Where do we go from here?

When Japan decided to legalize gaming in order to attract more tourism in late 2016, it proved to be just the beginning of a long road to implantation.

The Act Concerning Promotion of Development of Integrated Resort Areas (the IR Promotion Act) was passed into law by the Japanese National Diet in December 2016. The IR Promotion Act does not legalize wholesale casino gaming in Japan, but instead provides for the creation of a limited number of integrated resorts. Japanese IRs will integrate casinos with facilities such as international conference and exhibition centers, hotels, shopping centers, restaurants, theaters, amusement parks, sports complexes and other similar attractions.

The IR Promotion Act does not itself introduce a detailed regulatory framework for integrated resorts in Japan. Instead, the IR Promotion Act provides broad concepts, principles and goals, which must be included in a more detailed legal framework to be set out in a second bill, generally referred to as the IR Implementation Bill.

 

Proposed Regulatory Framework

Administrative bodies with varying roles and levels of authority have been established in accordance with the provisions of the IR Promotion Act. One such administrative body is the Expert Committee. The Expert Committee is the promotional leadership body charged with advancing the development of integrated resorts. On July 31, the Expert Committee published an interim report, which provides a high-level proposal regarding the basic structure of the IR Implementation Bill (the Interim Report). A stated goal of the regulatory framework is to develop “the world’s highest standard for casino regulations,” as publicly called for by Prime Minister Shinzo Abe.

The Interim Report spends a lot of space defining the role of the Gaming Control Board, another administrative body to be established in accordance with the IR Promotion Act. The Gaming Control Board will act as a type of watchdog over the IR industry in Japan. In its role, the board is to have investigatory power to conduct background investigations on specified parties, authority to issue penalties for certain violations of IR regulations, and supervisory power over the IR area, among other functions.

 

Selection and Licensing Process

The Interim Report sets out a proposal for IR selection and licensing. According to the Interim Report, the Ministry of Land, Infrastructure, Transport and Tourism (the MLIT) is to become the competent authority over IRs, and will be charged with designating IR areas. In preparations for IR area designation, the MLIT is to establish a basic national policy that contains several matters such as national unified guidelines and basic requirements for selection of IR areas. Candidate local governments are also separately tasked with establishing an implementation policy that discusses matters such as anticipated IR facilities as well as a screening process and requirements for candidate IR operators.

Once these policies are established, local governments interested in bidding for an IR area will conduct a public tender process for candidate IR operators. Upon selecting a partner IR operator, the local government will file an application with the national government for designation of the IR area. The application will include both a business plan mainly created by the partner IR operator and an IR area development plan. The IR area development plan will include details such as the IR’s business model, infrastructure development, and how to prevent negative effects of gaming.

Upon review of the application and completion of a selection process, the national government will select certain local governments for designation. At first, it is expected that perhaps two or three local governments will be designated for IR areas. Upon receiving a designation, successful local governments will then execute an accord with their respective partner IR operator.

IR Operator Licensing: Local government IR area designation and IR operator licensing will be done in two separate steps. The MLIT will first designate local governments upon completion of the selection process as discussed above. Only after the local governments are selected will the partner IR operators file a gaming license application with the Gaming Control Board.

The Interim Report states that IRs should operate under a licensing system that ensures a high level of integrity. One of the areas focused on extensively throughout the Interim Report is a licensing and approval process that would be effective in totally excluding anti-social groups (e.g., organized crime) from deriving any benefits from the IR area.

To achieve this goal, the Interim Report proposes that the Gaming Control Board conduct background investigations on a wide range of relevant parties such as operators, directors, shareholders, and external parties who have a controlling influence on IR operations. The subjects of the background investigation would include not only the IR operator itself, but also the IR operator’s subsidiaries, other related companies, and those connected at a degree of two, three or more from that subsidiary or related company, not only at the time of licensing or approval, but as necessary.

Process Overview: The chart below provides a general overview of the process from policy development to beginning IR operations as proposed in the Interim Report.

Two-Step Selection Process Risks: The two-step selection and licensing process creates risk for candidate local governments as well as for IR operators in the form of investor uncertainty. If a partner IR operator fails to obtain a license after IR area designation, given the integral relationship between the local government and IR operator in the national government’s designation process, will the local government also lose its designation? As stated above, the application for IR areas will include both an IR area development plan and a business plan. In that case, will the local government be required to recreate the IR’s business model and infrastructure development plan from scratch?

These questions remain unanswered in the Interim Report.

 

Gaming Area

The Interim Report proposes that the gaming area be just one part of the entire integrated resort. A primary purpose of introducing IRs in Japan, as set out in the IR Promotion Act, is to develop “stay-type tourism” in Japan. So, the Expert Committee’s intention with this proposed rule is likely to make clear that IRs are not only to include casinos, but also MICE, hotels, restaurants, entertainment and other facilities as well.

In addition, the Interim Report states that the gaming area is not to exceed a certain absolute upper limit of the IR area. Although a specific size is not mentioned, it has been suggested informally that an upper limit of 15,000 square meters (164,458 square feet) be established.

Japanese IRs have high expectations in terms of tax revenue. Furthermore, the Interim Report places an emphasis on assuring the success of non-casino businesses such as MICE, even suggesting that revenues from casino gaming be used to support MICE. Meanwhile, MICE and certain other non-casino IR businesses have historically acted as a sort of weight on casino IR businesses, earning less revenue overall. So talks of increasing this size have been a large focus for many insiders, as a sufficiently large gaming area will be particularly important to meet these stated goals and requirements.

 

What Will the Tax Model Look Like?

The IR Promotion Act provides for two special IR-related taxes. The first tax is a contribution levied on the IR business, and the second tax is an entrance fee to be levied on IR patrons. Both taxes are to be used for IR promotion, social welfare, promotion of culture and arts and other public benefits.

Contributions: The Interim Report sheds some additional light on a proposed tax scheme for IRs in Japan. With regard to contributions, the Interim Report proposes that contributions be comprised of: (i) a fixed amount equal to the Gaming Control Board’s expenses, and (ii) an amount in proportion to gross gaming revenue. GGR is defined in the Interim Report as “total wager amount minus payouts to customers (excluding comps)” and is to be calculated monthly by IR operators.

The fixed amount will likely be collected primarily as a license fee by license holders, and is to be in an amount equal to necessary administrative expenses incurred by the Gaming Control Board. The Interim Report does not specify an appropriate rate of GGR. Instead, the report simply states that such a determination “should be established taking into consideration foreign models and the competitive environment surrounding IRs.”

Entrance Fees: The second special tax for IR areas set out in the IR Promotion Act is an entrance fee. The IR Promotion Act provides few details on the scope and policy to be implemented with regard to entrance fees. However, the Interim Report offers some recommendations. According to the report, entrance fees should be charged on a per-day (24-hour) basis on all Japanese citizens and residents, while foreign visitors would enter without charge.

No specific entrance fee was suggested in the Interim Report. Nevertheless, the report proposes a general principle that the entrance fee amount be sufficient to deter easy entrance while also avoiding imposing an excessive burden on Japanese patrons.

Collection and Allocation: According to the Interim Report, fixed fee contributions will be national government revenue collected to pay for Gaming Control Board expenses. GGR contributions and entrance fees, on the other hand, should be split evenly (50-50) between the national government and local government. Further, GGR contributions should be collected monthly by the national government in a lump sum and paid to the local government as a local consumption tax.

Each of these special taxes for IR operators would be in addition to corporate taxes, consumption taxes and local taxes.

 

Next Steps

Public hearings on IR implementation began on August 17 and ended around two weeks later on August 29. A total of nine public hearings were held around the country in places such as Tokyo, Osaka, Hiroshima, Fukuoka (on Kyushu Island) and others.

Some attendees at the hearings were opponents of the legislation, citing concerns with gambling addiction and other social problems. This is in light of recently published opinion polls in Japan reflecting general antipathy towards the notion of establishing IRs, with opponents outnumbering advocates by 2-to-1 or even 3-to-1 margins. Meanwhile, other attendees of the hearings participated to learn further details about the implementation of the IR project, especially in connection with the Interim Report.

As one would expect, certain hearing attendees also lobbied for inclusion of certain desired provisions in the IR Implementation Bill. For example, in Fukuoka, the prefectural government officials in attendance called for the central government to allow for strong inclusion of regional bidders in the IR development process, and to not focus too heavily on the major urban areas of the country.

Several cities and prefectures have expressed an interest in bidding for an integrated resort in their locality. Such cities and prefectures include Hokkaido, Akita, Tokyo, Yokohama, Chiba, Osaka, Wakayama, Nagasaki and Fukuoka. The leading favorites thus far appear to be Osaka and Yokohama. However, it is still too early to accurately forecast the locations for any integrated resorts.

Although many of the expected front-runners for IR site selection are major cities, there is room for IRs in regional areas as well. One of the goals of introducing IRs into Japan, as stated in the IR Promotion Act, is to stimulate local economies by attracting tourists and creating jobs.

Regional governments interested in Japanese IRs are also an opportunity for mid-market operators to take on a big role. It is commonly believed that when large markets such as Yokohama submit an IR proposal to the national government in competition with other large markets, large-scale operations will be seen as a major point in the national government’s evaluation of the bids. Yet, smaller regional markets will likely have more moderate expectations in terms of scale and revenue. As such, mid-market operators interested in Japanese IRs will likely have a niche of their own by partnering with a smaller regional government.

Prime Minister Abe’s Liberal Democratic (LDP) party achieved an overwhelming victory on October 22, allowing the LDP and its coalition partner Komeito to maintain their two-thirds lower-house “super majority.” This victory gives Abe’s coalition a decided referendum from Japanese citizens to continue with its plans to promptly advance the IR implementation process. Many expect the IR Implementation Bill to be submitted to the Diet in January 2018, and IR business to begin after the 2020 Tokyo Olympic Games, helping to buoy the Japanese economy long past the end of the games and into the future.