Brazilian Market Faces Back-Tax Threat

January 15, 2025
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The newly-launched Brazilian market faces a dual threat in the shape of potential back-taxes for formerly offshore operators in addition to a selective consumption tax that has no cap.
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The newly-launched Brazilian market faces a dual threat in the shape of potential back-taxes for formerly offshore operators in addition to a selective consumption tax that has no cap.

Speaking on a Vixio GamblingCompliance webinar this week, Brazilian legal experts Luiz Felipe Maia of law firm Maia Yoshiyasu and Rafael Marchetti Marcondes, chief legal officer of licensed operator Rei do Pitaco, agreed that tax was a critical area of uncertainty for the newly regulated industry in 2025.

The threat of potential back-taxes based on activities in Brazil’s formerly offshore market was elevated last week when an ordinance was published to establish a working group involving the Brazilian betting regulator and tax authorities.

An article of the otherwise routine ordinance stated that one of the intended outcomes of the working group was to  “support a proposal for a compliance program to regularize tax obligations in relation to the period prior to authorization, for authorized legal entities”.

Maia noted that members of an ongoing Senate investigation into online betting had already signalled some interest in collecting past taxes from former offshore operators by questioning legal industry executives over how much they had paid in taxes in Brazil prior to becoming licensed.

He said he did not support the earlier ordinance that ultimately allowed Brazilian operators to transfer player accounts and balances from their unregulated to licensed platforms, “because it creates evidence of an ongoing operation”. 

“You’re transferring the clientele, the funds, the brand. One of the legal consequences is succession on all liabilities, including tax liabilities,” Maia said. 

He also pointed out that although offshore operators were not subject to tax until the new licensing regime took effect, the same cannot be said of their Brazilian players who should have been paying income tax on their winnings.

“I think we may see some attempt from the government to collect back-taxes from the players. My concern, from what we’ve heard in the Senate, is that they may try to shift it to the operators,” he remarked.

There would be no legal basis for such a move, which would be unconstitutional, according to Maia.

“But it wouldn’t be the first time we have seen unconstitutional tax obligations or tax laws being created and, of course, it would be subject to the courts to decide it’s not constitutional,” he said.

Marchetti Marcondes of Rei do Pitaco, a former tax lawyer, agreed it was “quite likely” that Brazil-licensed operators may receive infraction notices in the coming months from Brazilian tax authorities based on supposed past liabilities.

“We may expect a more aggressive approach to the operators who operated offshore and didn’t pay taxes in Brazil,” he warned.

On a separate front, concerns also remain regarding a newly approved selective tax, or sin tax, that has yet to come into effect. 

Established as part of a broader tax-reform package, the new sin tax is designed to add an additional tax burden or deterrent on goods or services that are deemed to have a negative impact on society. 

Brazil’s Chamber of Deputies and Senate last year approved a bill to determine that betting should fall into that category, alongside cigarettes, alcoholic drinks and other products. 

Although that decision has been made, what has yet to be determined is the rate of the new selective tax as it applies to gambling.

Marchetti Marcondes said: “What we can expect for 2025 is that the focus will shift to defining the tax base and the rate for the selective tax. The problem is there is no cap on how high this tax can go, which means, at least in theory, that it could be set at a level that's essentially prohibitive. 

“And this is what concerns the industry the most, and it should, at least in my opinion, also be a concern for the federal government, because international experience shows that when taxes are too high, it pushes people into the black market.” 

Taxes on online gambling, as they stand currently, include 12 percent of gross gambling revenue that is earmarked for specific beneficiaries as defined by a 2023 federal law. 

The remaining 88 percent of gross gambling revenue is then subject to additional taxes PIS and COFINS at a combined rate of 9.25 percent. 

Those two taxes are soon set to be phased out, however, and will be replaced by two new rates on goods and services that more closely resemble VAT. The new taxes — CBS and IBS — will be substantially higher, clocking in at 26.5 percent, although a broader range of deductions should apply, according to Maia.

Higher taxes were successfully fought against by operators and their representatives when the 2023 federal law on online betting was being debated in Congress. It was argued at the time that more prohibitive tax rates would tank the industry before it launched.  

In addition to taxes, the two Brazilian legal experts addressed a variety of further policy and regulatory risks as part of Vixio’s Brazil: The New Beginning webinar, including state-level licensing, pending court challenges and potential advertising restrictions. 

Additional reporting by James Kilsby.

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