UK: International Tax Planning For Entertainers And Sportsmen

There is no doubt that the world is becoming smaller and that international travel is for many people simply a way of life. Amongst this group are undoubtedly entertainers and sportsmen who are able to transport their talents and energies abroad on a greater scale than has ever been the case before. Whilst this adds an exciting new dimension to the profession of the international tax planner, it can also make life more complicated as sophisticated tax administrations move to close loopholes in national legislation for tax avoidance activities. For those not faint of heart and up to a challenge, there are many opportunities which may still be availed of provided that one keeps fully abreast of the fast moving developments in this area.

Entertainers and sportsmen may derive income from performance, reproduction of work or use of name and likeness. A production of a work may take place through television recording, film, publishing contracts, while capitalisation and use of name and likeness rights may be way of sponsorship, merchandising, or endorsement contracts.

It is important to realise that a copyright must be the product of the skill and labour of the author and it may be assigned, even for works, to an employer company either onshore or offshore. Protection is generally granted for the author's life plus 50 years or, in the case of sound recordings, for 50 years from the end of the year of release. The EC Directive of 29 October 1992 requires copyright to be for a life plus 70 years. With a copyright, the owner has the exclusive rights to copy it, issue copies to the public, perform the work in public, broadcast the work or make any adaptation of the work. Other rights which may not be subject to contractual arrangements are:

• moral rights including paternity (right of an author to be acknowledged as such),
• right of integrity (not to have one's work subjected to derogatory treatment)
• false attribution of work (right not to have work falsely attributed to an author)
• right of privacy (not to have commissioned work copied for public use).

These moral rights cannot be assigned, although one could receive income from the consent of moral rights to third parties.

Performance rights may be infringed by a third party making a recording of a performance without the performer's consent, playing or recording a performance in public or otherwise dealing with it.

Since the sales of recordings, whether in the form of compact discs, video or cassette tapes, may form the major part of an entertainers income, it is important to consider how the recording and publishing contracts are viewed. Recording and publishing contracts would constitute a supply of services or assignment of masters/compositions already produced. Royalties receivable from recording contracts may be attributed to the place where the services were performed, so that if for example records are recorded in the United States, royalty income may be subject to US tax in respect of worldwide sales of the records, notwithstanding that the artists may not be resident in the US, but have merely recorded their works in the US.

Whilst the main objective of live performances by entertainers is that of selling recordings, it should not be ignored as a separate and potentially major source of income. It is therefore important to ensure that the performance contracts are properly structured, and of course this specifically relates to sportsmen. Performance contracts would also be a supply of services, and where there is an advance receipt against entitlement to fees on the signature of the contract, this would not be classified as income until the performance is exercised. Indeed, the Commentary of the OECD Model double tax treaty on Article 17 confirms that payments even for the cancellation of an appearance commitment would not be construed as performance fees subject to Article 17, since the performances have not taken place. The payment of performance fees would be subject to PAYE or similar employee tax if paid to a person considered to be the employee of the promoter, or otherwise paid gross subject to withholding tax if the payment is to a self-employed individual or an individual who is employed by a third party, or to the third party itself.

Article 17 (1) of the OECD Model double tax treaty states that income derived by a resident of one state as an entertainer (such as a theatre, motion picture, radio or television artiste, or a musician) or as a sportsman (which will include for example footballers, golfers, jockeys, cricketers, tennis players, racing car drivers) as well as any participant in public entertainment (such as snooker, chess or bridge players), from his personal activities as such exercised in the other state may be taxed in the other state. The words ‘as such’ are important to understand in relation to income from non-performing activities contracted by the entertainers and sportsmen, such as endorsement and merchandising contracts referred to below.

Article 17 (2) extends the right of the local tax administration not only to tax income paid direct to the above individuals, but also to tax such income even if it is received by companies or indeed any other entity. Very few treaties still exist which afford protection to loan out companies from local taxation.

Where an entertainer or sportsman contracts with the manufacturer of a particular product to allow his name, logo or likeness to be used by the manufacturer to endorse his product, this should be treated as a grant of a licence, and therefore a royalty receipt. Endorsement contracts entered into by a company may minimise or avoid the withholding tax that would normally be levied upon payment of such a royalty direct to the individual. Thus the transfer of character merchandising rights to an offshore entity as described above may be relevant. Ancillary obligations under the contracts, such as television appearances, may again not be personal service income for the performance of their services as such, but again treated as royalty income. This is not, however, clear under the OECD model treaty where such income is not expressly covered within the royalty article and this should be looked at on a case by case basis.

Payments under these contracts are not necessarily for the performing activities of entertainers and sportsmen as such and therefore may not be subject to local withholding taxes. However, where say a tennis player wears a T-shirt with the manufacturer’s name emblazoned on it whilst playing tennis in a tournament, then the fee under the sponsorship contract will be taxable in the particular country. Where there is one fee under the contract covering a period in which the player performs in several countries, then the fee must be apportioned in the most acceptable manner for each relevant taxing jurisdiction, perhaps on the number of performances in one country compared to the entire number of performances during the period of the contract.

It becomes more difficult where the tennis player wears the T-shirt on say a television quiz programme, (in which case the income should not be taxed) whilst also performing in public in it, and such allocation problems need to be thought out in advance when preparing the relevant contracts. Bonuses under the contracts for winning tournaments would normally be taxed in the country where the performances are taking place.

Merchandising contracts will probably be entered into with specialist merchandising companies, as may a sponsorship contract. It may be helpful to design a special logo when reproducing the artiste’s name or picture, so that this can be separately licensed for a royalty payment. This is one of the areas in which sportsmen can definitely receive copyright royalties for the use of their name coupled with a specially designed logo for copyright purposes, and even payments under an endorsement contract where the artiste’s name and logo is attached to the endorsed article may also fall under the category of royalties rather than personal services. This would normally be more advantageous for tax purposes, since the receipt of such royalties may be free of withholding tax, whilst income from personal services may be subject to local tax as explained above.

Royalty payments would normally require two factors to be present, the first being the use of some proprietorial right (which is why the creation of logos for entertainers and sportsmen is so valuable), and the second being that the payment is based on usage of that right. It is therefore essential when preparing such contracts that these factors are reflected in the contractual arrangements.

There is a different tax treatment depending upon whether an artist is considered employed or self-employed, as discussed above. A 1981 Court case involving the Midland Symphonic Concert Society Limited cited the following tests:

• What were the actual arrangements between the parties, including rights and obligations under the contract?
• What degree of control did the Company exercise over the musicians engaged to perform?
• Were the musicians part and parcel of the Company's organization?
• Did the musicians carry on business on their own account?
• What chance of profit or loss did each musician have?
• Who provided the necessary equipment, that is to say, musical instruments?
• What are the traditional arrangements between an orchestra and musicians performing with it?
• What was the incidence of tax?
• What did the parties themselves believe to be the position?

If the individual can be considered as self-employed, the following categories of expense would normally be considered as deductible by the Inland Revenue, taking the UK as an example, which may otherwise not be deductible:

• Directly related costs
• Agent's and manager's fees and commissions
• Travel from Central base to engagements and competitions
• Touring and living expenses if supporting a permanent home (see below)
• Payment for use of sports facilities
• Taxis to and from the station whilst touring
• Supporting artists
• Singing, dance and sports coaching (including hire of hall - but see below)
• Laundry of professional clothing, theatre, laundry, etc
• Accounting
• Professional subscriptions, equity subscriptions, professional journals
• Costs for professional clothing
• Tips to dressers, call boys, stage doorkeepers, etc.
• Cost of equipment/instruments, etc - normally through a capital allowance claim unless the equipment has a short life
• Cost of repair to wardrobe and props, cleaning of wardrobe and props, cost of replacement or renewal of wardrobe or props
• Insurance re equipment/public indemnity
• Hairdressing
• Cosmetics, make-up
• Chiropody (for dancers, mainly ballet)
• Postage and stationery
• Records, books, etc
• Medical expenses in connections with 'professional' injuries
• Publicity costs, photographs, blocks, etc
• Hire of television set
• Business telephone, telemessages
• Secretarial assistance including possible payments to spouse. Such payments may enable a wife to utilize her own tax reliefs
• Research assistance and material
• Visits to theatre/cinema/concerts/sports events if these are relevant to performer's own profession
• Costs of music, theatre and sporting tickets for agents, managers, press, etc
• Overdraft interest

However, the following expenditures will not be deducted:

• Costs incurred in learning a profession, eg singing lessons prior to taking up professional engagements
• Expenditure on capital assets
• Entertaining of UK contacts
• Travel from one's home to engagements unless it can be shown that one's home is also one's 'office'

Value Added Tax (VAT) is an area which is often overlooked when assessing the broader issues relating to tax planning for entertainers and sportsmen. Since there is a growing trend for governments to raise revenue from indirect taxes more than direct taxes as has hitherto been the case, VAT is an important aspect. Having regard to the large amounts of money which usually are attached to various activities of entertainers and sportsmen, VAT can represent a significant cost which needs to be carefully considered.

In the case of sportsmen, who are liable to VAT where the performances are exercised, it may be beneficial to register for local VAT, particularly where there is a material amount of VAT incurred on expenditure, where there is more than one local amount involved; however, in situations where the entertainer is contracted to one promoter and no expenses are being incurred by him, the entertainer may opt for a 'tax shift' if allowable in that country whereby the promoter declares VAT on the services provided by the entertainer and deducts such VAT as input tax, thereby overcoming the problem of local VAT registration.

The question of VAT on royalties is often found to be confusing. The general issue with regard to VAT on royalty income is that the place of supply is where the recipient of the royalty is resident. Generally, speaking, for a UK licensor, no VAT needs to be charged on royalties receivable outside of the EU, or receivable from businesses in the EU. The payer of the royalty income, in respect of EU businesses, would be subject to the reverse charges mechanism whereby VAT on the payment is declared as an input tax but accounted for by the payer, so that no VAT payment actually needs to be made.

As to practicalities, VAT has to be declared either when payments have been received for the supply of a service, or when an invoice has been rendered if earlier. Advance payments may be considered as a consideration for supplier service, and therefore subject to VAT when received, and even interest free loans may be subject to VAT in respect of the interest foregone.

It is essential to be aware of the VAT penalties for non-registration where VAT registration is required, which may be as much as 30% of the tax due. There is a mechanism for a default surcharge of 2%, 5%, 10% and 15% in respect of late submission of returns, whilst serious or persistent errors will be subject to a 15% penalty.

A VAT registration in one European Union country can enable the registered individual to make claims for VAT incurred elsewhere within the EU. In order to make a claim, the following are required:

• A claim form completed in the language of the country where the expenses were incurred.
• A certificate confirming VAT registration in the European country of the claimant.
• Original invoices.
• The claim must be made within six months of the calendar year in which the expenses are incurred.

Planning for internationally active entertainers and sportsmen will continue to be a growing area of the international tax practitioner’s work. This tax briefing demonstrates the complexity of issues involved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.