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Global Tax Topical Focus

By Editorial
August 14, 2012

As governments attempt to extract the maximum amount of feathers from the goose with the minimum amount of hissing, they are increasingly turning their attention towards the wealthiest few percent of society in their search for extra revenue – and top sports professionals are a particularly juicy target. So with the London Games in mind, in this feature we take a look at how certain governments, legislatures and tax collectors are approaching this issue.

Sports stars present national tax authorities with a unique set of problems, and the taxman often has to (ahem) run ever faster to remain a step ahead. Not only can a professional sportsman command multi-million dollar salaries from the sports clubs which employ him, for example in the English Premier League or the NBA, but they can also earn many millions more from image rights, endorsements and other business activities. Then there are those sportspeople, like tennis players or track athletes, who aren’t employed by anyone as such and give the taxman an additional headache by competing in competitions for days, weeks or even months at a time on foreign soil.

Different governments have dealt with this problem in different ways. Some prefer not to overburden sports stars with additional taxes in order to attract the cream of the world’s sporting talent to their shores. Others take a much less lenient – some would say mean-minded – view by insisting that sportsmen are subject to at least the same level of taxation as would befall a citizen of the country, and sometimes more.

This issue was brought to the fore soon after the London Games kicked off, after Americans for Tax Reform (ATR) pointed out that American individuals winning medals at the Olympics would be liable for United States income tax on both the medals they earn and also the prizes they receive at the London games. As they face a top income tax rate of 35%, it has calculated the tax they should pay by adding the value of their Olympic medals and the prizes to their taxable income.

At current commodity prices, the value of a gold medal is said to be about USD675; a silver medal USD385; and a bronze medal under USD5. The prizes that accompany each medal are USD25,000 for gold, USD15,000 for silver and USD10,000 for bronze. American gold medal winners will therefore pay tax of up to USD8,986; silver medal winners USD5,385; and bronze medal winners will pay up to USD3,502.

The ATR has noted that US medal winners’ tax liability is another consequence of the US tax code’s taxation of ‘worldwide’ income earned by US taxpayers, rather than the ‘territorial’ system operated by most of the US’s competitors. As a result, Senators Marco Rubio (R - Florida) and Claire McCaskill (D - Missouri), and Representative Aaron Schock (R - Illinois) in the House of Representatives, have introduced the Olympic Tax Elimination bill, that would exempt US Olympic medal winners from paying federal taxes on the medals they receive in London.

If enacted into law, the gross income of Olympic athletes “shall not include the value of any prize or award won by the taxpayer in athletic competition in the Olympic Games”. This would apply to prizes and awards received after December 31, 2011.

“One of the greatest joys of the Olympics is to watch our athletes perform at the highest levels of competition ,” said Schock. “Apparently, the sacrifices they make for their success do not stop once they receive their Olympic medals. The federal government has to penalize our athletes by taxing them for the medals they have rightfully earned.”

“Our tax code is a complicated and burdensome mess that too often punishes success, and the tax imposed on Olympic medal winners is a classic example of this madness,” added Rubio. “Athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back home.”

The United Kingdom has granted Olympic athletes a tax exemption for the duration of the Games, but one suspects that if this was not a condition of London’s successful bid, the man from HMRC would be having something of a bonanza at the expense of the likes of sprint champion Usain Bolt.

In December 2010, the UK tax authority, HM Revenue and Customs confirmed that tax exemptions will be made available to a "small number of non-residents" who will be directly involved in the delivery of the Olympic and Paralympic Games in London in 2012. However, it was at pains to point out that for most people working at or supplying to London 2012, "there will be no specific tax exemptions in place, and normal tax laws apply".

"HM Revenue & Customs’s role in the London 2012 Olympic and Paralympic Games is to deliver the UK’s commitments on tax and borders policy. This means protecting tax revenue whilst facilitating those legitimately involved in and benefiting from the Games," HMRC stated.

The tax exemption will apply only to those who are neither "resident nor ordinarily resident" during the 2012/13 tax year on income "wholly and exclusively" connected to participation in the games. Besides competitors, the exemption applies to team officials, equipment technicians, technical officials (such as judges), representatives of official Olympic bodies, and media workers (including employees and contractors for broadcasters covering the games). The tax exemption began on March 30, 2012 and will last until November 8, 2012. For those employed or contracted by broadcasters, the exemption applies for the entire 2012/13 tax year (April 6, 2012 until April 5, 2013).

Nonetheless, the UK has perhaps one of the most punishing tax regimes for foreign sports stars competing at its sporting events, and there was much concern in sporting circles leading up to the Olympics tax exemption announcement that some of the world’s competitors would decide to stay away from London in 2012. Under UK tax rules, any sportsperson not resident in the UK is subject to UK income tax on any payment in connection with their performance within the country, including a proportion of any worldwide endorsement income – even if this income never touches the UK. As a consequence, it is possible for foreign competitors to pay more in UK income tax than they actually earn in the UK.

These tax rules are based on a House of Lords decision in 2006 against Andre Agassi, who had challenged an assessment of USD50,000 for the 1998-99 tax year in respect of a portion of the star's Nike and Head endorsement earnings; Agassi had appeared at a number of tournaments in the UK. The Court of Appeal had previously ruled in Agassi's favour because neither he nor the sponsors were UK-based. However, the decision was overturned on appeal by HMRC to the Lords.

In January 2012, the government announced that a tax exemption would be granted to athletes normally resident outside of the UK for the duration of the Commonwealth Games, due to be held in Glasgow in 2014. However, supporting personnel and team officials will be subject to UK income tax, should they have any UK taxable income. UK resident athletes will pay income tax in the UK as normal. The Treasury also said that as the government generally only grants tax exemptions for sporting events where tax exemptions are a necessary condition of bidding for an event that is at the highest level of world sport, this is regarded as a one-off (something to do with ‘sustaining the legacy’ of the Olympic Games in Scotland). However, these absurd rules have, unsurprisingly, led in the past to many foreign sports stars cancelling or curtailing their appearances in the UK, including Spanish golf star Sergio Garcia, Rafael Nadal, and, indeed, Usain Bolt. If these rules remain the same, high-calibre sport stars such as these will more than likely avoid competing in the UK at certain times in the future.

At least it can be said that the situation regarding the taxation of foreign sportsmen in the UK is relatively clear, even if it is very bizarre. In India, however, the fluid nature of the country’s highly complex tax code can leave some people, sport stars included, owing taxes they never thought they would be liable for.

In India, top cricketers are often considered as close to gods. But for the Central Board of Taxation, they are not quite as sacrosanct. Spin legend Harbhajan Singh, for example, was targeted by the taxman in December 2010 for not paying service tax on income earned during the first and second seasons of the highly-remunerative Indian Cricket Premier League (IPL) where he represented Mukesh Ambani’s Mumbai Indians. It was suggested that the figured owed by Singh was around INR10m (USD222,000) from promotional activities for his IPL franchisee, and followed on the heels of a fine dished out to batsman Yuvraj Singh for similar reasons.

Service tax was brought into force with effect from July 1, 1994. It extends to the whole of India except the state of Jammu & Kashmir. Initially, the service tax was levied on just three types of services including those provided by telecommunications operators, stock brokers and general insurers, at a rate of 5%. The service tax net has since been widened to cover dozens of other services and the rate was raised to 10%, plus a 3% of service tax education surcharge (for an effective rate of 10.3%) from February 24, 2009. These rules are, however, open to interpretation in many cases.

Not all countries take such an adversarial attitude towards sportsmen and their earnings, however. In Italy, there is an agreement in place between the Revenue Agency and the national football and basketball leagues for the regulation and control of the tax affairs of the clubs within the federations’ ambit. The agreements are renewable annually when both sides can determine whether to renew the ‘teamwork’ for a further period.

Within each agreement, as in previous years, the alliance between the Agency and each federation has the objective of exchanging openly all of the information necessary to verify the financial stability of the clubs and to check on whether, or not, they are respecting their tax obligations. Each federation will provide a list to the Agency of professional clubs, for which the Agency will proceed to check whether they are up-to-date on their payments of national and regional corporate income tax, value-added tax, and individual income tax for their players, as contained within their tax returns.

However, those at the top of their profession in certain highly-paid sports like football will invariably face paying the top rate of personal income tax; and given that most of the richest leagues are based in high-tax Western Europe, these are mostly in the 40 to 50% bracket. Spain is an exception in that foreign players competing in the country’s top division for up to six years pay a top rate of income tax of 25%. But players who are based mainly in a high-tax country often have to find ways to mitigate their exposure to tax by converting wages to investment or corporate income, for example by utilizing personal service companies. Investing in tax-privileged film finance schemes has been one method employed by Premier League footballers to reduce tax liability, while the practice of clubs paying players through interest-free loans is thought to have been quite widespread. However, with general anti-avoidance rules becoming more prevalent in national tax legislation, tax authorities are finding it easier to strike down schemes which have little economic purpose other than to avoid tax. A moral dimension has also crept into the debate with more forms of tax avoidance now considered as tax evasion, and it goes without saying that few sports starts would like to be ‘outed’ by the press for using an aggressive tax avoidance scheme.

Another way that sports stars can avoid high income taxes is by switching their residence to a low tax territory. This is obviously easier to do for those whose chosen sport takes them around the world for short spells rather than keeps them in one country. Thus Monaco, which does not levy income tax, has become the favourite bolt hole for Formula One drivers, while Switzerland remains a popular place of residence for many of Europe’s wealthy peripatetic sportsman.  Switzerland’s lump sum tax basis is currently accorded to wealthy foreigners provided that they are not gainfully employed in the Confederation. The tax is based on the cost of living rather than the individual’s wealth or income, making the benefit a highly attractive proposition.

However even in Switzerland, the question of tax breaks accorded to wealthy foreigners is vexed. During recent federal and cantonal votes, the Swiss canton of Appenzell Ausserrhoden in the north of Switzerland voted in favour of abolishing the flat rate of tax currently benefiting wealthy foreigners. It is the third canton after Zurich and Schaffhausen to abolish the longstanding tradition, which was introduced in the Swiss canton of Vaud in 1862. In contrast, although again clear evidence that the tax perk is becoming increasingly unpopular among the Swiss population, voters in the canton of Lucerne voted in favour of plans to tighten the system, by increasing the amount of tax paid by wealthy foreigners domiciled in the region to seven times the rental value and to insist on a minimum taxable income of CHF600,000 (USD650,000) (EUR500,000).

A solution to the problem of how governments should tax the cross-border income of sportsmen and entertainers may come courtesy of the OECD, which in 2010 published a public consultation on proposed changes to the commentary on Article 17 of the Model Tax Convention, which deals with this particular issue.

Under Article 17 (Artistes and Sportsmen) of the OECD Model Tax Convention, the State in which the activities of a non-resident entertainer or sportsman are performed is allowed to tax the income derived from these activities. According to the OECD, this regime differs from that applicable to the income derived from other types of activities making it necessary to determine questions such as what is an entertainer or sportsman, what are the personal activities of an entertainer or sportsman as such and what are the source and allocation rules for activities performed in various countries.

In the area of horse racing and motor racing, the Discussion Draft suggests that the regime should not apply to racing prize money won by owners of horses or race cars. However, if the owner receives a payment on behalf of the jockey or race car driver, that income may be taxed in the hands of the jockey or race car driver. The Draft also suggests that the tax regime should not extend to visiting conference speakers, for example former politicians who receive fees for speaking engagements (maybe Tony Blair had a hand in drafting this section!).

Little has been achieved in the two years since the Draft was released however, to clarify and standardise the way that a sportsman’s earnings are taxed, except perhaps more confusion.  

So, while governments have a legitimate claim to the income of sportsmen, and few people would doubt that they should pay their ‘fair share’ (although one man’s fair share is another man’s tax grab), if the rules are such that they would forgo competing to avoid a swingeing tax bill, as in the case of the UK, then everyone’s a loser. There is little evidence to suggest that things are about to change, however.


Tags: agreements | Spain | Monaco | Italy | business | individual income tax | film finance | court | legislation | professionals | employees | contractors | entertainers | investment | services | tax avoidance | law | Switzerland | India | sportsmen | tax



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