Artistes and Sportsmen -

Recent developments

around Article 17

Mumbai Mumbai 4 December 20104 December 2010

Dr. Dick Dr. Dick MolenaarMolenaar

All Arts Tax AdvisersAll Arts Tax Advisers

Research Fellow Research Fellow -- ErasmusErasmus University University

Rotterdam, the NetherlandsRotterdam, the Netherlands

2

SPECIAL RULES ARTISTS/SPORTSMEN

National: withholding tax on performance National: withholding tax on performance

incomeincome

International International tax treaties:tax treaties:

First in 1939 tax treaty USA First in 1939 tax treaty USA SwedenSweden

Later in German tax treaties in 1950sLater in German tax treaties in 1950s

1963 OECD Model: Art. 171963 OECD Model: Art. 17

because of practical difficultiesbecause of practical difficulties

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PERFORMANCE INCOME

Art. 17 OECD Model Art. 17 OECD Model -- ArtistesArtistes and and SportsmenSportsmen: : TaxingTaxing right right forfor the the sourcesource country, country, overrulingoverrulingotherother treatytreaty provisionsprovisions (7, 14 (7, 14 andand 15)15)

MeasureMeasure to counteract:to counteract:

taxtax avoidanceavoidance

nonnon--compliancecompliance

Art. 23 Art. 23 -- TaxTax exemptionexemption or credit in the or credit in the residenceresidence countrycountry

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ARTICLE 17(2)

Introduction in 1977Introduction in 1977

Also payments to others than the artiste or Also payments to others than the artiste or

sportsmen fall under Art. 17sportsmen fall under Art. 17

But limited approach, i.e. only in abusive But limited approach, i.e. only in abusive

situationssituations

Extended to the unlimited approach in 1992, Extended to the unlimited approach in 1992,

after the 1987 OECD Reportafter the 1987 OECD Report

But USA, Switzerland and Canada: reservationBut USA, Switzerland and Canada: reservation

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1987 OECD REPORT

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1987 OECD REPORT

ClearClear expressionexpression of mistrustof mistrust (( 7 and 8):7 and 8):clear evidence of nonclear evidence of non--compliancecompliance

rarely disclose casual earningsrarely disclose casual earnings

sophisticated tax avoidance schemes, many involving sophisticated tax avoidance schemes, many involving the use of tax havens, are frequently employed by the use of tax havens, are frequently employed by toptop--ranking artistes and athletesranking artistes and athletes

relatively unsophisticated people relatively unsophisticated people in the business in the business sense sense can be precipitated into great richescan be precipitated into great riches

travel, entertainment and various forms of ostentation travel, entertainment and various forms of ostentation are inherent in the business and there is a tendency are inherent in the business and there is a tendency to be represented by adventurous but not very good to be represented by adventurous but not very good accountantsaccountants

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EXAMPLES

Sting Sting Canada / USA / NetherlandsCanada / USA / Netherlands

Johansson Johansson Switzerland / USASwitzerland / USA

LucianoLuciano Pavarotti Pavarotti MonacoMonaco

Steffi Graf Steffi Graf -- MonacoMonaco

Boris Becker Boris Becker MonacoMonaco

Mario Mario CipolliniCipollini MonacoMonaco

Valentino Rossi Valentino Rossi UK (nonUK (non--domiciled status)domiciled status)

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NO DEDUCTION OF EXPENSES

94 of the 1987 OECD Report94 of the 1987 OECD Report

(( 10 of the Commentary on Art. 17 OECD)10 of the Commentary on Art. 17 OECD)

The article says nothing about how the income concerned The article says nothing about how the income concerned

is to be computed. It is for a Contracting Stateis to be computed. It is for a Contracting States s

domestic law to determine the extent of any deductions domestic law to determine the extent of any deductions

for expenses. Domestic laws differ in this area, and for expenses. Domestic laws differ in this area, and

some provide for taxation at source at an appropriate some provide for taxation at source at an appropriate

rate based on the gross amount paid to artistes and rate based on the gross amount paid to artistes and

athletes. Such rules may also apply to income paid to athletes. Such rules may also apply to income paid to

groups or incorporated teams, troupes, etc.groups or incorporated teams, troupes, etc.

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PROBLEM OF EXCESSIVE TAXATION

InsufficientInsufficient taxtax credit in credit in residenceresidence country, country,

becausebecause of high of high withholdingwithholding taxtax

ExampleExample: 2.000 : 2.000 grossgross 1.200 1.200 expensesexpenses = 800 = 800

profitprofit

WithholdingWithholding taxtax:: 20% x 2.000 = 20% x 2.000 = -- 400400

TaxTax credit: credit: 30% x 800 = 24030% x 800 = 240

InsufficientInsufficient taxtax credit = credit = -- 160160

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PROBLEMS WITH TAX CREDITS

It is often problematic to achieve a tax credit in It is often problematic to achieve a tax credit in

the country of residence. Examples are:the country of residence. Examples are:

No tax certificate availableNo tax certificate available

Name of group, but credit in name of artistsName of group, but credit in name of artists

Conflict with monthly salary administrationConflict with monthly salary administration

No acceptance by local tax inspectorNo acceptance by local tax inspector

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EUROPEAN UNION

No direct influence on artiste and sportsman No direct influence on artiste and sportsman taxation, but indirect through EC Treatytaxation, but indirect through EC Treaty

ArnoudArnoud Gerritse: ECJ 12 June 2003, CGerritse: ECJ 12 June 2003, C--234/01234/01

FKP Scorpio FKP Scorpio KonzertproduktionenKonzertproduktionen GmbH: ECJ GmbH: ECJ 3 October 2006, C3 October 2006, C--290/04290/04

Deduction of expensesDeduction of expenses

Normal tax ratesNormal tax rates

Withholding tax?Withholding tax?

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2008 CHANGE IN OECD MODEL

Option for deduction of expenses in Option for deduction of expenses in 10 of 10 of

the Commentary on Article 17the Commentary on Article 17

End of gross taxation ?End of gross taxation ?

New examples: Germany, Austria, Spain, New examples: Germany, Austria, Spain,

Belgium, SwedenBelgium, Sweden

Existing examples: UK, USA, Australia, Existing examples: UK, USA, Australia,

NetherlandsNetherlands

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BROADENING THE SCOPE

Territoriality principle: Territoriality principle: AgassiAgassi casecase

United KingdomUnited Kingdom

House of Lords, 17 May 2006, [2006] UKHL 23House of Lords, 17 May 2006, [2006] UKHL 23

Also equivalent part of sponsoring and Also equivalent part of sponsoring and endorsement income be allocated to country endorsement income be allocated to country of performanceof performance

But tax credit in country of residence?But tax credit in country of residence?

Or resident in tax haven?Or resident in tax haven?

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ARTICLE 17(3)

Optional exemption for subsidized artistes and Optional exemption for subsidized artistes and sportsmensportsmen

14 of Commentary on Art. 1714 of Commentary on Art. 17

Very often used in bilateral tax treatiesVery often used in bilateral tax treaties

India in 97% of its bilateral tax treatiesIndia in 97% of its bilateral tax treaties

Why? Is the state defending its budget?Why? Is the state defending its budget?

Unequal treatment towards nonUnequal treatment towards non--subsidized?subsidized?

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THE NETHERLANDS - 2007

The government had decided not to tax nonThe government had decided not to tax non--

resident artistes and sportsmen from treaty resident artistes and sportsmen from treaty

countries anymorecountries anymore

Although the NL has the taxing right under Although the NL has the taxing right under

Art. 17 of its tax treatiesArt. 17 of its tax treaties

But tax revenue was too low and But tax revenue was too low and

administrative expense were too highadministrative expense were too high

Return to normal taxing rights of Art. 7 and 15Return to normal taxing rights of Art. 7 and 15

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OLYMPICS / UEFA

Also exemptions from source tax for:Also exemptions from source tax for:

2010 Winter Olympics 2010 Winter Olympics Vancouver (Canada)Vancouver (Canada)

2011 Champions League Final 2011 Champions League Final London (UK)London (UK)

2012 Summer Olympics 2012 Summer Olympics London (UK)London (UK)

Tax literature:Tax literature:

1999 1999 -- Dr. Dr. HaraldHarald Grams Grams GermanyGermany

2001 2001 -- Joel Joel NitikmanNitikman CanadaCanada

2006 2006 Dr. Dick Dr. Dick MolenaarMolenaar

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DISCUSSION VIENNA NOV 2007

Daniel Sandler Daniel Sandler Canada:Canada:

Article 17 is both underArticle 17 is both under-- and and overinclusiveoverinclusive

(+) Former politicians as speakers / models / (+) Former politicians as speakers / models / caddies of golf players/ film directorscaddies of golf players/ film directors

((--) Lower income too many obstacles) Lower income too many obstacles

Broaden to all Broaden to all celebritiescelebrities, but set limit at , but set limit at $100,000 p.p. per year$100,000 p.p. per year

Dick Dick MolenaarMolenaar The Netherlan