Whilst Russian troops have been amassing on the borders of Ukraine, Russian tax students have shown their penchant for closer connections to Western business practices and have been flocking to the Moscow State Academy of Law (MGYuA) and Saint-Petersburg State University (SPbGU) (where Messrs Putin and Medvedev studied) to hear Dmitry Zapol deliver a study course on international taxation based on the now infamous Polycon Lens story. Dmitry explained the structural issues arising out of the development of a small domestic company into a large branded conglomerate, a case study I first developed in 1983 which now has its Russian counterpart.
And Polycon has travelled to other parts of the world too. Following the successful initial launch of the London branch of the International Business Structuring Association (IBSA) of which I have the honour to be Chairman, I travelled to Asia recently to open branches in Hong Kong and Singapore using the Polycon Lens story to illustrate the many multi-disciplinary issues that need to be considered when helping a small company grow into a multi-national organisation. We were delighted to have KPMG host the Hong Kong event, with KPMG Partner, John Timpany as a guest speaker. Our thanks to Kishore Sakhrani for organising this, and to Shanker Iyer for organising a splendid Singapore event at the Singapore Cricket Club!
As you may be aware, the International Business Structuring Association was created to build a global community of business structuring professionals, dedicated to advancing the practice of international business structuring, placing emphasis on transparency and best practice. IBSA is rapidly expanding through branches in many jurisdictions around the world, and I plan to open further branches in the next two months in New York, Cyprus and Israel, so please look out for further information if you would like to attend these seminars — information is always available on the IBSA website (click here).
The UK Branch is well established and will have its first IBSA Member meeting on the evening of 15th May in London. The theme for the evening is Transparency in International Business Structuring and we are excited to have Chris Sanger, Head of Tax Policy at EY as our guest for that event. Members are invited to register for this event at no charge.
As you will note from the above, transparency is a key theme in business structuring and forms part of the agenda for our June conference on International Business Structuring in the Digital Economy, where our keynote speaker is Raffaele Russo, Head of the BEPS Project at the OECD. Mr Russo will be discussing the BEPS Project, the tax challenges of the digital economy and creating a sustainable regulatory ecosystem. It promises to be a very interesting session and is a fantastic opportunity to find out how the OECD is undertaking its’ brief from the G20 nations first hand.
In addition to Mr Russo, we have an excellent line up of topics, speakers and panel discussions to look forward to. The conference will be held in London on Tuesday 3rd June at the Mandarin Oriental Hyde Park hotel and you can find out further information by visiting the IBSA website (click here).
You may have been reading about the crackdown by various Tax Administrations on sports personalities resulting in a massive €24mn fine for Lionel Messi as an alternative to a jail sentence for tax fraud, and approximately €19 mn fine levied on Barcelona in respect of a transfer involving a star player. And Spain is not the only country which is targeting undeclared income of sports personalities — HMRC are investigating many clubs in the UK who have organised aggressive tax avoidance schemes which defy the underlying principles of tax law. This month’s IFS Newsletter article explains the basic concepts relating to such income, whilst at the same time affording a glimpse into legitimate arrangements for income which may not have a source where the sportsman is performing his services.
And now that the Winter floods have largely receded and Spring has arrived, I hope you had an enjoyable Easter and are looking forward to the Summer ahead.
With my best regards
Tax Planning for Sportsmen
Professional sportsmanship is rarely a life-long career but it can be extremely lucrative. In addition to performance income, an ever increasing proportion of the income of successful sportsmen comprises income from exploitation of their image rights by international brands. Also, individuals at the peak of their career rarely spend significant lengths of time in one place — a sportsman may have their home in one country, train in a different country and perform their services around the world. The combination of different income sources and the athletes’ peripatetic lifestyles bring with them particular tax considerations which need to be fully understood.
Media attention has highlighted the plight of several well know personalities who have tried to thwart the basic taxation principles related to residence and source. These rules are highlighted in this article which particularly focuses on the exploitation of image rights and how such income may be generated with legitimate tax deferral.
A sportsman will usually be subject to tax in the state in which he or she is tax resident. This presents the most obvious tax planning opportunity of becoming tax resident in a country with a lower rate of personal tax. It may be unavailable during the active performing phase due to the conflict with professional obligations, such as attending training sessions. However, when the athlete retires and is willing to move to a low tax state, the time might be right to have the savings that he might have made earlier distributed to him. This is considered in more detail later but may result in tax deferral becoming a permanent benefit.
Alternatively, the individual may take advantage of domestic provisions, which limit his domestic tax base, such as pension arrangements. These often permit sizeable premiums to be deductible based on a limited expectancy of his working life. Also, for example, the UK allows non-domiciled individuals to be taxed on the remittance basis whereby foreign income is not taxed unless brought in its territory. However, without such remittances, the sportsman may find himself in financial difficulties unless he has other sources of income.
Meanwhile, the same income will often be taxed in the state where it is earned or sourced — where the sportsman performs his or her services or whence he or she receives royalties and other non-performance-related fees. The result may be double taxation which an agreement for the avoidance of double taxation between the two countries can help to effectively eliminate. Generally tax treaties provide that employees are only taxed in a foreign country if they are present there for more than 183 days in a 12 month period (“the employee rule”). However, the tax agreements treat sportsmen markedly differently than other individuals who earn income from working in another country.
In the OECD Model Tax Convention, which is the foundation of many of the world’s tax agreements, Article 17(1) states that notwithstanding the provisions of the treaty relating to other forms of personal income (i.e. the employee rule), income derived by a resident of one state as a sportsman from his personal activities as such exercised in the other state may be taxed in the other state. Article 17(2) allows the local tax administration not only to tax income paid directly to the above individuals, but also to tax such income even if it is received by companies or other entities. This is directed primarily to companies acting on the sportsmen’s behalf.
Article 17 reflects the transient nature of a sportsman’s activities whereby he or she can set foot in a country for only one day to play a game for which he or she will be remunerated and would normally be taxed under the employee rule only in the country of residence. The provision recognises this fact and grants the right to tax income to the state where the sportsman’s activities as such were performed regardless of who receives the income, and regardless of the number of days present in the source State. The words “as such” are important to understand in relation to income from non-performing activities contracted by the sportsmen, such as endorsement, sponsorship and merchandising contracts.
The separation of such sources of income from performance services as such is where many tax investigations may arise. After all, it is difficult to conclude that an image rights payment for wearing a shirt on the football field emblazoned with the logo of an international brand, is not related to the performance of the individual in the source State. If the individual did not perform his services, he would not receive any payments for such image rights. It is difficult to refute an Article 17 type provision in these circumstances; sportsmen and their advisers adopting complex schemes in an attempt to create such a division fail to understand the basic concept of source taxation.
However, the payment for adopting the image of an individual for merchandising products, or for example endorsing a sports related product in a television commercial, may create a source of income separate from the country where performances are undertaken. Such income is not related to the performances as such and may circumvent the draconian consequences of an Article 17 type provision of domestic law where the income arises.
Thus relationships arising from the contracts that govern the non-performing activities can be shaped to generate royalties and other forms of income, which in fact receive tax treaty protection. With rare exceptions, however, it does not take away the fact that both forms of income are liable to tax in the sportsman’s residence state.
An individual may have a contract with a club or other entity for his or her performance services, but may decide to contract his or her image rights potential to a specialist image rights company, entering into a consultancy or indeed an employment contract which permits the company to exploit the image rights to their full potential. It is then the image rights company that contracts with companies that may want to benefit from the sportsman’s image rights — usually various international brands depending on the individual’s popularity.
The income resulting from exploiting the image rights might arise under different guises, although usually it constitutes royalties. There are jurisdictions that tax foreign royalties and licence fees received by such image rights companies at beneficial rates. However, the ultimate choice of jurisdiction depends firstly on whether the elected State has double taxation treaties that limit withholding taxes on the royalties payable by the image rights users. Some treaties have anti-avoidance provisions such as remittance clauses or general anti-avoidance rules, which should be considered. Secondly, the company should be a bona fide active commercial entity that satisfies the requirements of corporate substance — it should have an office and staff adequately skilled to perform their tasks and being able to decide on the utilisation of the received payments. Failing this, the company will not be considered the beneficial owner of the royalties resulting in the denial of the treaty benefits. Thirdly, the company should be independent from the sportsman and effectively managed and controlled in the chosen jurisdiction. Failing this, the company might become tax resident elsewhere thus potentially suffering higher taxation.
As long as the image rights income remains in the company’s hands, the sportsman does not incur personal tax liability except in respect of any income paid by the image rights company to the individual. However, in some countries there are anti-avoidance provisions which could attribute the income received by the company to the individual, who is liable to income tax on the entire amount — for example, the “transfer of assets abroad” rules in the UK and the Subpart F rules in the US.
The image rights company will add value to the image rights of the individual through contractual arrangements with agents, marketing companies, intellectual property firms, and other third party consultants. It may use some of its income to acquire insurance policies for the term of the individual’s career, pay monies to professional advisers to protect the image rights, or contribute to pension schemes for the ultimate benefit of the individual.
When thinking of minimising his or her tax liability, the sportsman should also consider other taxes such as social security contributions, the cost of establishing the appropriate structure and professional fees. IFS has advised sports personalities for many years on how to structure their long term wealth preservation through legitimate structures, taking into account the basic concepts of tax residence and source of income. And such structures should be considered to be long term arrangements. The short term schemes which conflict with basic taxation principles are rarely successful in the long term.
Article written by Roy Saunders
22nd April 2014
Roy Saunders, Chairman, IFS and IBSA. IBSA is the network for international business advisors and their clients, bringing together specialist advisors to enable businesses to optimise the structure of their international operation by enhancing resilience in tax planning, mitigating regulatory and market risk and enabling sustainable multi-jurisdiction growth.