Taxation of Artistes and Sportsmen Available Options to change Article 17 (Artistes and Sportsmen) Dick Molenaar* 1. Introdction The International Tax

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2 Taxation of Artistes and Sportsmen Available Options to change Article 17 (Artistes and Sportsmen) Dick Molenaar* 1. Introdction The International Tax Conference in Mmbai devoted one of its panels to the special taxing rles for artistes and sportsmen, following from Article 17 of the OECD and UN Model Tax Conventions. The athor has made a presentation at the conference in which he explained the recent developments and discssed how Article 17 cold be improved or perhaps even radically changed. * Dr. Dick Molenaar is partner with All Arts Tax Advisers and researcher with the Erasms University in Rotterdam, the Netherlands INTERNATIONAL TAXATION n VOL. 4 n JANUARY 2011 n 71 61

3 The taxation of international performing artistes and sportsmen is a small bt special topic in international taxation. Most contries in the world levy a withholding tax on the performance fees of non-resident artistes and sportsmen, even when they are self-employed, their fees are bsiness income and they do not have a permanent establishment in the contry of performance. This practice is confirmed in the OECD Model Tax Convention, which devotes a special clase (Article 17) to artistes and sportsmen. The OECD believes that taxation at sorce is a reasonable measre to ensre that every artiste and sportsman pays his share of his earnings to the government, and almost all its Member contries follow this instrction, both in their bilateral tax treaties and in their national legislation. As Article 17 has been taken over in Article 16 of the 2006 US Model Income Tax Convention and Article 17 of the UN Model Tax Convention and many contries have inclded the special artiste and sportsman provision in their bilateral tax treaties. Becase the artistes and sportsmen also have to report their foreign income in their residence contry, doble taxation may occr. Bt this is eliminated in the contry of residence by either exempting the foreign income or granting the artiste or sportsman a foreign tax credit. The OECD Model Tax Convention advises to se the ordinary tax credit of Article 23B, 1 bt the tax exemption method is also still sed, often in older tax treaties and by contries which se a territorial basis for taxation. 2 This sggests that the taxation of performance income of artistes and sportsmen is balanced, allowing the contry of performance the right to tax the income bt reserving a secondary taxing right pls progression for the contry of residence. It may seem that a reasonable allocation of income tax has been created, even thogh it deviates from the normal allocation rles of the Articles 7 and 15 of the OECD Model Tax Convention. 2. Significant problems, discssion in tax literatre and OECD Bt nfortnately this arrangement has also increased the risk of practical inadeqacies, becase e.g. the taxable base in the contry of performance can be (mch) higher than in the residence contry and tax credit problems may arise in the contry of residence. And the artistes and sportsmen in any case end p with comparatively high advisory costs, in the contry of performance as well as in the contry of residence. The tax literatre shows that these problems occr freqently and that artistes, sportsmen and organizers of the performances both experience the special international taxing rles as an obstacle to crossborder activities. The OECD initially did not believe that anything was wrong with Article 17, bt has nevertheless entered into discssions with its Member States, which reslted in changes in the Commentary on Article 17 in 2008 and in a Discssion Draft for changes in the same Commentary in April And the OECD held a seminar at the 64th IFA Congress in September 2010 in Rome, in which it discssed the legitimacy and necessity of Article 17 nder the title Red Card Article 17?. 3. History of artiste and sportsman taxation in earlier article In the discssion abot Article 17 over the last years the following information was made clear by several athors: Article 17 was introdced in the 1963 OECD Model, becase of practical difficlties regarding the taxation of international performing artistes. A second paragraph was added to Article 17 in 1977, stating that when another person (not the artiste or sportsman himself) receives the performance income, the sorce contry still holds the right to tax the income. This was meant to conteract tax avoidance schemes sing loan-ot or star companies, registered in tax havens. More concerns were broght forward in the 1987 OECD Report, 3 which recommended the scope of Article 17(2) to be extended to all third parties that cold receive fees for artistic and sports performances. This nlimited approach was accepted by most 62 INTERNATIONAL TAXATION n VOL. 4 n JANUARY 2011 n 72

4 contries, except Canada, the United States and Switzerland, which made reservations to this extension. 4 The 1987 Report also allowed contries to tax the gross performance income withot the dedction of expenses, bt then only at a low tax rate. Althogh it is nclear how this gross taxation at sorce relates to the earlier expression in the 1987 OECD Report that only the profit of a legal entity can be taxed. Many contries are sing gross taxation for non-resident artistes and sportsmen, sch as India with 10%, France 15%, Portgal 20% and Italy 30% withholding tax. Bt net taxation is the national rle in the USA, UK, the Netherlands, Canada, Astralia, New Zealand and Hngary. A srvey of 2,500 performances in the Netherlands in the years showed that the expenses for performing artistes are considerable, i.e., on average 75% of the performance income. The non-dedctibility of expenses can easily lead to excessive taxation, becase the taxable income in the contry of performance is mch higher than in the residence contry, more than compensating the difference in the tax rates between the two contries. The risk of doble taxation is also very likely, becase problems with obtaining the foreign tax credit can easily occr. Some contries have introdced minimm thresholds for smaller artistes and sportsmen in their national taxing rles. The USA is sing the De-Minimis-Rle of $20,000 in its Model Income Tax Convention, althogh in the 1989 treaty with India the threshold is only set at $1,500 p.p. per year. The Eropean Cort of Jstice (ECJ) has decided in the Arnod Gerritse case, that the non-dedctibility of expenses is against the freedom to provide services of the EC Treaty and also ordered the EU Member States to allow taxation after the taxable at the normal tax rates. 5 An optional exception to the general rles of Article 17 OECD Model has been given for performances that are sbstantially spported by pblic fnds. 6 This Article 17(3) is widely sed, e.g. by India in all of its tax treaties containing Article 17. The existence of Article 17 may lead to neqal treatment and distortion of competition. This has already been recognized by the OECD in the 1987 Report and it can be qestioned whether this is jstified, not only for EU contries nder the EC Treaty, bt also nder the non-discrimination articles of both the OECD and UN Model Convention and the US Model Income Tax Convention. The tax revene from the performance income of non-resident artistes and sportsmen is relatively low and the administration costs are relatively high, both for the artistes and sportsmen and the tax athorities in the performance and the residence contry The dedctibility of expenses: Eropean Cort of Jstice and OECD Within the Eropean Union the Eropean Cort of Jstice decided in two frther cases, Scorpio and Centro Eqestre, that the direct expenses of performing artistes and sportsmen shold be dedctible already at the withholding stage and that indirect expenses shold be dedctible in a normal tax retrn after the year. 8 These two decisions forced the EU Member States to change their national legislation from gross taxation into net taxation after the dedction of expenses. And with the EU Member States being the vast majority of the OECD Member States, it also forced the OECD to change its recommendation in Para 10 of the Commentary on Article 17 for a gross taxation into a choice between gross taxation at a low rate or net taxation with the dedctibility of expenses, probably at normal tax rates. This choice was introdced in the 2008 change of the Commentary on Article 17 OECD Model. INTERNATIONAL TAXATION n VOL. 4 n JANUARY 2011 n 73 63

5 5. Broadening the scope of performance income The discssion abot the scope of the performance income nder Article 17 got a new dimension with two UK cort decisions in 2003 and Both discssed the endorsement income of tennis players, first with three nknown international tennis players and second with Andre Agassi. They had entered into endorsement contracts with the manfactrers and resellers of tennis eqipment and clothing. The conclsion in these cases was that an eqivalent part of the worldwide endorsement income also had to be allocated to the UK performances, becase of the direct relationship to the performances. The taxable income of the tennis players was sbstantially increased 9. The UK tax athorities bring this extensive interpretation of the territoriality principle in practice for bigger sports events, sch as the London Marathon, Wimbledon, the British Open Golf, athlete events and the 2010 Ryder Cp in Wales. It happened in Agst 2010 that Usain Bolt did not want to rn the 100 metres at Crystal palace in London becase of this tax measre. 6. Not sing the taxing right anymore The small tax revene and relatively high administrative expenses broght The Netherlands to the nilateral measre not to se the taxing right anymore from 2007 onwards for non-resident artistes and sportsmen from contries with which The Netherlands have conclded bilateral tax treaties. Figres from the Dtch Tax Administration from the year 2003 showed that the tax revene was a mere 7 million ero per year, knowing that the options to dedct expenses and file income tax retrns were not even sed by every non-resident artiste and sportsman. The nilateral measre wold cost The Netherlands 5 million ero per year, bt wold save all parties involved together 1,6 million ero administrative expenses per year. This made it a very good trade-off in The Netherlands and the non-resident artistes and sportsmen wold normally pay income tax in their residence contries, nder the presmption that the tax credit method is sed in the bilateral tax treaty, which was the case in 78 of the 90 tax treaties of The Netherlands in The Dtch government annonced that it wold start negotiations with the other 12 contries to change the exemption into the credit method 10. The Dtch removal of its artiste and sportsman withholding tax is welcomed by the artistes and sportsmen visiting The Netherlands as a very positive development, becase it takes away mch administrative work and the risk of doble or excessive taxation. This was followed by Canada for the Winter Olympics in Vancover in Febrary The IOC had set also as condition for the Olympic bid, that no sorce tax shold be levied from the direct prize monies or the related other earnings, sch as sponsoring, advertisement income and bonses from national federations. This was against the Canadian national tax rles, which apply a 15% withholding tax on performance income for non-resident sportsmen, with the option to file a normal Canadian income tax retrn at the end of the year, bt still the Canadians accepted this exemption for the 2010 Winter Olympics. This will be followed by the United Kingdom for the Smmer Olympics in London in And the UK has also accepted to give p its sorce tax for the UEFA Champion s Leage Final Football at Wembley in London in May And also the 2011 ICC World Cp Cricket will be exempted from Indian withholding for the participating foreign teams and cricket players. Earlier in 2004, the Cricket Champions Trophy was moved to Sri Lanka, becase by then Indian government did not want to give p its taxing right. Bt they changed their mind and made it possible that the World Cp tornament comes to India. With these nilateral measres it is important that the tax credit method is sed in Article 23 of the tax treaties, becase with the exemption method in the residence contry doble nontaxation wold occr, which is not the prpose of the nilateral sorce exemption. 7. Discssions abot adjstments in Geneva and Vienna In October and November 2007 at two conferences discssions were held abot Article 17 OECD 64 INTERNATIONAL TAXATION n VOL. 4 n JANUARY 2011 n 74

6 Model. First in Geneva, where the niversity organised a two-day conference with reports from varios contries and practical experiences 11, and second in Vienna, where the also the niversity discssed the fndamentals of the fll OECD Model Tax Treaty, inclding Article Daniel Sandler started the discssion at both conferences with his contribtion that Article 17 was both over-and nder-inclsive in terms of persons and types of income and that he wold prefer an extension to all celebrities, inclding former politicians as speakers, sport coaches, film directors, models and sch, bt also a restriction to earnings of more than e.g. $100,000 per year per contry. This wold catch only the bigger names with the sorce tax. Dick Molenaar responded that he prefers the fll removal of Article 17, becase it is seless in treaty sitations and creates the risk of excessive or even doble taxation. Bt he cold also accept Sandler s proposal, which follows from a new contribtion principle and wold only catch the happy few in Molenaar s pyramid of the entertainment world. 8. Draft changes in the Commentary on Article 17 On 23 April, 2010 the OECD pblished a Discssion Draft for changes in the Commentary on Article 17, becase it had to determine on qestions raised abot the interpretation of the article. As with other Discssion Drafts, the OECD asked for comments. In the first paragraph the OECD starts sing the term entertainer instead of artiste and clarifies what falls nder Article 17, sch as the prize money of an amater and advertisements and interviews directly related to entertainment and sports events, bt also what falls otside the scope of the article, sch as the reporting or commenting by an entertainer or sportsman in broadcasting, if he does not participate himself in the match or tornament 13. The second paragraph makes clear that the income of the owner of a race car or horse also falls nder Article 17. The third paragraph broght preparation and training also nder the personal activities as sch of entertainers and sportsmen. It also specifies that models at fashion shows, former politicians at speaking engagements and independent concert promoters stay otside the scope of the article. Also this paragraph discsses the taxation in two instalments in some contries, creating the risk that the non-resident artiste or sportsman is being taxed already twice at sorce, and orders those contries to leave ot the income at the second level 14. Finally, this paragraph pays more attention to the already existing option to exclde artistes and sportsmen working as employees for teams or grops from the article and gives an optional text for competitions with teams from different contries 15. The fifth paragraph gives rles how to break down income and expenses of tors throgh varios contries. The sixth paragraph clarifies that also prizes and awards paid to national federations, associations and leages fall nder the article, that merchandising and broadcasting income only fall nder the article, when there is direct connection with specific performances, and that this is the same for the se of image rights. Ten individals and organizations have responded on the reqest of the OECD for comments on the Discssion Draft changes in the Commentary on Article They gave their practical experience with Article 17, showed varios problems and sggested frther improvements or asked for removal of the article. The Discssion Draft is now pending in Working Party 1 of the OECD. 9. Seminar E at the 64th IFA Congress in Rome The Draft Changes in the Commentary on Article 17 OECD Model were discssed at the 64 th IFA Congress in Rome in September Three case stdies were presented and discssed by Xavier Oberson (Switzerland), Michael Pfeifer (USA), Aart Roelofsen (The Netherlands), Mary Bennet, Andrew Dawson and Jacqes Sasseville (OECD) and Richard Vann (Astralia). The conclsion from the Seminar was that the crrent application of Article 17 is a big mess. The main problem is that it singles ot a specific grop of services from artistes and sportsmen for special treatment (taxation at sorce withot INTERNATIONAL TAXATION n VOL. 4 n JANUARY 2011 n 75 65

7 PE) and the fndamental qestion is whether these services shold receive special treatment. The special problem is with all types of services which earn a high vale in a very short time when by hypothesis there is no PE. Sorce contries insist on taxing part of the income. Bt the present mess makes life of many smaller performers and earners miserable. Some panel members proposed therefore to extend the application of Article 17 to all forms of pblic entertainment on an independent basis in excess of a threshold and to restrict the application of Article 17 to star companies so as to preserve a certain measre taxation in the sorce contry. 17 Bt other panel members preferred to remove Article 17 for treaty sitations, as The Netherlands has done in Both measres wold redce administrative expenses considerably and prevent tax credit problems. The OECD representatives admitted that Article 17 creates problems for performing artistes and sportsmen and expressed that they are willing to look for soltions. 10. Crcial discssion abot Article 17 The excessive taxation that follows from Article 17 leads to a distortion of international competition becase resident artistes and sportsmen, who do not experience this excessive taxation, are better off than non-resident artistes and sportsmen. Interestingly enogh, the OECD acknowledged already years ago that the special tax treatment of artistes and sportsmen cases difficlties. The 1987 OECD Report came to two conclsions on this matter: 61. Differences in treatment which exist in some contries distort competition and prodce claims for a harmonized system whereby resident and non-resident artistes and athletes wold be treated alike and pay the same tax. 62. There is a feeling, in these contries, that conteracting tax avoidance and evasion in this area shold preferably se ways and means which wold not divorce the artiste or athlete from the main categories of taxpayers to which they belong, i.e. providers of dependent and independent services. This was an interesting objective 23 years ago, bt nfortnately no realistic follow-p has occrred since then. Bt after many athors have showed the practical problems following from Article 17, now also the OECD has realized that Article 17 shold be changed. This is a very interesting development and gives hope to international performing artistes and sportsmen. Short-term soltions are already available nder the crrent Article 17 OECD Model and its Commentary: Make it obligatory for Article 17 OECD Model that expenses shold be dedctible and that tax shold be levied from net income (and not jst optional) 18 Reintrodce the limited approach for Article 17(2), as it was intended in 1977 Restrict Article 17 to bsiness activities, exempt foreign employees (with their foreign employers) 19 Exempt cross-border team competitions 20 Addition of Art. 17(3) to the official text of Art. 17 OECD Model, so that it is not an option anymore Set the De-Minimis-Rle at higher level, e.g. $100,000 per artiste or sportsmen per year, exempting smaller and medim artistes from sorce tax 21 The more far-reaching change wold be the removal of Article 17. This wold mean exemption in the contry of performance in treaty sitations and retrn to the normal rles of Article 7 and 15. And it will lead to a trade-off: no sorce tax collection, bt also no foreign tax credits anymore. What wold be the balance for contries? That wold be positive for the US and the UK and perhaps also for India, becase the entertainment export is bigger than the import, which means that now the Foreign Tax Credit for residents with foreign income is higher than the sorce tax from non-residents. The conclsion therefore needs to be that the US and probably also India wold be better off, if Article 17 wold be removed. In the ideal world we wold not need an Article 17 in bilateral tax treaties. The general rles for companies, self-employed 66 INTERNATIONAL TAXATION n VOL. 4 n JANUARY 2011 n 76

8 and employees are good enogh to deal with all sitations regarding performances. Under a bilateral treaty normal taxation in the contry of residence will be secred. 22 Removal wold also take away the considerable administrative expenses that follow from Article 17, when performing in varios contries. The Dtch figres of 1.6 million ero s administrative expenses for 7 million ero s tax revene (in a contry with 16 million citizens) are a compelling example. 11. Smmary and conclsions Unfortnately, Article 17 creates tax problems for international performing artistes. These problems are: 1. The nlimited approach of Article 17(2), catching every payment to any third party 2. The non-dedctibility of expenses in the sorce contry 3. Problems with obtaining tax credits in the residence contry 4. Mch administrative work to get to both sorce tax and tax credits Short-term soltions are already available from the Commentary on Article 17 and can be implemented at short notice. Bt the existing problems wold best be solved with the removal of Article 17 and retrn to normal taxation nder Articles 7 and 15. Very interesting is that entertainment exporting contries, sch as the US, the UK and perhaps even India, can profit from the removal of Article 17, becase it also scraps foreign tax credits. These contries can act as advocates for this removal. 1. See 12 of the Commentary on Article 17 of the OECD Model Tax Convention. 2. These are mostly continental Eropean contries. 3. Taxation of Entertainers, Artistes and Sportsmen, in Isses in International Taxation, No. 2 (Paris: OECD, 1987). 4. Para 90 of the 1987 OECD Report, later in Para 16 of the Commentary on Article 17 OECD Model. 5. ECJ, 12 Jne, 2003, C-234/01 (Arnod Gerritse); see also Dick Molenaar and Harald Grams, The Taxation of Artistes and Sportsmen after the Arnod Gerritse Decision, 43 Eropean Taxation 10 (2003), at Following from Para 14 of the Commentary on Article 17 OECD Model. INTERNATIONAL TAXATION n VOL. 4 n JANUARY 2011 n 77 67

9 ARTISTES AND SPORTSMEN TAXATION 7. See Dick Molenaar, Taxation of International Performing Artistes (Amsterdam: IBFD, 2006), at ECJ 3 October, 2006, C-290/04, FKP Scorpio Konzertprodktionen GmbH, and ECJ 15 Febrary, 2007, C-345/04, Centro Eqestre da Leziria Grande Lda. 9. Mr Set, Miss Dece & Mr. Ball v. Robinson (HMIT) (SPC No. 0373)(2003) and André Agassi v. Robinson (HMIT), Hose of Lords, 17 May, 2006, [2006] UKHL The Dtch tax treaties with Estonia and Astria has been changed ntil then. This means that still 10 tax treaties have the exemption method and lead to doble non-taxation for artistes and sportsmen from those contries for their Dtch performance income. One of the major contries is Spain. 11. See Xavier Oberson (ed.), International Taxation of artistes & sportsmen (Geneva, Zrich: Schlthess, Brylant, 2009). 12. See Michael Lang (ed.), Sorce Verss Residence: Problems Arising from the Allocation of Taxing Rights in Tax Treaty Law and Possible Alternatives (The Hage: Wolters Klwer, 2008/New Delhi: Taxmann, 2008). 13. This was the sbject in Cheek v. The Qeen, 2002 DTC 1283 (Tax Cort of Canada); see also Nathan Boidman, Canadian Taxation of Foreign Service providers: Tax Treaty Isses and Cort Decisions, 56 Blletin for International Fiscal Docmentation Tax Treaty Monitor 7 (2002), at An example of sch two-tier taxation is Germany with Asländersteer at the 1. Stfe and 2. Stfe. 15. Sch a provision has been inclded in Article XVI of the 1980 US-Canada tax treaty. 16. All Arts Tax Advisers, Cirqe d Soleil, Ricardo da Palma Borges, FEPS, Cristian Garate, Msic Managers Form, Pearle*, RSM Tenon, Taxand and Craig West. 17. Tax News Service The optional choice between gross and net taxation can be fond since 2008 in the new text of Para 10 of the Commentary on Article 17 OECD Model. 19. This option is directly available, becase it is mentioned in Para 2 of the Commentary on Article 17 OECD Model. Bt it only has been sed in German tax treaties from the 1950s and 1960s and not after the introdction of this option in the Commentary. This wold be the same provision as Article 15(2). 20. This is proposed in Para 3 of the 2010 Discssion Draft for the change of the Commentary on Article 17. The option has been placed in a new Para 11.4 of the 2010 Commentary on Article 17 OECD Model. 21. This option was the reslt of the discssion between Sandler and Molenaar in Geneva and Vienna in See Harald Grams, Artist Taxation: Article 17 of the OECD Model Treaty a Relic of Primeval Tax Times?, 27 Intertax (1999), at 188; Joel Nitikman, Article 17 of the OECD Model Treaty An Anachronism?, 29 Intertax (2001), at 268; Dick Molenaar and Harald Grams, How To Modernize Income Taxation of International Artistes and Sportsmen, 33 Tax Management International Jornal 4 (2004), at 238 and Dick Molenaar, Taxation of International Performing Artistes (Amsterdam: IBFD, 2006), at INTERNATIONAL TAXATION n VOL. 4 n JANUARY 2011 n 78