Spain Said to Wring $200 Million From Gaming Sites on Tax Threat

Spanish Budget Minister Cristobal Montoro squeezed about 150 million euros ($200 million) from foreign-owned gambling companies by springing a tax probe on them when they applied for online licenses, according to two people involved in the process.

Companies including Betfair Group Plc and William Hill Plc, both based in the U.K., were told that they risked missing out on permits to operate in Spain unless they paid disputed back taxes, said the people, who asked not to be named out of concern they may face retribution from government officials.

“It was a measure they pulled out of their sleeve at the last moment,” Laura Guillot, a Barcelona-based lawyer and independent consultant to the gaming industry, said in a Jan. 10 telephone interview. “It was not very elegant.”

Montoro’s gambit reflects the pressure on European officials to squeeze revenue from slumping economies. A 75 percent surcharge on the wealthiest was struck down by French judges; the Portuguese government scrapped an increase in social-security contributions that split the ruling coalition; in Italy, Silvio Berlusconi has based his campaign on repealing a property levy.

“A number of governments have already fallen across the euro zone trying to implement austerity,” Jonathan Loynes, chief European economist at Capital Economics Ltd. in London, said in a telephone interview. “There are obvious political costs.”

Market Access

Montoro, moving to regulate Internet-based gambling, got the companies to pay taxes on bets that Spaniards made via websites based outside the country between 2008 and 2011. The companies, which argued that laws cited by the government dating to 1966 and 1977 weren’t applicable to online operations, paid to avoid exclusion from the 27 billion-euro gaming market, the people said.

“The gaming companies voluntarily resolved their fiscal situations with no direct instruction from the tax agency,” Montoro’s director of communications, Julio Sanchez, said in an e-mailed statement.

After the Treasury, the biggest potential beneficiary was Codere SA, a Madrid-based gambling company and client of the lobbying firm Equipo Economico SL. The firm lobbied lawmakers on behalf of Codere while the gaming law was before parliament, according to a person involved in the process.

The firm was then part-owned by Montoro’s brother, Ricardo, who sold his stake in 2012. The levy drained the marketing budgets of Codere’s rivals, leaving them more vulnerable to competition from Codere’s network of 1,100 betting shops in Spain.

Revenue Decline

Revenue at London-based Sportingbet Plc fell by more then 50 percent in Spain last year after it cut advertising to preserve cash and sold 15 million pounds ($24 million) of convertible bonds to pay its tax bill, one of the people said. Its Spanish website was also shut down temporarily by the courts after it was sued for unfair competition by Codere, the person said.

Betfair said in a May statement that it paid “not more than” 10 million euros. Ladbrokes Plc paid a sum that was “not material,” according to spokesman Ciaran O’Brien. Bwin.Party Digital Entertainment PLC said in an Aug. 31 statement it paid

31.5 million euros. Bwin spokesman John Shepherd declined to comment as did Simon Sporborg, an external spokesman for William Hill.

After taking office in December 2011, Montoro suspended the licensing process and installed a new gaming director to determine who would be allowed to operate in Spain. Lobbyists from Equipo Economico met with Budget Ministry officials during January and February of last year about the licenses, according to one of the people, who discussed the meetings with ministry staff.

‘Great Collaborator’

The firm’s chairman, Ricardo Martinez Rico, served as deputy budget minister under Montoro in 2003 and 2004. The minister described him in an August 2012 interview as a “great collaborator.” Martinez Rico’s brother Felipe is Montoro’s chief of staff.

“We categorically deny any hint of suspicion of possible trafficking of influence,” said Sanchez, Montoro’s spokesman. He declined to disclose records of visitors to the ministry during this period. Codere and other companies met frequently with officials with no need for an intermediary, he said.

In March, the online operators began to receive letters from the tax-fraud office demanding information about revenue from online gambling by Spanish residents going back to 2008. Two months later, Enrique Alejo, the head of gaming regulation appointed by Montoro, told the gaming executives they might be refused licenses unless they paid, the people said.

The regulator’s Deputy Director of Institutional Relations Jaime Lorenzo canceled an interview Alejo had planned with Bloomberg and didn’t respond to an e-mail request to reschedule.

Payment Dispute

While the tax office requested only information in a letter seen by Bloomberg to a gaming company, officials at the regulator told executives the fraud investigators were demanding payment, the people said.

Investigators “requested information but did not demand any payment, nor did they link their requirements with the award of licenses,” Montoro’s spokesman Sanchez said.

The dispute came to a head in May in a meeting at the regulator’s former headquarters on Calle Capitan Haya in central Madrid.

Sitting around a conference table, executives and advisers from companies including Betfair, BWIN, Pokerstars and William Hill clashed with Alejo during the hour-and-a-half-long meeting, which was conducted in Spanish, according to a record of the gathering obtained by Bloomberg.

Licensing Process

Executives accused the officials of allowing the licensing process to be hijacked by the interests of one company -- the executives never mentioned Codere. One said his company was considering abandoning the Spanish market while another told Alejo and his deputy director for regulation, Carlos Hernandez, their actions undermined the rule of law, the record shows.

“You have to address this with the tax-fraud office,” Hernandez told executives, according to the record. “They are absolutely convinced that you have to pay.”

The officials refused a request to disregard any report from the fraud investigators when granting licenses. The companies said that under Spanish law it’s illegal to make the licensing process subject to a tax dispute that hasn’t been resolved.

“Understand the position of the directorate,” Hernandez said, according to the record. “In the part that I am involved in, I promise you that the granting or denial of the licenses will follow a strictly legal process.”

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