Casino Enterprise Management

Views and opinions on the state of gaming in Mexico vary widely. Some are favorable due to the prospects for growth, but others reflect concern about the country’s weak regulatory foundation, legal uncertainty and lack of enforcement.

Clearly Mexican gaming is still in its infancy when compared to other Latin American countries, but the inconsistent and ineffective regulatory framework for the industry underscores the reality that not only is Mexico lacking in leadership, but it is also still not quite prepared to compete on a global scale.

Politics as Usual
Unfortunately, Mexico has other domestic issues to take care of, such as corruption and economic and social matters. And, as President Calderón remains focused on these top priorities, it is obvious that the issues confronting the gaming industry are not his most pressing matters.

Due to these circumstances, it is becoming more apparent that the senators and deputies in Congress will have to take the initiative to propose a new regulatory framework and legal environment that can offer security, transparent oversight and enforcement for the gaming industry. This must start with the simultaneous passage of a new law and the creation of an accountable Gaming Commission, two essential cornerstones of a viable industry in Mexico. Given the current political trends, however, the path to gaming reform does not look that easy or quick, despite the obvious motivations for the Mexican Congress to do this before summer 2011, when all the political parties (PRI, PAN and PRD) will begin focusing on their candidates for the presidential elections in 2012.

Foreign investment in Mexico’s gaming business is allowed, but compliance continues to pose a serious challenge for foreign investors, which is why many hesitate to risk their capital in Mexico.

Taxes
Gaming permit holders, and even players, already pay several taxes on profits and winnings, and other increases may be coming soon.

Gaming taxes, in combination with other domestic taxes in Mexico, are high in comparison to other countries, but the federal government now appears ready to increase the gaming tax with little regard for the affect it will have on the industry. If the Mexican government simply analyzed the relationship between tax rates on gaming and the per-capita yields in other jurisdictions, it would see a pattern of inverse benefits between tax rates and tax revenues.

Like most countries, taxes are a constant subject of debate in the Mexican political arena, and Mexico’s congressmen (deputies) continually discuss taxes in the context of governmental budgets.

In September, the political parties in Mexico’s Chamber of Deputies decided to give the Congressional Chairmanship of the Budget Commission to Luis Videgaray of the PRI and simultaneously awarded the head of the Treasury Commission to Mario Becerra, a deputy from the PAN.

Of course, we will see debate regarding gaming taxes between the Mexican political factions, but to put the issue of gaming taxes into its proper perspective, one needs only to look at the percent of citizens that actually pay income taxes country by country throughout all of Latin America.

On the surface, it would appear that Mexican legislators, as well as their constituents, might be better served by taking measures to increase the general tax base rather than putting an additional tax burden on gaming.

There will no doubt be a great temptation among legislators in the coming congressional session in Mexico to increase gaming taxes, but given the country’s need to foster new, viable industries with sustainable tax bases, let’s hope Mexico’s politicians do not kill the gaming goose before it has a chance to lay its golden egg.

Vigilance and Compliance
Regardless of any impending tax increases, accepting proposals for monitoring gaming revenues and taxes by way of a government-operated online system, which is common in many other jurisdictions, seems like a wise and practical move. If adopted, such a system would usher in greater compliance and bring accountability and transparency at a critical time for the industry, not to mention a huge anticipated increase in revenues due to more accurate reporting.

But bringing in a central monitoring system will not be easy, since some existing operators and venues may already be operating outside of current law, while others simply lack the motivation or technological capability such monitoring would require. By some estimates, only about 30 percent of all gaming locations in Mexico operate in compliance with the existing regulations. Conversely, perhaps half of all gaming locations are not operating in a legal manner, and there is little doubt that these illegal or noncompliant operators do not want a government-operated monitoring system. Further, it is estimated there may be as many as 75,000 gaming devices in Mexico, nearly half of which are so-called skill or entertainment games—illegal devices by strict interpretation of the regulations. Of these skill- or entertainment-designated devices, a large percentage is operating under amparos while their legal status is being challenged or verified. And while in the entire country only 25 permit owners have approximately 300 gaming locations open, with another 100 authorized venues pending, there are dozens of Class II, Class III and multi-player machine suppliers, each with different communication protocols and different operating systems, which will make interconnecting tens of thousands of machines across these venues a daunting challenge.

Current regulations of the federal gambling and drawings law do not contain uniform standards or requirements to implement or enforce a monitoring system even though some gaming permits do have such requirements in their conditions. Enforcing monitoring will simply add one more item of responsibility for regulators who are already having a difficult time performing their duties effectively.

Finally, it will be interesting to see if gaming interests chose to fight new taxes or instead find ways to meet the same objectives without impacting the long-term prospects for growth before the Nov. 15, 2009, deadline passes on the new tax issue.

Some observers believe the increase in the gaming tax may not survive because it is packaged with tobacco, beer and alcohol tax increases as well. We should know soon enough.

José Luis Benavides is a practicing attorney representing some of the largest corporations in Mexico. He can be reached at jlbenavides[at]benavideslaw.com.mx.