. 36/18.01.2010, regarding the quality of social insurance – the difference in treatment of people who earn income compared to those who do not:
“(…)The Court notes that the constitutional principle of equal rights requires the establishment of identical legal treatment for identical situations. However, this does not mean homogeneity, so that different situations allow and sometimes require a different regulation, in full agreement with the aforementioned constitutional principle.
Similarly, the principle of the fair placement of fiscal burdens requires that the payment of contributions be made in the same way by all taxpayers, by excluding any privilege or discrimination, so that, with equal incomes, the contribution is the same. The same principle, however, assumes that the placement of tax burdens to take into account the contributory capacity of taxpayers, respectively, in the setting of fiscal obligations, the need to protect the most disadvantaged social strata should be taken into account, taking into account the elements that characterize the individual situation and the social duties of the taxpayers in question.
● Partial admission decision no. 3/06.01.1994, published in Official Gazette no. 145/08.06.1994, regarding the income tax of lawyers:
“Therefore, taxation must not only be legal, but also proportional, reasonable, fair and not differentiate taxes based on the criterion of groups or categories of citizens.“
● Rejection decision no. 695/28.06.2012, published in M. Of. no. 623/30.08.2012, regarding tax on income from interest on bank deposits:
“Therefore, the legislator must show particular care when determining the category of income on which the tax burden is borne, the concrete amount on which it is owed and the concrete way of calculating the tax burden. (…)“
The constitutional principles established by the provisions of art. 56 of the Constitution must be reflected in the tax legislation, which is the primary source for establishing the tax burden.
According to the provisions of art. 61 of the Fiscal Code:
The categories of income subject to income tax, according to the provisions of this title, are the following:
a) income from independent activities, defined according to art. 67;
a1) income from intellectual property rights, defined according to art. 70;
b)1 income from wages and wages, defined according to art. 76;
c) income from the transfer of the use of goods, defined according to art. 83;
d) income from investments, defined according to art. 91;
e)2 income from pensions, defined according to art. 99;
f) income from agricultural activities, forestry and fish farming, defined according to art. 103;
g) income from prizes and gambling, defined according to art. 108;
h)1 income from the transfer of real estate properties, defined according to art. 111;
i) income from other sources, defined according to art. 114 and 117.
Income from gambling, which represents the taxable base according to art. 61 letter g) of the Fiscal Code are defined as follows:
(3) Gambling income includes all amounts collected, goods and services received, as a result of participating in gambling, regardless of the name of the income or the form in which it is granted, including those of the jack-pot type, defined according to methodological norms.
From the analysis of the previously mentioned texts, it follows beyond any doubt that, in order to be in agreement with the constitutional principles established according to art. 56 of the Constitution, the taxable base for taxing gambling income it is represented only by the sums generated from the activity of games of chance, carried out organized by specialized companies.
The interpretation is reinforced by the provisions of point 32 of the Methodological Norms for the application of Law 207/2015 on the Fiscal Code, which provide: (2) For the purpose of delimiting prize revenues from gambling revenues, those awarded to game participants by any legal entity authorized to operate such games of chance, according to the relevant legislation, are considered to be gambling winnings.
Although the purpose of the rule is to highlight the differences between the income from prizes and the income from games of chance, it appears obvious the intention of the legislator to clarify the extent of the notion of “income”, by referring to the legislation that specifically regulates this activity.
The conclusion that emerges from the interpretation of these legal provisions is that the taxable base is represented by the winnings obtained by the natural person, following the participation in the authorized game of chance.
In practice, the difficulties in implementing the legal text (art. 108 Fiscal Code) result from the apparent inconsistency between the provisions of art. 108 and the provisions of art. 110 para. 2 and art. 21 of the Fiscal Code, on the one hand, and on the other hand, the impossibility of income payers (companies licensed and authorized to carry out gambling activities) to determine the value of the winnings achieved by the participant, as a result of the practical way of carrying out the the game.
At a first analysis, there is an inconsistency between the provisions of art. 108 Fiscal Code, which defines “gaming income” by referring to the notion of “winning”, defined according to special legislation and the provisions of art. 110 para. 2 and para. 21 of the Fiscal Code, which regulates gambling income as follows:
(2) Gambling income is taxed through withholding tax. The tax due is determined with each payment (…)
(21) For the incomes made by individuals as a result of participating in remote or online gambling games, defined according to Government Emergency Ordinance no. 77/2009 regarding the organization and exploitation of games of chance, approved with amendments and additions by Law no. 246/2010, with subsequent amendments and additions, the tax due according to the provisions of para. (2) is determined and withheld at source for each transfer from the account on the gaming platform to the bank account or similar.
If with regard to the provisions of art. 110 para. 2 Fiscal Code, to be in agreement with the constitutional principles regarding the fiscal burden and with the provisions of art. 108 Fiscal Code, the allowed interpretation is that the gross income represents the profit generated from the activity of gambling, and the notion of “payment” refers to the remittance of the winnings by the gambling organizer to the participant, the provisions of art. 110 paragraph 21 of the Fiscal Code represents the premises of a violation of the constitutional order, the text of the law expressly providing that all transfers made from the account registered on the gaming platform to the bank account or similar are assimilated to the winnings from gambling activity.
According to art. 8 of the Government’s Emergency Ordinance no. 77/2009, regarding the organization and exploitation of games of chance, by win or prize is understood the amounts in money, goods or services granted by the organizer to the participant in the game declared the winner, in accordance with the provisions contained in the regulations of the respective game of chance. The responsibility for awarding the winnings or the prize rests exclusively with the organizer of the game.
In the absence of express provisions regarding the definition of income resulting from participation in gambling activities, differentiated by type of activity, the principles enshrined in art. 19 of the Accounting Regulations regarding individual annual financial statements and consolidated annual financial statements, approved by the M.F.P. Order. no. 1802/2014 are to be transposed into the special regulation, both of a general nature, but also in a particular way, for each individual gambling activity.
Although individuals are excluded from the scope of applicability of Order 1802/2014, not having the obligation to keep accounts for the income obtained, the immediate benefit of such an analysis resides in the fact that the correct determination of the tax base and the withholding of the tax owed are the obligations of the gambling organizers, who are obliged to apply the accounting regulations and which, on the one hand, must ensure the capitalization of the state’s right to collect the debt, and on the other hand, they have the obligation not to prejudice the rights of the persons to whom the fiscal burden is imposed.
According to art. 19 para. 2) from the Accounting Regulations approved by Order 1802/2014, the concepts of income and expenses are defined as follows:
a) revenues are increases in economic benefits recorded during the accounting period, in the form of incomes or increases in assets or reductions in liabilities, which materialize in increases in equity, other than those resulting from shareholders’ contributions;
b) the expenses constitute reductions of the economic benefits recorded during the accounting period in the form of outflows or decreases in the value of assets or increases in liabilities, which materialize in reductions of own capital, other than those resulting from their distribution to shareholders.
The definition of “income” established according to the Accounting Regulations, is in accordance with the provisions of art. 11 of the Government’s Emergency Ordinance no. 77/2009, according to which: 1) For the calculation of the tax related to the authorization to operate games of chance, the gambling income of a licensed operator is calculated as the difference between the amounts collected from players with the title of game participation fee and the prizes awarded (including the “jack-pot”) for each type of game per calendar day/month, according to point 1 subsection II from the annex to this emergency ordinance.
(2) In the case of games of chance where the organizer collects a commission from the participants/winners of the games of chance, for the calculation of the fee related to the authorization to operate the games of chance, the income from the games of chance of a licensed operator is the proceeds obtained ( the commissions withheld from the participants in the game), respectively the share of the amount charged by the organizer, according to the game regulations for a calendar day/month, according to point 1 subsection II from the annex to this emergency ordinance.
Summarizing, the income of the gambling organizer is the difference between the total stakes placed and the total value of the winnings paid to the participants or the commission collected from the participants, according to the rules of the game.
Gambling income of individuals represents, from the perspective of the gambling organizer, expenses, being, consequently, recognized in accounting as a payment obligation, determined globally over an accounting period (daily, monthly and annually).
The sums paid by the gambling organizer cannot be recognized in its accounting except to the extent that they are generated from the gambling activity, when the conditions for determining it as “winning” are met.
The expenditure made by individuals in order to participate in the game of chance in an accounting period is included in the income of the organizer of games of chance and are, consequently, taxed separately, according to the rules applicable to the taxation of these categories of taxpayers. Therefore, it is unjustified to consider that all payments made by gambling organizers to natural persons represent, for the latter, gambling income.
Depending on the conditions under which the gambling activity is organized, in practice there may be difficulties in determining the income obtained from gambling and applying the provisions regarding the withholding tax due according to art. 110 Fiscal Code.
In other words, the application of tax provisions according to the letter of the law would lead to the unacceptable situation both from a constitutional perspective and from a systematic perspective of tax legislation, in which, would be subject to gambling income tax including the player’s amounts, even if they were returned by the gambling organizer before they were played and even if the player actually loses.
The particularities of gambling activities, combined with the transfer of the fiscal burden from individuals to gambling organizers, represent, in our opinion, arguments for maintaining the taxation at the level established by Law 227/2015, before the adoption of Ordinance 16/2022.
