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Artistes and Sportsmen - Recent developments around Article 17 Mumbai Mumbai 4 December 2010 4 December 2010 Dr. Dick Dr. Dick Molenaar Molenaar All Arts Tax Advisers All Arts Tax Advisers Research Fellow Research Fellow - - Erasmus Erasmus University University Rotterdam, the Netherlands Rotterdam, the Netherlands

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Page 1: Molenaar 19112010 - Article 17fitindia.org/downloads/Molenaar_2010.pdf · Dr. Dick Molenaar All Arts Tax Advisers ... in official text of Article 17 Change from tax credit to tax

Artistes and Sportsmen -

Recent developments

around Article 17

Mumbai Mumbai –– 4 December 20104 December 2010

Dr. Dick Dr. Dick MolenaarMolenaar

All Arts Tax AdvisersAll Arts Tax Advisers

Research Fellow Research Fellow -- ErasmusErasmus University University

Rotterdam, the NetherlandsRotterdam, the Netherlands

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SPECIAL RULES ARTISTS/SPORTSMEN

�� National: withholding tax on performance National: withholding tax on performance

incomeincome

�� International International –– tax treaties:tax treaties:

�� First in 1939 tax treaty USA First in 1939 tax treaty USA –– SwedenSweden

�� Later in German tax treaties in 1950sLater in German tax treaties in 1950s

�� 1963 OECD Model: Art. 171963 OECD Model: Art. 17

““because of practical difficultiesbecause of practical difficulties””

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PERFORMANCE INCOME

Art. 17 OECD Model Art. 17 OECD Model -- ArtistesArtistes and and SportsmenSportsmen: : TaxingTaxing right right forfor the the sourcesource country, country, overrulingoverrulingotherother treatytreaty provisionsprovisions (7, 14 (7, 14 andand 15)15)

MeasureMeasure to counteract:to counteract:

�� taxtax avoidanceavoidance

�� nonnon--compliancecompliance

Art. 23 Art. 23 -- TaxTax exemptionexemption or credit in the or credit in the residenceresidence countrycountry

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ARTICLE 17(2)

�� Introduction in 1977Introduction in 1977

�� Also payments to others than the artiste or Also payments to others than the artiste or

sportsmen fall under Art. 17sportsmen fall under Art. 17

�� But limited approach, i.e. only in abusive But limited approach, i.e. only in abusive

situationssituations

�� Extended to the unlimited approach in 1992, Extended to the unlimited approach in 1992,

after the 1987 OECD Reportafter the 1987 OECD Report

�� But USA, Switzerland and Canada: reservationBut USA, Switzerland and Canada: reservation

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1987 OECD REPORT

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1987 OECD REPORT

ClearClear expressionexpression of mistrustof mistrust ((§§ 7 and 8):7 and 8):““clear evidence of nonclear evidence of non--compliancecompliance””

““rarely disclose casual earningsrarely disclose casual earnings””

““sophisticated tax avoidance schemes, many involving sophisticated tax avoidance schemes, many involving the use of tax havens, are frequently employed by the use of tax havens, are frequently employed by toptop--ranking artistes and athletesranking artistes and athletes””

““relatively unsophisticated people relatively unsophisticated people –– in the business in the business sense sense –– can be precipitated into great richescan be precipitated into great riches””

““travel, entertainment and various forms of ostentation travel, entertainment and various forms of ostentation are inherent in the business and there is a tendency are inherent in the business and there is a tendency to be represented by adventurous but not very good to be represented by adventurous but not very good accountantsaccountants””

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EXAMPLES

�� Sting Sting –– Canada / USA / NetherlandsCanada / USA / Netherlands

�� Johansson Johansson –– Switzerland / USASwitzerland / USA

�� LucianoLuciano Pavarotti Pavarotti –– MonacoMonaco

�� Steffi Graf Steffi Graf -- MonacoMonaco

�� Boris Becker Boris Becker –– MonacoMonaco

�� Mario Mario CipolliniCipollini –– MonacoMonaco

�� Valentino Rossi Valentino Rossi –– UK (nonUK (non--domiciled status)domiciled status)

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NO DEDUCTION OF EXPENSES

§§ 94 of the 1987 OECD Report94 of the 1987 OECD Report

((§§ 10 of the Commentary on Art. 17 OECD)10 of the Commentary on Art. 17 OECD)

““The article says nothing about how the income concerned The article says nothing about how the income concerned

is to be computed. It is for a Contracting Stateis to be computed. It is for a Contracting State’’s s

domestic law to determine the extent of any deductions domestic law to determine the extent of any deductions

for expenses. Domestic laws differ in this area, and for expenses. Domestic laws differ in this area, and

some provide for taxation at source at an appropriate some provide for taxation at source at an appropriate

rate based on the gross amount paid to artistes and rate based on the gross amount paid to artistes and

athletes. Such rules may also apply to income paid to athletes. Such rules may also apply to income paid to

groups or incorporated teams, troupes, etc.groups or incorporated teams, troupes, etc.””

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PROBLEM OF EXCESSIVE TAXATION

InsufficientInsufficient taxtax credit in credit in residenceresidence country, country,

becausebecause of high of high withholdingwithholding taxtax

ExampleExample: 2.000 : 2.000 grossgross –– 1.200 1.200 expensesexpenses = 800 = 800

profitprofit

�� WithholdingWithholding taxtax:: 20% x 2.000 = 20% x 2.000 = -- 400400

�� TaxTax credit: credit: 30% x 800 = 24030% x 800 = 240

InsufficientInsufficient taxtax credit = credit = -- 160160

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PROBLEMS WITH TAX CREDITS

It is often problematic to achieve a tax credit in It is often problematic to achieve a tax credit in

the country of residence. Examples are:the country of residence. Examples are:

�� No tax certificate availableNo tax certificate available

�� Name of group, but credit in name of artistsName of group, but credit in name of artists

�� Conflict with monthly salary administrationConflict with monthly salary administration

�� No acceptance by local tax inspectorNo acceptance by local tax inspector

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EUROPEAN UNION

�� No direct influence on artiste and sportsman No direct influence on artiste and sportsman taxation, but indirect through EC Treatytaxation, but indirect through EC Treaty

�� ArnoudArnoud Gerritse: ECJ 12 June 2003, CGerritse: ECJ 12 June 2003, C--234/01234/01

�� FKP Scorpio FKP Scorpio KonzertproduktionenKonzertproduktionen GmbH: ECJ GmbH: ECJ 3 October 2006, C3 October 2006, C--290/04290/04

�� Deduction of expensesDeduction of expenses

�� Normal tax ratesNormal tax rates

�� Withholding tax?Withholding tax?

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2008 CHANGE IN OECD MODEL

�� Option for deduction of expenses in Option for deduction of expenses in §§ 10 of 10 of

the Commentary on Article 17the Commentary on Article 17

�� End of gross taxation ?End of gross taxation ?

�� New examples: Germany, Austria, Spain, New examples: Germany, Austria, Spain,

Belgium, SwedenBelgium, Sweden

�� Existing examples: UK, USA, Australia, Existing examples: UK, USA, Australia,

NetherlandsNetherlands

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BROADENING THE SCOPE

�� Territoriality principle: Territoriality principle: ““AgassiAgassi”” casecase

�� United KingdomUnited Kingdom

�� House of Lords, 17 May 2006, [2006] UKHL 23House of Lords, 17 May 2006, [2006] UKHL 23

�� Also equivalent part of sponsoring and Also equivalent part of sponsoring and endorsement income be allocated to country endorsement income be allocated to country of performanceof performance

�� But tax credit in country of residence?But tax credit in country of residence?

�� Or resident in tax haven?Or resident in tax haven?

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ARTICLE 17(3)

�� Optional exemption for subsidized artistes and Optional exemption for subsidized artistes and sportsmensportsmen

�� §§ 14 of Commentary on Art. 1714 of Commentary on Art. 17

�� Very often used in bilateral tax treatiesVery often used in bilateral tax treaties

�� India in 97% of its bilateral tax treatiesIndia in 97% of its bilateral tax treaties

�� Why? Is the state defending its budget?Why? Is the state defending its budget?

�� Unequal treatment towards nonUnequal treatment towards non--subsidized?subsidized?

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THE NETHERLANDS - 2007

�� The government had decided not to tax nonThe government had decided not to tax non--

resident artistes and sportsmen from treaty resident artistes and sportsmen from treaty

countries anymorecountries anymore

�� Although the NL has the taxing right under Although the NL has the taxing right under

Art. 17 of its tax treatiesArt. 17 of its tax treaties

�� But tax revenue was too low and But tax revenue was too low and

administrative expense were too highadministrative expense were too high

�� Return to normal taxing rights of Art. 7 and 15Return to normal taxing rights of Art. 7 and 15

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OLYMPICS / UEFA

�� Also exemptions from source tax for:Also exemptions from source tax for:

�� 2010 Winter Olympics 2010 Winter Olympics –– Vancouver (Canada)Vancouver (Canada)

�� 2011 Champions League Final 2011 Champions League Final –– London (UK)London (UK)

�� 2012 Summer Olympics 2012 Summer Olympics –– London (UK)London (UK)

�� Tax literature:Tax literature:

�� 1999 1999 -- Dr. Dr. HaraldHarald Grams Grams –– GermanyGermany

�� 2001 2001 -- Joel Joel NitikmanNitikman –– CanadaCanada

�� 2006 2006 –– Dr. Dick Dr. Dick MolenaarMolenaar

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DISCUSSION VIENNA NOV 2007

�� Daniel Sandler Daniel Sandler –– Canada:Canada:

�� Article 17 is both underArticle 17 is both under-- and and overinclusiveoverinclusive

�� (+) Former politicians as speakers / models / (+) Former politicians as speakers / models / caddies of golf players/ film directorscaddies of golf players/ film directors

�� ((--) Lower income too many obstacles) Lower income too many obstacles

�� Broaden to all Broaden to all ““celebritiescelebrities””, but set limit at , but set limit at $100,000 p.p. per year$100,000 p.p. per year

�� Dick Dick MolenaarMolenaar –– The Netherlands:The Netherlands:

�� Removal of Article 17, but new approach with Removal of Article 17, but new approach with ““contributioncontribution”” principle is also interestingprinciple is also interesting

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OECD – 2010

�� Discussion Draft changes in Commentary on Discussion Draft changes in Commentary on

Article 17 Article 17 –– April 2010April 2010

�� Just technical issuesJust technical issues

�� No discussion about real changesNo discussion about real changes

�� Comments are published on website OECDComments are published on website OECD

�� But much more inBut much more in--depth discussion at IFA depth discussion at IFA

Congress in Rome Congress in Rome –– September 2010September 2010

�� Discussion about existence of Article 17Discussion about existence of Article 17

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AVAILABLE OPTIONS FOR CHANGE

�� Reintroduction limited approach Article 17(2)Reintroduction limited approach Article 17(2)

�� Definitive change of Definitive change of §§10 Commentary 10 Commentary (deduction of expenses / normal tax rates)(deduction of expenses / normal tax rates)

�� Special provisions for smaller artistes and Special provisions for smaller artistes and sportsmen (sportsmen (dede--minimisminimis--rulerule))

�� Restrict Article 17 to business activities, Restrict Article 17 to business activities, exempt employeesexempt employees

�� Exemption for equivalent part of salariesExemption for equivalent part of salaries

�� Article 17(3) in official text of Article 17Article 17(3) in official text of Article 17

�� Change from tax credit to tax exemptionChange from tax credit to tax exemption

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RADICAL CHANGE

�� Removal of Article 17Removal of Article 17

�� Special provision is not necessary against tax Special provision is not necessary against tax

avoidance behavior, because there are no tax avoidance behavior, because there are no tax

treaties with tax havenstreaties with tax havens

�� Loss of withholding tax revenue from nonLoss of withholding tax revenue from non--

residentsresidents

�� But also no tax credits anymore for residents But also no tax credits anymore for residents

with foreign incomewith foreign income

�� Balance = 0Balance = 0

�� Much less administrative work and expensesMuch less administrative work and expenses

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WITHHOLDING TAX REMAINS

�� National withholding tax remains in place !!National withholding tax remains in place !!

�� Only exemption after procedure in which both Only exemption after procedure in which both

countries are involvedcountries are involved

�� Approval / confirmation by country of Approval / confirmation by country of

residenceresidence

�� As with royalties and business profits (no PE)As with royalties and business profits (no PE)

�� If tax avoidance scheme: gross withholding If tax avoidance scheme: gross withholding

tax without deduction of expensestax without deduction of expenses