How Betting Giant Sportspesa Increased Revenue 400% and Trimmed Taxes by Moving to the UK28/09/2020 19:38
Former Arsenal, and Everton betting partner Sportspesa might have cut ties with these EPL clubs. But that doesn’t mean it’s hurting financially. Quite the contrary, Sportspesa has increased its revenue 400% since 2017 in a deal that involves exploiting British-Kenyan taxation agreements.
According to a recent investigation, Sportspesa uses its England-based startup SPS Sportsoft to supply betting software to its Kenyan company Pevans East Africa. In doing so, Sportspesa is able to avoid Kenya’s 30% tax for gambling businesses. And instead, it pays Britain’s 19% tax rate.
As mentioned, Sportspesa also benefits from a 43-year-old tax treaty between the Kenyan and British government. That way, it keeps it cost operations incredibly low while increasing its profit margin by up to 77%.
£22 Million Profit Reserve
Thanks to the company’s latest arrangements, Sportspesa made roughly £22 million in less than three years (2017-2019). For clarity, the former Formula One sponsor made £33 million in the same period, which means it only parted with £11 million in taxes.
Not everyone is happy with Sportspesa’s newly found success, though. According to an official from the Kenyan Revenue Authority, the company appears to be overcharging Pevans East Africa to inflate its British revenue—where it’s taxed.
However, Sportspesa rejected the accusation, calling it “factually incorrect” and saying charges made by SPS Sportsoft are normal.
“It is factually incorrect to suggest Pevans East Africa has been overcharged by SPS Sportsoft,” a spokesperson of Sportspesa replied. “SPS Sportsoft’s software development and operational costs are in line with industry norms.”
Revenue Sharing Arrangements
After ending most of its sports sponsorship ties, Sportspesa plans to spend its £22 million profit reserve for revenue sharing. To expound more, it will split the money among shareholders in Kenya and Europe.
Sportspesa lost its Kenyan betting license mid-last year after it was listed amongst betting companies that owed the government unpaid taxes. It was then ordered to pay millions of dollars’ worth of taxes or risk losing its permit.
Sportspesa chose the latter, ending sports betting in Kenya to focus on other African and European countries. Led by its Bulgarian group of investors, the company has been pretty successful in the UK.
Creating SPS Sportsoft
After its tax problems in Kenya, Sportspesa relocated its headquarters from Nairobi to Liverpool at the famous Liver Building. But there was one problem. Most of its gambling market was based in Kenya. And if it continued to target these people, it had to pay high taxes in Kenya.
That’s when the idea of SPS Sportsoft came up. Sportspesa launched this startup to be its primary business arm in the UK. But more importantly, it would become the main revenue source for the brand, at least in the eyes of the UK government.
As mentioned, Sportspesa says the main goal of SPS Sportsoft is to provide betting software and entertainment services. But as many critics have pointed out, the startup only works with companies owned by Sportspesa, mainly Pevans East Africa.
Indeed, 97% of SPS Sportsoft’s (£43.5M) revenue between 2017 and 2019 came from Pevans East Africa. When questioned by Finance Uncovered, Sportspesa hired one of Britain’s biggest financial advisory firms to answer questions.
Is Everything above Board?
Although Sportspesa has received criticism for shifting operations to Britain for tax reasons, some experts believe there’s no foul play in the betting giant’s part. Apparently, many sportsbooks in Africa acquire betting software from other companies. And then they share revenue in the range of 20% to 30%.
That’s precisely what Sportspesa says it does. It leases software through SPS Sportsoft and then re-sells it to Pevans East Africa at a profit. Of course, the problem is the profit margin it makes from this deal.
According to Finance Uncovered, Sportspesa seems to charge Pevans East Africa 400% more than what it pays for licensing fees. That’s the only way to explain SPS Sportsoft’s extremely low cost of operation compared to its astronomical profit rate.
“That is way beyond the normal boundaries of possibility for Software as a Service,” an expert quoted by Finance Uncovered said.” It poses the simple question as to why this software could not have been bought vastly more cheaply by the operating companies in Kenya.”