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. Last Updated: 07/27/2016

Casinos Feel Heat of New Tax Law

It's noon at the Golden Palace casino in Moscow, and half the 40 tables in the room are occupied with lunchtime gamblers trying their luck at poker, blackjack and roulette.

"It's amazing. Even on a Monday morning this place fills up," said Natalya, the casino's secretary.

But the Golden Palace and casinos like it are about to be dealt a bad hand by the tax authorities, who have decided to squeeze Russia's lucrative gambling industry for cash in their drive to plug budget holes in the face of a financial crisis.

A new federal tax on the gambling industry signed by President Boris Yeltsin last week will tighten the screws on casinos and make it virtually impossible for them to dodge taxes. While the result is likely to be a windfall for the cash-strapped government, one prominent casino manager voiced concern that it will put reputable establishments out of business.

Under the old law, casinos and other gambling institutions were taxed on profits just like any other business, only at a higher rate. Casinos were required to pay 90 percent of their profits to the tax authorities, about three times more than other businesses. But with so much cash changing hands, casinos could easily massage their profit figures if they wanted.

"More than half of the casinos declaring taxes reported losses, which of course was not true," said Georgy Kokarovtsev, the tax service official who oversees the gambling industry.

Now casinos will have to pay a flat tax for every table and slot machine they operate, a move Kokarovtsev said will make it easier to collect taxes and monitor the industry's compliance. The change could boost the federal budget's annual tax take from gambling to 1.6 billion rubles ($258 million) from about 700 million rubles now, he said.

"It is very difficult to hide tables and machines," said Viktor Sneguirev, a tax attorney at Watson, Farley & Williams in Moscow.

Under the new system, casinos will be required to pay 1,200 times the annual minimum wage, or about $16,000 a year, for each gambling table they run. The rate for each slot machine will be 45 times the minimum wage, or $3,700.

For a casino such as Beverly Hills, owned by American actor Chuck Norris, the new tax regime will result in a $160,000 annual federal tax bill to the government for the 10 tables it runs. With city levies, that amount could double.

"It's catastrophic," said Mounir El Debs, the casino's manager. "I don't know if we can survive." Casinos around the world are frequently taxed per table. But El Debs said the new rates in Russia are so high that they will effectively kill the gambling industry and drive customers to other countries.

Casinos in Monte Carlo, Cannes and Las Vegas are eager for Russian clientele and ready to offer package deals, including cheap air travel and hotel accommodations, to lure them in, El Debs said.

"Remember that Vegas prospered because they had a lower tax rate," he said. "You don't just open the doors, put up a few tables and expect people to come rushing in. You need to invest."

El Debs said Moscow's casino operators -- there are now 415 casinos and 18,000 slot machines in the country -- banded together to lobby the government for a lower rate, but to no avail. Some industry observers predicted that about a third of the industry would go under as a result.

"There is so much competition from abroad," El Debs said. "The net result of the new law will be that people will go elsewhere and taxes will go to other countries."