Editorial SLT March 2023 14.1

It is with much pleasure that we welcome readers to the March 2023 edition (citation: SLT 2023/1) of our ground-breaking journal Sports Law and Taxation (SLT) and online database www.sportslawandtaxation.com.

Apart from death, tax is one of the other certainties in life and, in view of the fact, that sport, despite the global economic crisis, continues to be big business, worth more than 3% of world trade, we thought that we would devote most of this Editorial to this important subject of tax and sport. In fact, to the need for sportspersons, as high earners, to be aware of and, as far as legally possible, mitigate its effects, through appropriate tax planning. So, we invited a leading expert and regular contributor to SLT, Kevin Offer – a Partner at Hardwick and Morris, LLP, London, UK – to provide some insights into this complex and fascinating topic. His comments now follow.

“Tax challenges for sportspersons playing in tournaments around the world

The taxation of international sportspersons who perform in international tournaments is a minefield that can result in high tax charges for some and low or no tax for others. It is not just the country in which the tournament takes place and/or the country in which the sportsperson resides that can affect the tax position. The sport, tournament and type of income can all affect how an individual may be taxed.
This editorial raises and considers some of the issues that a sportsperson may encounter when performing at international tournaments.

General Tax Position

A full analysis of Article17 of the OECD Model Tax Treaty is beyond the scope of this editorial and most readers will be well aware of its contents and the additional commentary. However, as a starting point, it can be noted that the article provides for tax to be levied by the tax authorities of the country in which a sportsperson undertakes personal activities as such. A sportsperson resident in country A and playing in a tournament in country B may therefore be subject to tax in country B. The sportsperson may also be taxable in country A as a resident of that country. The purpose of the treaty is to avoid double taxation although an element of this can still arise. It is also possible to achieve double non-taxation in some cases.

Some countries will allow a credit for overseas tax whereas others will operate the exemption method so that no tax is levied on overseas tax. Where the exemption method is operated, and no tax is deducted in the country of performance, then no tax may be suffered on the income of a sportsperson.

Where the credit method is applied then any tax that is suffered in the country of performance may be offset against the tax liability of the sportsperson in the country of residence. In simple terms, if tax is deducted at a rate of 20% in the country of performance and the tax rate in the sportspersons country of residence is 45% then it is just the additional 25% tax that will need to be paid in the home country.

The position in a number of countries, however, is not as simple as this. A number of countries will have domestic legislation that will limit the amount of credit that may be claimed for overseas tax.

For example, a UK resident sportsperson performing in the USA may suffer withholding tax on income generated from a tournament in that country. They may also be able to file a US tax return at the end of the US tax year and claim some expenses resulting in a repayment of some of the tax originally withheld. When the sportsperson files their UK tax return the UK tax due on their income, including the amount arising from the US tournament, will be calculated. A credit will be given for the US tax suffered and any additional UK tax will be collected. However, the UK has a principle that a taxpayer should take whatever steps they are able to reduce the tax that is suffered in another country. If the sportsperson has failed to claim any deductions and has decided to accept the full withholding tax, the UK tax authorities may not allow a full credit and an element of double taxation will arise.

Whilst it may seem obvious to file a return or take other steps to reduce the tax charge in the US in the example above this may not always be cost effective. Professional fees are likely to be incurred to comply with the tax law of another country which may far outweigh any tax benefit. There is, therefore, an economic decision to be made.

Individual v Team

Whether a sportsperson participates as an individual or as a team player may have an effect on the tax position. A sportsperson playing for a team will be an employee of a club. There has been some consideration that it would be more appropriate for these situations to fall within Article 15 covering employment income. A special arrangement exists between the USA and Canada covering their usual international competitions such as the NHL, NBA, etc. UEFA have operated a system to avoid the need to tax footballers in their European competitions and club finals such as the Champions League. Some experimentation has been undertaken in football to tax at source such as the 2006 FIFA World Cup in Germany and the UEFA EURO 2008 tournaments but these proved to give rise to complications. The exemptions for such tournaments (see below) and taxation in the country of residence has therefore prevailed.
For an individual sportsperson, such as a tennis or golf player, the position is a little more straightforward. As their income will arise from their individual performance it is clear that they would fall within Article 17. However, there has been some suggestion that Article 7 (business income) or it’s predecessor, Article 14 (self-employment) should apply. Whilst these suggestions may have some credibility, it is generally recognised that Article 17 should prevail. Some treaties (such as a number of those entered into by Switzerland) expressly provide for Article 17 to apply and so most income from self-employment or business income may be taxed in the country of performance no matter that there will be no permanent establishment as required under Articles 14 or 7.

Sources of Income

The next issue a sportsperson will need to address is the type of income that they will be receiving.

Direct Income

A fee for performing at an event or a prize for winning a tournament the position is straightforward. Such income will arise from the performance itself and so, in most cases, fall to be taxed in the country of performance under Article 17. However, what if the fee is part of a salary for playing for a team? IN the absence of any special provisions it would be necessary to apportion the salary of the sportsperson between the various countries in which they perform and tax in each country accordingly. Whilst an employing club may try to calculate the apportionments centrally it is the individual sportsperson who has the obligation to pay the correct amount of taxation. This is but one example where a sportsperson would be wise to ensure they have proper advice on taxation as well as other areas of their affairs.

Indirect Income

A sportsperson performing at international level is likely to receive income from sources that may not appear to be directly attributable to a specific performance. However, if the income is connected with the personal activities of the sportsperson performed in another country, the income will fall within Article 17. Examples of this type of income will include such items as endorsement income, sponsorship, image rights and merchandise.

For example, if a tennis player is sponsored by a racquet manufacturer then it is likely that they will be required to use the racquets of the sponsor at tournaments around the world and may also be required to wear the sponsor’s logo on clothing. A proportion of the payment by the sponsor will therefore be connected with the performances of the sportsperson and an apportionment will be required in a similar way to other fees. The tax position will then need to be considered for each of the various countries in which the sportsperson performs as well as the sportsperson’s home country.

This type of income can create a number of issues for the sportsperson as to how much of the sponsor’s income should be attributed to a specific tournament. In some cases, the sponsor will pay an increased amount for success in the tournament so the relevant amounts may be easily identified. However, for an annual payment, it will be necessary to consider how an apportionment should be made. Some countries may not tax the income as not directly attributable to the performance (i.e. the payment would be made anyway). Others will impose tax based on the proportion of performance days at a tournament over the total days of performance in the year. Some countries may allow training days, others just the time performing. There is no global view of how this type of income should be taxed and the sportsperson will need to have advisers who fully appreciate the complications and can source local advice where necessary to ensure that tax law is complied with.

Merchandise is another area that can create issues for sportspersons. The slae of t-shirts, pictures and other items at tournaments is common. Where a sportsperson is performing at the tournament and receives a payment related to the sale of these items then it is likely that the payment will be regarded as connected to their performance and local tax will apply. This can be contrasted, however, with a sale of the same items within a shop or online which are not connected to a performance. Such income may, however, be in the form of a royalty payment or business income which could result in a local tax charge. A further issue for the sportsperson (or, more likely, their adviser) is to identify how the same type of income may be taxed in different circumstances.

Payments to Another Person

A further area that can cause problems for sportspersons is where the amount is not paid to the sportsperson themself. It is not uncommon for sportspersons to set up a corporate entity to generate income from exploitation of image rights, endorsements, etc. Some countries operate a “look though” principle so that a payment to a corporate entity will be taxed in the country of performance if it is connected in any way to a performance at a tournament. One leading UK case on this involved Andre Agassi. A payment was made by a tennis racquet manufacturer to a non-UK company. However, after Agassi performed at a tournament in the UK, the UK tax authorities sought to tax a proportion of the payment as being attributed to the performance at the UK tournament. Despite the payment being made between two non-UK entities it was decided that a proportion of the payment should be taxed in the UK. A similar situation led to Usain Bolt being reported as pulling out of an appearance in the UK due to the proportion of his endorsement income that would be subject to UK tax if he went ahead.
Another example of a payment to another person is where a fee is paid to an agent or manager. If the payment relates to a performance at a tournament in, say, the UK then that payment will fall to be taxed in the UK by reason of Article 17 although it may be possible to reduce the tax charge if not all of the payment is for the benefit of the sportsperson. Once again the importance of good tax advice cannot be stressed too highly.

Tournament Exemptions

To deal with the tax complications that can arise at international tournaments there are a number of exemptions that are granted. It is a requirement of FIFA and UEFA that tax exemptions are granted to sportspersons who play at their tournaments and finals. The failure to give an exemption was reported as the reason the UEFA Champions League final was not awarded to London resulting in a special tax measure being introduced for the 2011 final. Those special measures only extended to non-resident players, however, so the incentives to win for Barcelona were perhaps greater than for Manchester United in that final!
A similar exemption is required to be granted for countries which host the Olympic Games. However, for the London Olympics in 2012, the exemptions applied to the income derived from performance at the games or in promoting the games. Any sponsorship or endorsement income that was not received from official sponsor of the Olympics was not covered. It is therefore important for any sportsperson playing in a tournament that does allow for tax exemptions to be certain of what, exactly, will be exempt.

Conclusions

As can be seen above, the tax position of a sportsperson taking part in international tournaments can be a minefield and the importance of having advisers who are fully aware of the issues cannot be over stressed. A series of articles covering both the legal and tax implications of international tournaments in various countries around the world is something I will be putting to the other members of the editorial board and, if you are interested in this subject and would like to contribute an article to the journal, then do get in touch."

We now report on the record results of the Winter 2023 football transfer window, quoting from the News Release Deloitte Wednesday 1 February 2023.

“Records tumble as Premier League clubs spend £815m in January transfer window

–   Premier League club’s gross spend of £815m during the 2023 January transfer window was the largest ever – 90% higher than the previous record (£430m in 2018) and almost triple the previous January window (£295m).

–   Premier League clubs also set a record for net transfer expenditure during a January window with a net spend of £720m, eclipsing the previous record set in January 2022 (£180m).

–   Combined with the record spend during the summer transfer window (£1.9bn), Premier League clubs have spent a total of £2.8bn during the 2022/23 season, a new all-time high.

–   Deadline day expenditure by Premier League clubs of £275m is also a new January window record, an increase of 83% over the previous record of £150m set in January 2018.

–   The top six revenue-generating Premier League clubs accounted for 54% of the total gross transfer expenditure by the league, with Chelsea accounting for 37% of the total league spend.

–   Premier League clubs accounted for 79% of total spending across Europe’s “big five” football leagues – marking the highest proportion ever reported.

–   Transfer spending fell across the rest of Europe’s “big five” leagues, from €396m in in the January 2022 window to €255m.

–   The total gross transfer expenditure for English Football League clubs during the January 2023 window totals £25m, up from £20m in January 2022. 

Premier League clubs spent a record-breaking £815m in the January 2023 transfer window, according to analysis from Deloitte’s Sports Business Group. Gross transfer expenditure was almost triple Premier League clubs’ spending in January 2022. 

Following the record-breaking 2022 summer transfer window (£1.9bn), Premier League clubs have spent a total of £2.8bn overall on player transfers during the 2022/23 season, overtaking the previous record of £1.9bn set in the 2017/18 window by 47%. 

Tim Bridge, lead partner in Deloitte’s Sports Business Group, said: “The record spending by Premier League clubs this season is beyond anything that we’ve seen before. It is a clear indication of talent acquisition being core to Premier League clubs’ business strategies. In securing the best available talent, clubs hope to improve results on the field, which in turn will enhance the appeal of the Premier League and further cement its position at the very top of world football.  Premier League clubs have outspent those within the rest of Europe’s “big five” leagues by almost four to one in this transfer window, allowing them to hold on to their key players, while attracting top-talent from overseas. However, while there is a clear need to invest in squad size and quality to retain a competitive edge, there will always be a fine balance to strike between prioritising success on-pitch and maintaining financial sustainability.” 

Premier League spending power

Over 85% of gross Premier League clubs’ spending was directed towards acquiring players playing outside the UK in the 2023 winter transfer window – the highest ever share of transfer expenditure flowing outside of the Premier League.* By contrast, £25m was spent on acquiring players from the Football League, up from just £1m in January 2022, but just 3% of total gross spending. 

Bridge continued: “The decline in spending across the English football system is likely to be of growing concern for members of the English Football League and could further fuel the debate around distributing finances more evenly across the pyramid. Transfer income from Premier League clubs, which has historically been an important source of club funding, now appears to be less guaranteed, with Premier League clubs choosing to prioritise talent from abroad.” 

Within the Premier League, five of the top six revenue-generating clubs (Manchester City, Liverpool, Chelsea, Tottenham, and Arsenal) accounted for 54% of Premier League club gross spend, with Chelsea accounting for 37% of the league’s total spend while also breaking the British transfer record. In January 2023, Chelsea spent more on gross transfer expenditure than the combined total of all clubs in the Bundesliga, La Liga, Serie A and Ligue 1, and more than the cumulative spend of Premier League clubs in each of the previous January windows, excluding 2018 (£430m). 

AFC Bournemouth, currently 18th in the table, are the second largest spenders within the Premier League. The five clubs currently at the bottom of the Premier League (West Ham, Wolverhampton, AFC Bournemouth, Everton, Southampton) spent c.£175m, compared to the bottom five clubs in January 2022 (£150m). There are three Premier League clubs (Manchester United, Brentford, and Everton) who did not spend funds on acquiring players in the January 2023 window. Additionally, three Premier League clubs; Leeds, Chelsea and Southampton, broke their transfer records this window. 

European transfer market 

Across the rest of the “big five” European Leagues there was a cumulative gross spend of €255m and net receipts of €120m. This represents a year-on-year fall of 35% in gross spend compared to January 2022 (€395m).

Serie A reported the steepest year-on-year decline in gross transfer spend, falling 84% from €185m in January 2022 to €30m in January 2023, the lowest spend by the league since 2006, followed by La Liga (63%, €80m to €30m). 

During the 2023 window, Premier League clubs reported a net transfer expenditure of €820m. Bundesliga also reported a net transfer expenditure of €5m, however the rest of the big five leagues reported net transfer receipts in this window as clubs looked to sell players before adding permanent or loanee signings (Ligue 1 – net receipts of €75m; Serie A – net receipts of €35m; La Liga – net receipts of €15m). 

Calum Ross, assistant director in the Sports Business Group at Deloitte, commented: “Across Europe, many clubs have sold some of their most valuable talent to other leagues, particularly the Premier League, as they look to prioritise financial sustainability and likely have targeted the development of players that will appeal to the English market. The rest of the big five leagues in Europe have had more subdued spending power, likely impacted by negative growth in their broadcast rights in the most recent cycle, while at the same time, some European clubs are still recovering post-pandemic. In the future, the ability of such clubs to invest large sums in on-field talent will continue to be driven by funds generated across commercial, matchday and broadcast revenues, in addition to receipts from the sale of players.” 

Articles in this issue

We now turn our attention to some of the interesting and topical articles that you will find in this issue.

As you will see from the Table of contents of this issue, we include a wide range of topical sports law and sports tax articles, which will engage and inform our readers’ attention and also provide them with many things to consider and ponder. Amongst them, we would mention a couple of them as follows.

One is on sexual abuse in a sporting context in South Africa, which, sadly, is not the only place in the world where such abuse occurs, particularly amongst minors and in a variety of sports, not least in swimming and gymnastics. For example, see the Post on the SLT website on the Whyte Review of British Gymnastics published on 16 June 2022. In this article, Anneli Hyman, an Attorney of the High Court of South Africa and a Doctoral Candidate at the University of Pretoria, profiles the victims and perpetrators of sexual offences in sport in South Africa.

In her introductory remarks, Hyman points out that:

“In a South African sporting context, existing case law confirms that children are at highest risk of suffering sexual abuse. Studies have also shown that the gender of a victim is not the main indicator of a predisposition to sexual abuse, nor is the role, which the perpetrator portrays within the sport setting, a definitive indicator for occurrences of sexual abuse. Internationally and locally, the male coach remains the most featured perpetrator of sexual abuse in the sport setting, whilst South African case law pertaining to sexual offences committed in the sporting environment indicates that, in seven of the ten known cases, the victims were male children.”

In her concluding remarks, she points out that:

“There is no doubt that there exists a grey area in the sporting environment, where ample opportunity for abuse is available, and that the boundaries of acceptable and unacceptable touching between participants or between the coach, assistant coach, team medic, administrators, and participants, are blurred.

Historic research has focused on the female-athlete, male-coach relationship; however, more recent research confirms that the group of vulnerable participants is much wider.

South African case law confirms that children are at highest risk of falling victim to sexual abuse in the sporting environment and aligned with findings of past international research, the male coach was the perpetrator of sexual abuse in all South African cases.

The perpetrators are, however, not limited to coaches, with international research showing that perpetrators come from a variety of groups and often include peer-athletes and, to a lesser extent, opponent participants.”

The other article – by David B. Hoppe, Managing Partner, Gamma Law, San Francisco, USA – is on esports and skill-based gaming in the USA .

In his introductory remarks he points out that:

“Esports and skill-based gaming have become highly competitive arenas, with millions of people playing against each other daily, vying for lucrative sponsorships, and supported by rabid fan followings. Many want to get a piece of the action. Esports Network expects real-money games industry revenue to top US$ 2.5 billion by the end of the year.

Real-money skill-based gaming competitions are legal by default nearly everywhere globally, including most states in the US. Whilst the UK, Canada, and other countries are exploring the best ways to regulate real-money gaming, US federal law does not forbid it, largely leaving regulation of fantasy sports, online poker, trivia contests, and other skill-based games to the states. Few states expressly prohibit skill-based games, opting instead to regulate and license both online platforms and “real life” games in which players compete for money or prizes. The states most often separately categorize these games from online casinos, raffles, and other gambling sites where game outcomes are based upon pure luck.

The proliferation of mobile gaming has contributed to an explosion in both supply and demand for casual skill-based games that offer the opportunity to win real money. Entrepreneurs and investors eager to cash in on the trend must take care to structure their games – and their promotions – to emphasize skill over chance to satisfy state regulators and appropriately inform the gaming public.”

In his concluding remarks, he points out that:

“The real-money skill-based gaming industry is exciting, lucrative, and legal in most jurisdictions. However, because it is a relatively new industry with evolving laws and regulations, operators should take steps to avoid misinformation and should, under no circumstances, assume that their games comply with the regulations of the regions in which they play.

Advice from an attorney can help real-money gaming platforms understand the law and standards each state or country applies when determining whether a game is skill based or constitutes illegal gambling.”

As always, we would welcome and value your contributions in the form of articles and topical case notes and commentaries for our journal and also for posting on the SLT dedicated website www.sportslawandtaxation.com, which has an increasingly wide international footprint!

So, now read on and enjoy the March 2023 edition of SLT.

Dr. Rijkele Betten (Managing Editor)

Prof. Dr. Ian S. Blackshaw (Consulting Editor)

March 2023