Taxing the super-rich

Levying additional taxes on the super-rich is the latest in-thing. What the Oracle of Omaha hinted as a possibility, the French Government implemented in a jiffy. The performance of the current Indian cricket team in England till date has been as plain as the attire they have worn for the Test Matches. The coloured clothing in the other formats of the game could well change their fortunes. It could also change their tax liabilities due to tax laws prevalent in the United Kingdom.

Foreign entertainers' tax

The HMRC in UK has a separate unit called the Foreign Entertainers Unit (FEU) that administers the provisions of the taxing statutes on the entertainers. One of the most controversial provisions in the law is that a foreign entertainer performing in the UK is taxed at high rates not only on the prize money they receive, but also on a proportion of their global endorsement fees.

In effect, this means that a sportsman who receives an annual endorsement fee from an advertiser performs in the UK for three months, he would have to shell out tax on a third of his endorsements. Double tax avoidance agreements (DTAAs) could assist in setting-off his liability; but withholding tax provisions could ensure that he pays the tax first and avails himself of credits later.

In 2006, Andre Agassi was defeated in a tax battle with the UK taxman, which meant he had to pay tax not only on his previous Wimbledon winnings, but also a portion of his endorsement money from Nike – despite him being an American citizen, easily passing the ‘day test' (the 90-day limit of being in the UK before you are liable for tax) and the company being American. Usain Bolt has refused to run in the UK prior to next year's London Olympics citing unreasonable tax laws.

The Champions League football final played in Wembley would have been played in a European city had a foot-note not been added to the HMRC tax laws that exempted the players playing in the match from tax. This stirred a controversy citing inequality in tax laws.

Golfer Sergio Garcia has also mentioned about the unreasonable tax laws in the UK. The present rate of UK withholding tax is 20 per cent of all gross income (including cash per Diems and indirect expenses paid by the payer) arising from work in the UK. Normal UK rates (at present 2010-11), a basic rate of 20 per cent, a higher rate of 40 per cent and an additional rate of 50 per cent on taxable earnings above £150,000) can only be levied on net income after the year-end (5 April) or by special arrangements made with the Foreign Entertainers Unit (FEU) in the year of an entertainer's or sports person's performance. Expenses allowed are travel and stay expenses and any direct expenses incurred for the performance.

Indian provisions

Section 115BBA of the Income-Tax Act is the equivalent provision in India. It taxes income of a non-resident sportsman at a flat rate on income received or receivable by way of participation in any game, advertisement and contribution of articles relating to any game or sport in India in newspapers, magazines or journals. Sports associations earning income in India are also covered under the provision.

One of the significant differences with the UK law is that no deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the income. Foreign sports performers should be glad that the wordings used in the section are restricted to advertisement, and not global sponsorship income which could be interpreted to mean advertisement income earned in India. The necessity of filing a return of income India has been done away with if tax has been deducted at source.

Just so as to cover all possible games, the preceding section 115BB taxes winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever. The Government has the power to grant specific exemptions to games conducted in India and the winnings therefrom. The Direct Taxes Code is expected to continue with similar provisions.

There is a school of thought that in the present era of global sports events, double tax avoidance agreements should be tweaked to tax the global income of a sportsman in one country, preferably the source country. The variety of income avenues available to a sportsperson these days makes this a thin possibility equating him with any multinational company.

(The author is a Bangalore-based charted accountant.)

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