Special regulation of gambling in Romania and harmonization of national with european rules in this field

Special regulation of gambling in Romania and harmonization of national with european rules in this field

By Anchidim Zăgrean, FedBet Vice-President and ROMBET President

At European level, gambling is not regulated by sectoral rules as a result of Community provisions on the possibility of adopting national rules laying down a number of restrictions on this activity. Such national rules can, however, be accepted only as exceptional measures, as expressly provided for in the Treaty on the Functioning of the European Union (TFEU) in Articles 51− as an exempt activity and 52 – as a special scheme on grounds of public policy, public security or public health, or can be justified, in accordance with the case law of the Court of Justice of the European Union (CJEU), by overriding reasons relating to the public interest. However, the Court of Justice of the European Union (CJEU), in accordance with European Union (EU) law, has ruled that gambling services fall under Article 56 of the Treaty on the Functioning of the European Un ion (TFEU) and are therefore covered by the rules on service provision. According to these rules, operators authorized in one Member State may provide services to consumers in other Member States unless they impose restrictions justified by overriding reasons in the public interest, such as consumer protection or the general need to maintain public order. These restrictions must also be compatible with EU secondary legislation and Member States’ overall policy in the field of gambling must be proportionate and applied consistently and systematically.

Therefore, after Romania’s accession to the European Union, as gambling was excluded from the Services Directive (Directive 2006/123/EC) and as a consequence of the fact that there is no obligation to harmonize with this sectoral norm, the following emerged the need to draw up and adopt a package of special national rules for gambling activity, designed and adopted strictly in accordance with and within the limits of Articles 51 and 52 of the Treaty, the obligation still remains, assumed under Article 291 of the Treaty, as and this activity to be harmonized, by national law, with European legislation, as provided for in Articles 267 and 288 TFEU, as follows:

1. EU Regulations have general applicability, are binding in their entirety and directly applicable in each Member State;
2. The Directives are binding for each Member State to which they are addressed on the result to be achieved, leaving national authorities to decide the form and means;
3. The decision shall be binding in its entirety. Where addressees are indicated, the decision shall be binding only on the addressees;
4. Obligation to implement, in any similar situation, judgments of the Court of Justice of the European Union as regards the interpretation of the Treaties or the validity and interpretation of acts adopted by Union institutions, bodies, offices or agencies.

In this regard, Romania has developed and adopted its own special national rules on gambling activity, through which it has established that this activity is a state monopoly, with the maintenance of certain types of activities exclusively for their exploitation by the state, through its own operator and establishing, at the same time, for other activities, the criteria for the manner of organization and operation and establishing by law a number of conditions and restrictions on how they are carried out, such as:

1. Conditions for the licensing and authorization of gambling – the main object of activity to be gambling; the opinion of the police authorities granted to the legal representatives, as well as to the associates or shareholders of the legal entity; a minimum level of subscribed and paid-up share capital and of the guarantees to be provided; criminal record certificates or other documents issued by the competent authorities; etc.;
2. Restrictions on the mode of operation – location of specialized gambling venues; access of players to specialized venues; minimum or maximum number of gaming machines; periodic inspection and certification of gaming machines; etc.

With the adoption of the legal rules on the conditions or restrictions on the organization and operation of gambling in Romania, as provided for in Articles 51 and 52 TFEU, it was absolutely necessary and mandatory to include in this package of special national regulation the following rules provided for in European legislation:

1. Those provisions in the EU Regulations that make direct reference to gambling, which are generally binding in all the elements laid down in these European rules, as they can be identified in Regulation (EU) No 549/2013, of the European Parliament and of the Council of May 21, 2013 on the European system of national and regional accounts in the European Union, where a number of specific gambling rules are set out in clear definitions, as presented and explained below:

a) In 4.135 “Lotteries and gambling” we will find the following Definition: „The amounts paid for lottery or betting tickets consist of two elements: payment for a service to the establishment organizing the lottery or gambling and a transfer residual current to winners.

Payment for the service can be substantial and includes taxes on the production of gambling services. In the system, transfers are considered to be made directly between lottery or gambling participants, i.e. between households.”

This definition, with express reference to gambling and in accordance with Art. 267 TFEU, presented above, is mandatory to be harmonized with the national norm. If this definition were to be included in the Romanian package regulating gambling, it would definitively eliminate, for the whole of Romanian society (politicians, representatives of the public administration, the media, gambling organizers, players, civil society, etc.), a permanent dispute related to the false but also exaggerated interpretation, whether intentional or not, of the exorbitant level of income earned by those who organize and exploit this type of activity. This subjective interpretation, which is untrue and in deep contradiction with the European legislation, has been and is always supported, especially in society, due to the fact that the representatives of the Romanian authorities, according to their own judgments, but without any legal basis, consider that all the amounts rolled in gambling would represent the income of the person who organizes this activity, when in reality and obviously, as it follows from the definition, the economic reality and the economic content of these operations are described in this way:

• All sums deposited by players, for the purpose of participating in gambling and for the entire period during which the game is played, are only managed on their behalf, by the organizers and who, based on the definition of this regulation, are obliged to record these amounts in their own accounting, as an obligation to this “household” of players;
• Once the game session or the game itself is over and after the winning players have been nominated, the organizer, as defined in the rules, is obliged to transfer these sums to the winners, by taking them from the “members of the households” of those who lost the stake of the game and the actual transfer made by the organizer is and must be treated as a transfer between these households;
• After these transfers have been made to the winners, the difference remaining at the organizer’s disposal is to be recorded in the accounting records as own income from this activity, i.e. as payment for a service rendered to the participants, as defined in the definition;
• The organizer’s income, the definition says, can be substantial in that he, as is natural, includes taxes on the production of gambling services as defined directly below;

b. At paragraph 4.19 we find the definition of taxes on goods and services, which are payable as a result of production or services including in particular taxes on lotteries, gambling and betting, other than on winnings;

c. As well as point 4.78 and where the definition of income tax is found which consist of taxes on income, profits and capital gains.

These income taxes also include fees on lottery or gambling winnings payable in relation to the amounts received by the winners, differing from the turnover taxes of producers organizing these activities, which are treated as product taxes.

All these definitions should necessarily have been harmonized in the national norm but, unfortunately and with serious consequences for this activity, they are not found in the special regulation of gambling and their absence creates problems of implementation in practice by:

– difficulties in the organization and management of financial accounting, affecting the accuracy of financial statements, which must give a true and fair view of the assets, liabilities, financial position and profit or loss of the enterprise, and creating major difficulties in economic analysis at European level;

– creating particular problems when these data are needed in the interests of comparability, as such data must be compiled on the basis of a single set of principles and leaving no room for different interpretations, including, but especially, when the income earned is used as the basis for taxation;

– the need to ensure that the information made available to the public or to the authorities is as accurate, complete and up to date as possible, in order to ensure full transparency on the activity of the whole sector.

Any different interpretation, in particular by representatives of state authorities, what is defined in the Regulation, and which is generally binding to be applied in gambling activity, is all the more difficult to understand in the light of the fact that Article 19 of Law 500 of 2002 imposes as an obligation, for any head of the financial accounting department of the Ministry of Public Finance, provide proof of possession of a certificate of attestation of acquired knowledge in the field of this Regulation on the European System of Accounts.

2. In Directive 2006/112/EC on the common system of value added tax, we find two articles with a direct reference to gambling, to be transposed into national law, in terms of purpose and result to be achieved:

a. First, Article 135, which states that Member States shall exempt betting, lotteries and other forms of gambling, subject to conditions and restrictions laid down by each Member State;

b. Second, Article 401, which develops the last sentence of Article 135, namely that, without prejudice to other provisions of Community law, no Member State shall be prevented from maintaining or introducing taxes on games of chance and sports betting or, more generally, any taxes, duties or charges which cannot be characterized as turnover taxes, provided that the collection of such taxes, duties and charges does not give rise, in trade between Member States, to formalities connected with the crossing of frontiers.

Unfortunately, in transposing this directive into national law, only half-measures have been used, in the sense that when the Tax Code was adopted, only VAT exemption without the right to deduct was provided for gambling activities, but the special system of taxation was not fully harmonized with any conditions and restrictions laid down in the Directive. The transposition of the Directive concerned only the way in which the sums transferred to players for the purposes of income tax on gambling participation are taxed. This differentiated treatment of the system of taxation in the case of gambling has subsequently given rise to a wide-ranging arbitrary mechanism of interpretation and implementation, with its inherent and abusive confusions. As a consequence of the exclusion of the gambling taxation system from the general rules laid down in the national tax legislation, new procedures were generated for putting these special regulations into practice, which implicitly led to the invention of a new type of administrative and tax litigation, incoherent and absolutely different from what is found in the practical content of Romanian administrative or tax litigation and which is permanently correlated with the European legislation on the matter.

3. Even when it comes to the Judgments adopted by the Court of Justice of the European Union, regarding the interpretation of acts adopted by the institutions, bodies, offices or agencies of the Union, related to gambling in Romania, we cannot say that their implementation is satisfactory, so below we will refer to only a few of them:

a. The Court recognized a number of overriding reasons in the public interest, such as the objectives of consumer protection and the prevention of both fraud and incitement to excessive expenditure on gambling, and the general need to maintain public order, but not the fact that the reduction in tax revenue would be among the grounds referred to in Article 52 TFEU and that the level of tax revenue does not constitute an overriding reason in the general interest;

b. To the extent that the authorities of a Member State incite and encourage consumers to participate to the benefit of public finances, lotteries, gambling and betting, the authorities of the State concerned shall may not invoke public policy considerations to justify restrictions leading to the need to reduce betting opportunities;

c. Restrictions must be applied in a non-discriminatory manner and must be proportionate and appropriate to achieve the objective pursued and not go beyond what is necessary to achieve it;

d. The procedure for granting a license must comply with the principles of equal treatment and non-discrimination, as well as with the obligation of transparency that stems from them.

Fortunately, even in the absence of some correlations with European legislation, by the fact that they are not found in the specific national gambling norm, although this was mandatory, all those who are affected in one way or another by the lack of harmonization or transposition, can use, when necessary, European legislation, invoking the constitutional provisions, according to which:

a) Constitutional provisions on the rights and freedoms of citizens shall be interpreted and applied in accordance with the Universal Declaration of Human Rights, the covenants and other treaties to which Romania is a party;

b) If there are inconsistencies between the covenants and treaties on fundamental human rights, to which Romania is a party, and domestic laws, international regulations shall take precedence, unless the Constitution or domestic laws contain more favorable provisions;

c) The accession of Romania to the constituent Treaties of the European Union, for the purpose of transferring certain powers to the Community institutions and of exercising jointly with the other Member States the competences provided for in those Treaties, shall be effected by a law adopted in a joint session of the Chamber of Deputies and the Senate, by a two-thirds majority of the number of Deputies and Senators.

d) Following accession, the provisions of the Treaties establishing the European Union, as well as other binding Community regulations, shall take precedence over contrary provisions of domestic law, subject to the provisions of the Act of Accession.

The main conclusions that emerge after reviewing the national and European rules in the field of gambling can be summarized as follows:

• As a result of the fact that the European legislation, through Regulation 549 of 2013, with generally binding applicability, in all its elements, even in the absence of transposition into the specific gambling legislation, must ensure a uniform treatment in terms of establishing the income from this activity, as a difference between the amounts deposited by the participants and the amounts transferred between these households of the players (payment that goes from those who lose to those who have won the stakes of the game), and that this difference represents the payment for the service performed by the organizer in the interest of the players;
• Since the European Regulation establishes the content and the economic reality of gambling operations, in all financial statements of those who carry out this activity, the elements of economic analysis based on: income from this activity; taxes assessed and due; net turnover, etc.;
• The European legislation, through the VAT Directive and Regulation 549 of 2013, makes it clear, obviously and for everyone, that the exemption from value added tax for gambling, but without the right to deduct, is not a facility for this industry, but is a consequence of the fact that the amount deposited by players is not the taxable amount for this type of tax and in these conditions of inapplicability, Member States must find, in their own tax system, a tax that is not based on the principles and rules of establishment, calculation and payment characteristic of VAT;
• The definitions in the EU Regulation establish, without the possibility of arbitrary interpretation, that all taxes and charges (by whatever name called) in the activity of gambling, with the exception of administrative charges, are a tax which must be set according to the level of service provided and is part of the income from this activity;
• The CJEU has established that the system of taxation of gambling cannot be included in the range of exceptional measures with a view to the adoption of restrictions, therefore the same regime must be applied in terms of the principles of taxation, the rules for establishing, declaring and paying them and the rules on tax litigation applied to them;
• The current special regulation of gambling in Romania needs to be revised and modernized in order to fully comply with the European rules in this field, even if there is no sectoral directive for this activity.