Sportspersons and Entertainers – Part I
Just over a week ago I had the privilege to spend a few days with the many colleagues we work alongside in our Nexia network at the international tax conference in Cologne.
As part of the conference I was asked to put together some case studies and work alongside my colleagues Julian Hedley, Pablo Gomez-Acebo and Chris Leenders with regards to the international tax consequences that are unique to sportspersons and entertainers. Given that much of the work was already done I thought it worthwhile to put together some of what we went over starting with the basics and looking to elaborate on these items later down the line.
Step 1 – who in fact is an ‘entertainer’ for tax purposes?!
(I’ve left out sportsperson here as I’m assuming most of us could work that one out with relative ease…)
A rule of thumb most people use is whether the individual is front of camera and considered ‘talent’ and therefore likely an entertainer. However the OECD have felt it necessary to elaborate on certain aspects here with regards to professional speakers (such as ex politicians) and models. Essentially the OECD feel neither of these individuals should be considered entertainers performing in those capacities. Similarly ex sportspersons acting as commentators on tv are also not considered entertainers in one of the rare occasions of front of camera individuals being considered, quite frankly, not entertaining!
Step 2 – Why do we care and why does it matter for international tax purposes?
This may not be too easy to answer in relatively simple terms but I’ll try.
Essentially, sportspersons and entertainers are not afforded the usual treaty protection of income exclusion that may be given to other trades and activities when performing their ‘trade’ in tax treaty countries.
A simple illustration can show the differentials here between a UK individual going to the US to work for a week in their capacity as a tax adviser as opposed to a UK artist going to the US to play a week of shows supporting a new album they’re about to release (we will assume that this is their only trips to the US and both are UK tax residents). Under US domestic rules they have each generated US source income subject to US tax, and for arguments sake it is the same amount of $50,000.
The tax advisor, despite being a thoroughly engaging and entertaining individual is ordinarily able to exclude his or her US source income under Article 14 (employment income) of the tax treaty.
However, the artist playing a string of gigs is subject to Article 17 of the treaty which means they can only exclude their income if it falls below an annual limit of $20,000. Given that the artists income is greater than the annual limit, they are unable to exclude their income from US taxation; the result is that the US has primary taxing rights to that portion of income with the UK giving credit for the US income tax suffered.
If the facts were the opposite way around, the answer would be the same with the UK having primary racing rights with the US giving credit for the UK income tax suffered.
So, although there is still the ability to relive the taxpayer from the effects of double taxation, the compliance burden that greets them is a real and indeed required process on both sides of the water.
There are many other aspects and facets that greet the sportsperson and entertainer that works internationally and as I stated above I’ll be adding my tuppence worth to try and help shine some light on a complex and often convoluted system.
Please do get in touch if you have any questions or insights as I’m always happy to hear and share other people’s experiences and issues.