Costa Rica's Online Gaming Industry Set For Stricter Controls

Mike Godfrey, Tax-news.com, New York

25 October 2000

Last week Tax-news.com reported that the Costa Rican government is to investigate offshore gambling, in particular the leagl framework that allows offshore betting companies to work in the Central American country, which has been called a "Virtual Vegas". There's a chance that the days of Costa Rica's Internet gambling or "sportsbook" industry could be numbered. In the coming days the National Liberation Party deputies will present to Congress Costa Rica's first bill to create mandatory industry licensing and yearly operations fees that could net the government some $4m to $5m in annual revenues.

Liberation Deputy Rafael Arias is quoted in the Tico Times newspaper as saying that the bill obliges sportsbook operators to buy a $150,000 operating license, as well as pay sales and luxury (consumer) taxes and a yearly fee based on the volume of bets they process. The industry as it stands at present has been called "lawless and taxless" - it and its employees currently pay no taxes, and only a reduced amount of the Social Security payroll deductions required of all Costa Rican companies and workers to fund the country’s health and welfare programmes.

As a requirement for obtaining their operating license, the companies will have to finance an Interpol investigation proving that the bets they process are not funded with illegal drug money or through other illicit sources. The companies will also be required to present complete accounting reports to local tax authorities. Mr Arias estimates that the new obligations could result in some $4-5 million in annual government revenues, but he says these new measures will not cause the country to lose its competitive advantages over the Caribbean islands where Internet gaming is also a thriving industry.

However, the situation is unlikely to change quickly as weeks of debate will follow the presentation of the bill. Mr Arias insists that the bill is a multi-party effort that reflects a "consensus" in Congress that Internet gambling benefits Costa Rica by providing well-paying jobs to hundreds of bilingual workers. However, there is also general agreement that it must be regulated to ensure that the state gets a cut of the estimated millions in bets processed in the country each year. Jorge Eduardo Sánchez, vice president of Congress and deputy for the controlling Social Christian Unity Party, is in favour of the bill too: 'It’s time this industry was regulated,' he said.

Costa Rica’s lack of regulation and its good telecommunications infrastructure has transformed it into a mecca of offshore gaming. It all began in 1996-97, when Caribbean centres such as Aruba, Antigua and Dominica established mandatory licenses of up to $250,000 and regulations that required the companies operating there to pay taxes.

The numerous Internet gaming companies in Costa Rica process bets, but no money enters the country. Those placing bets open an account with the companies’ offshore banks and bet using their deposited funds by visiting the companies’ Web sites or by calling toll-free numbers that are answered by call center "clerks". Winnings are deposited into the offshore account.

The US authorities are keen to crack down on Internet gaming, an estimated $20 billion worldwide industry, due to US laws that prevent interstate gambling. But it has been unable to stem the flow of bets accepted by companies such as those in Costa Rica and some 45 other countries that do not violate local laws. Mr Arias and Mr Sánchez have denied that the US is putting pressure on Costa Rica to clamp down on the industry. Their next step comes later this month, when they travel to the Czech Republic and Poland to observe gaming and regulations there. Once it goes to Congress, Costa Rica’s Internet gambling bill will be the third piece of legislation presented in the past few months to regulate gaming in the country.

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