The online gambling industry in Brazil is facing unprecedented challenges. Recently, the government proposed to increase the gambling tax rate from the current 12% to 18%, causing a strong backlash within the industry. This tax increase proposal aims to fill the fiscal deficit, but it has also become a Damocles sword hanging over the young gambling industry. Tax lawyer João Rafael Gandara stated, the industry's greatest hope now rests on the veto power of the Congress.
Although the Brazilian gambling market was legalized at the beginning of 2024 and expanded rapidly, the government recently expressed dissatisfaction with its "tax potential," pointing out that its contribution to national tax revenue is insufficient. On June 3, the Brazilian Gambling Industry Association issued a warning about the proposed tax increase, fearing that it would stimulate the development of the black market and undermine the industry's foundation.
Although the policy content is superficially simple, namely increasing the total gambling revenue tax rate by 50%, the execution mechanism and legislative process are exceptionally complex. Gandara pointed out that the proposal is a provisional measure (MP), which must be approved within 60 days after submission to the Senate, and can be extended to up to 120 days. If it is not finally approved, the taxes collected since its implementation must be fully refunded to the operators within 90 days.
Unstable policy direction
At the end of May, the government originally planned to raise the Financial Transaction Tax (IOF) from 0.38% to 3.5%, but faced strong opposition and urgently withdrew it. The gambling industry then became the new target to "fill the budget black hole." It is reported that the Lula government needs to reduce the fiscal deficit by 20 billion reais by the end of 2025. Other industries, such as agriculture, also face the risk of increased taxes.
It is worth noting that although the tax increase measure is still a temporary policy, it has been effective since June and is planned to be officially implemented after 90 days. This also means that if Congress does not pass the bill within 120 days, the government not only faces policy revocation but also needs to return all temporarily collected taxes.
Gandara cited a similar situation last year, stating: "We have seen the president of the National Congress directly reject a provisional measure because he believed that the policy had no chance of passing." He emphasized that if the gambling industry can clearly convey to Congress the impact of excessive tax burden, there is a complete possibility that the policy could be vetoed.
Positive signals from the legislative level
Last week, the House of Representatives quickly reviewed a motion to overturn the government's "Israeli Occupation Forces" bill, without any committee review. This indicates that Congress is currently showing stronger legislative independence and generally holds a reserved attitude towards the new tax policy proposed by the government.
Gandara criticized the government for "avoiding the political cost of cutting fiscal spending," instead shifting the tax burden to the gambling industry: "This is an emerging industry with stable revenue, yet it becomes a scapegoat due to its negative image."
He further pointed out that the gambling industry is not the "villain in the story" but a legitimate industry with development potential, and the government should treat it in a more rational manner. The current public opinion is highly focused on tax issues, providing an opportunity for the gambling industry to conduct effective lobbying.
The Laffer Curve and policy misjudgment
Gandara cited the famous Laffer Curve to illustrate the potential consequences of increased taxes. He warned: "Once the tax rate exceeds the optimal point, the government's actual tax revenue will decrease, as businesses may choose to exit the market, and consumers may turn to illegal channels."
Therefore, he suggested that the government adopt the opposite strategy, namely setting moderate tax rates to attract more legal operators to enter the market, thereby maximizing tax revenue. He concluded: "If the government hopes to stabilize income and expand the base, it must avoid 'killing the goose that lays the golden eggs' in the gambling industry."
Ultimately, whether to increase taxes, how much to increase, or even whether to implement, all depend on the decisions of the Brazilian Congress in the coming months.
