Casino Enterprise Management

Costa Rica has suffered only two very brief moments of civil unrest since it became a democracy in the late 19th century and is the fastest emerging economy in Central America. With a robust and stable democracy, its economy has steadily prospered on the back of coffee, electronics exports and tourism. Although the economy was hit by the global economic crisis, with tourist numbers falling by 8 percent in 2009, the economy is once again experiencing positive growth (3.6 percent GDP growth rate in 2010).

Today Costa Rica boasts a $1.92 billion per year tourism industry and is the most visited nation in the Central American region, with about 1.9 million foreign visitors arriving every year. With an inexpensive cost of living, growing infrastructure and affordable health care, it is also a haven for American retirees.

Situated between Panama and Nicaragua, Costa Rica has the Caribbean Sea to the west and the Pacific Ocean to the east. With mile upon mile of stunning coastline, it also boasts several world-renowned natural parks, live volcanoes and endless pristine waterfalls. Rich with renewable energy resources and with such a wide variety of natural attractions on offer, it comes as no surprise that Costa Rica is currently leading the pack in the ecotourism boom in Central America.

However, despite the large number of tourists who visit Costa Rica each year and the very real potential of the gaming market, the casino industry has been beset by a number of drawbacks and obstacles. Similar to gaming legislation in many countries in Latin America, gaming law in Costa Rica was designed specifically to increase tourism—and to begin with, matters looked straightforward enough ...

Casinos were permitted in hotels, with the number of tables and slot machines dependent on the number of stars the hotel possessed. Clustered around the country’s most famous beaches (and with seven casinos located in capital San Jose), today there are around 50 casinos in Costa Rica, the majority of which are located in three-star or more hotels. Together they employ, directly and indirectly, more than 3,000 people.

Unfortunately, casinos in Costa Rica have been consistently singled out for special attention from the Department of the Treasury and have been hit by a series of additional taxes and restrictions over the years. This has made matters very difficult for casino operators, as they have often found themselves competing on a playing field where the rules are constantly changing.

Casinos were first affected by an emergency tax package in 2002 aimed to help Costa Rica pay part of its public debt. For a year an additional monthly tax was placed on slot machines as well as another tax, the amount of which depended on how many hours the casino was open. The tax ran from $319 for casinos that were open for 10 hours per day to $851 for casinos that were open 24 hours per day. Additionally, each slot machine was taxed $216 per month.

Many casino operators argued that the new tax was more than they could afford to pay, and about 300 angry casino workers took to the street in protest. But it was to no avail. The measures received presidential approval, and the new tax was given the green light. At least eight casinos went out of business due to the new measures.

Casino operators were then faced with yet another serious setback in 2006, when a new gaming law was passed that limited opening times. The legislation ruled that casinos in Costa Rica would only be allowed to be open from 6 p.m. to 2 a.m. the next day, and casinos were given only six months in which to comply. The only good news for operators was that Article 4 of the same gaming law was scrapped.

That clause bizarrely ruled that “those games in which loss or gains are dictated exclusively by luck” would be forbidden. This was widely perceived to mean slot machines—a move that would have effectively ended the casino industry in Costa Rica overnight.

The New Gaming Law
Today casinos are in the spotlight once again as Costa Rica’s Legislative Assembly considers new gaming legislation. If approved, the new law will have a profound effect not only on land-based casinos, but on the online gaming industry in Costa Rica as well. As previously reported in CEM’s October 2010 “Latin American News Round-Up,” new gaming legislation that would increase taxation on all types of gambling was a major aspect of center-right candidate Laura Chinchilla’s running campaign this year.

Elected in February, Chinchilla promised that additional taxation on gaming would be used to combat crime and would help fund a crackdown on the rising gang violence. In 2008, the murder rate increased by 38 percent in Costa Rica and her tough anti-crime stance was one of the factors that earned Chinchilla a landslide victory. Casino and gaming legislation is therefore a top priority for the present administration. However, just how much and exactly how casinos would be taxed remained unclear.

To begin with, it looked as if Costa Rica might use Panama’s gaming legislation as a model. While on a state visit to meet current President Ricardo Martinelli in April, Chinchilla initially announced that she would seek to replicate gaming legislation currently in place in Panama. In Panama, casinos must pay 5 percent of gross income in tax. But according to the new legislation currently under debate, taxation on casinos would increase from an originally discussed 2 percent to 15 percent per year. The new bill also imposes a 0.5 percent annual fee on both land-based casinos and Internet gambling sites operating in the country.

According to the proposed legislation, a new gaming board will also be created and, in perhaps its most significant clauses, the new law stipulates that a casino does not have to be attached to a hotel. This controversially opens the way for free-standing casinos and slot parlors.

It is partly because of the free-standing clause that the law is currently facing such a turbulent time in the House of Legislators, where officials have argued that the new law is unclear and will lead to an unacceptable proliferation of gaming. At the same time, members of Chinchilla’s own party have also been critical of the new act.

Ex-Treasury Minister Guillermo Zúñiga, from the Partido Liberación Nacional (Chinchilla’s party), also recently expressed his doubts about the current legislation. Zúñiga has voiced his opinion that under current proposals it will be difficult to raise the predicted tax revenue needed to combat crime. He also argued that the Ministry of Government and not the Treasury Department should be responsible for collecting the additional taxation generated from the casinos.

Online and New Gaming Legislation
The bill will also affect the online gambling industry. Today there are currently around 300 online sports books and Internet gambling websites operating out of Costa Rica. And they, too, will be affected by an additional tax. Traditionally the biggest draw for online businesses in Costa Rica was that, by operating in Costa Rica, Internet gaming services could, in theory, tap into the American market.

The U.S. Federal Wire Act of 1961 bans interstate wagering via telephone or telegraphs and was widely interpreted to legislate against online sports gambling in the U.S. According to the Federal Wire Act, it is against the law to use phone lines or wires to place bets on sports across international borders.

However, operators flocked to Costa Rica in order to take advantage of a supposed loophole in the act where it is legal to use the telephone to make a bet if the bet is being made in a country where gambling is legal. By 1999, online gambling operations were receiving on average 20,000 calls per week, and by 2000, Costa Rica had transformed itself into a highly significant gaming center and was already home to about 120 online betting businesses.

Since 2006, when then-President Bush passed the Unlawful Internet Gambling Enforcement Act (UIGEA), U.S. laws have forbidden companies from accepting wagers over the Internet while banks and credit card companies are prohibited from accepting payments. Despite this, Costa Rica still proves to be an attractive proposition to online casino operators and sports books looking to expand their operations in other markets. Because set-up costs are low, there is no special tax on online casinos, and foreign investors do not pay taxes on revenues generated by their gambling businesses.

However, according to draft legislation, each online gambling company in Costa Rica will in the future have to pay $50,000 per year in tax. Taxation on Internet gambling sites is aimed at raising extra tax revenue in order to help tackle Costa Rica’s spiralling deficit. In the first eight months of 2010, Costa Rica’s deficit rose to $997 million, 70 percent more compared to the same period in 2009.

However, despite growing opposition to the bill, it still looks as if a new gaming act will be eventually passed. President Chinchilla has announced that she has no intention to withdraw it, and she has also urged legislators to pass the new gaming legislation as a matter of urgency. But as opposition to the new act mounts, it is likely that it will see some significant changes before it is finally approved. Just what those changes will be remains to be seen for now.



James Marrison has been covering the casino industry in Latin America for over seven years and has written in-depth features on every country in the region. Marrison has worked as a research contributor for Global Betting and Gaming Consultants and serves as a consultant for industry professionals for the Gerson Lehrman Group. Marrison is also a researcher into the online gaming markets in Europe.