The Hindu Business Line : Tax bouncer from Down Under

Prior to the commencement of the ongoing Indian cricket tour of Australia, taxation issues grabbed almost equal attention as the series itself. Apparently, Australian tax authorities, through Cricket Australia (CA), have asked the Board of Control for Cricket in India (BCCI) to sign a Memorandum of Understanding (MoU) that requires players to pay tax on all income generated on Australian soil.

This was something unheard of for the players since they do not pay tax on such income in India; tax is levied only on their sponsorship earnings. Apparently, Australian tax laws have changed since July 1, 2004 — months after the last Indian tour. The new law — christened “Pay as you Go” ( PAYG) — is summarised below:

Pay as you Go

“The Foreign Resident Withholding arrangement, which applies to both individuals and non-individual entities, was introduced on July 1, 2004, and is part of the ‘Pay As You Go’ withholding system.

“Australian payers are required to withhold an amount to cover expected income-tax liabilities on payments made to foreign residents being paid for providing entertainment. Generally, under Australia’s international tax treaties, income derived by foreign resident entertainers is taxed in Australia.

The Australian payer is required to supply a foreign resident with a Payment Summary. The foreign resident entertainer will then need to report these amounts by lodging an Australian Income-Tax Return with the amounts withheld claimed as a credit against the tax assessed.

“A Notice of Tax Assessment will be issued after the lodgement of the tax return. The Notice of Assessment will be proof of tax paid in Australia and a credit for the tax can be claimed in the foreign resident’s home jurisdiction. If the foreign resident expects to incur tax deductible expenses which will reduce their taxable income, a Foreign Resident Withholding (FRW) application may be lodged, prior to lodging an income-tax return. The reason for this type of variation is ‘tax deductible expenses’.

Foreign entertainers from the United States are exempt from paying Australian tax where gross receipts do not exceed US$10,000 for the taxable year .Where it is determined that a foreign resident is NOT an entertainer (such as crew or production personnel) and an article within the appropriate tax treaty applies to exempt them from paying tax in Australia, a FRW variation based on ‘tax treaty’ may be lodged by the foreign resident. Whether you are making a payment to a foreign resident entity or an individual, the withholding requirements take precedence over the PAYG scheme.”

Tax Deducted

As can be seen, it is the draconian tax deduction law that has stumped the Indians. Although as per the Indo-Australia DTAA, the players can take credit of these taxes from their earnings in India, they would be reluctant to do so since similar earnings in India escape the tax net as also because of the hassles of filing certificates and claiming refunds in case applicable. Although the BCCI has assured the cricketers that they would pick up the tab of the tax in case it is applied, the decision throws up a larger taxation issue. Would entertainers not have to pay tax on all their earnings? Would the BCCI come to the rescue of the players in case all countries levy this tax?

The players would be ruing the fact that the cricket manager and the coaches would ostensibly not have to pay this tax due to their non-entertainer status. Would a player who has not played suffer this tax since he has not entertained? In case the Indian Government decides to levy this as a tax for all entertainers coming into India, which could double up as a robust revenue booster considering the volume of business in this sphere, would Indian entertainers have to pay tax on their earnings in India too?

The Australian Government appears to have opened a new tax-earning window for governments. It remains to be seen how many go through the same window.

(The author is a Hyderabad-based chartered accountant.)