Jackpot Tax Avoidance: How one lottery company hides its billions

jacqueline macou

DURBAN, South Africa—In line at a downtown convenience store, Helen Dlamini waits to pay for 10 slices of house-brand baloney and a half-liter of milk. It’s a waste of money to buy just half a liter, but she doesn’t have an icebox. Her employer gave her a mini fridge, but it broke and Dlamini now uses the appliance as a cupboard. A domestic laborer, she earns about 3,900 Rand ($300) per month.

Dlamini reaches the register and begins counting out coins from her worn pocketbook. A R10 bill is visible inside its beaten pleather. That money, she says, belongs to “u-lotto.”

She has never won any money playing the South African lottery, but she calls the game her one shot at a “free ride.” In exchange for a small amount of cash—R5 per ticket—players can indefinitely chase their get-rich-quick fantasies.

Like Dlamini, a majority of South African lottery players are poor. In 2010, nearly three-quarters of them earned less than R5,000 a month, and of those, 33 percent earned about R1,000 a month or less, according to a study of lottery participants conducted by the University of South Africa. More than 70 percent of players surveyed reported forgoing purchases of house-hold necessities in order to have lotto money.

The research mirrors studies from the United States and Europe that suggest lotteries can amount to a regressive tax. In the U.S., where lottery tickets are heavily taxed, state-run lottery revenues often exceed corporate income taxes. In South Africa, the poor are sold on “a dream” that, in the words of the National Gambling Board, which oversees the country’s gambling industry, is “consciously and perhaps irresponsibly manipulated” by the national lottery’s aggressive advertising. Some of the revenue fills government coffers. But the companies involved get an arguably bigger jackpot: As of 2014, the global lottery industry was worth roughly $300 billion.

This gamble, though, may in fact be a swindle. While lotteries function essentially as a tax on poor citizens, some of the big companies that dominate the industry engage in aggressive tax avoidance to ensure they pay very little. GTech, a U.S.-based lottery titan that operates jackpots in 100 countries, has been the subject of controversies stretching back decades. Active in South Africa since 1999, it merged with another U.S. gaming giant, International Game Technology (IGT), in 2015. IGT is currently the main supplier of technology for Ithuba, the company that runs South Africa’s lottery.

As part of the merger, it appears that GTech engaged in tax avoidance to slash its corporate tax rates in half and hide billions from the taxman. An exclusive analysis of public financial documents shows that the company has avoided hundreds of millions of dollars in taxes through these financial maneuvers.

GAMES OF CHANCE

Arguably the world’s biggest lottery company, with annual revenues topping $6 billion, GTech, as part of its merger with IGT, used a tax avoidance technique called corporate inversion. This allowed the then-Delaware-based company and its Italian parent, GTech S.p.A., to move their legal domiciles from the United States and Italy, two countries with comparatively high corporate tax rates, to the United Kingdom, where taxes are significantly lower. Under the law, all corporate entities, including the U.S. and Italian companies, are now considered subsidiaries of their new U.K.-based parent. As part of the merger, GTech also changed its name to IGT.

Despite this on-paper move, more than half of the combined company’s real economic activity remains in the United States, according to company disclosures filed with the U.S. Securities and Exchange Commission (SEC). As of 2016, about 9,500 of the company’s employees worked in the United States and approximately 1,000 in Italy, compared with 813 personnel who were located around the world in countries such as South Africa.

IGT PLC, the U.K. parent, was formed as a holding company in...