Special Reports A Separate International Tax Regime for ...taxprof.typepad.com/taxprof_blog/files/2005-2745-1.pdf · A Separate International Tax Regime for Nonresident Athletes

A Separate International Tax Regime forNonresident Athletes

by Ralph Winnie Jr.

Athletes and entertainers are among the mosttransient and mobile individuals in the interna-

tional community. The types of services performed ona daily basis and the types of income generated fromtheprovisionofthoseservicesarequitevarieddepend-ing on the nature and level of activity. Entertainersand athletes travel the globe to work on movies andtelevision shows, perform in charity events, and par-ticipate in and promote sporting events and competi-tions. Consequently, as an entertainer or an athletebecomes increasingly well known in the internationalcommunity, his income may not just be derived in hiscountry of residence but in other countries as well.Therefore, thetiesasaresidenttoaparticularcountrytend to lessen because those individuals may spend agreat deal of time abroad earning income in manydifferent countries. This article discusses: (1) the dif-ficulty in taxing nonresident athletes in the UnitedStates, Canada, and Mexico; (2) the feasibility of aseparate tax regime for nonresident athletes; (3) thedifficulties faced by nonresident athletes in payingtaxes; (4) the characterization and allocation of theincome athletes receive; (5) the possible methods oftaxing athletes; and (6) a special income tax andwithholding tax regime for nonresident athletes.

Problems taxing performance-related bonusespaid by some nations to their athletes during inter-national competitions illustrate how taxing athletesin the source country can be difficult because of theshort stay and the lack of a strong nexus or ties withthat country. That problem came to the forefront justbefore the start of the 2000 Olympic Games inSydney. The Australian Taxation Office originallyindicated that any athlete who picked up bonusesfrom their national Olympic committees or sponsorswould be liable for tax in Australia because theperformances took place on Australian soil.1 How-

ever, when Olympic athletes receive income whileperforming in competitions, problems frequentlyarise on how that income will be taxed. The payer,either the national Olympic committee or a sponsor,is not located in Australia, the country of source inthat particular case. As a result, Australia has nochance to seize anything or require the payer tomake a tax payment.2 In effect, the AustralianTaxation Office expected the athletes to come for-ward voluntarily to report their earnings and seekhelp establishing their tax liability.

In theory, any country, including Australia, couldtax an athlete who was paid for competing on its soil.However, in practice, it places an onerous compli-ance burden on the athlete. In all probability, theathletes can pay the tax. However, the people whomanage their money find it frustrating because ofthe huge amount of paperwork involved. ‘‘It’s anaccounting nightmare,’’ says Leigh Steinberg, anagent and tax attorney for prominent athletes.3

I. Definition of Entertainer andAthlete

In evaluating the issues and problems associatedwith a separate tax regime for nonresident athletes,a tax scholar or analyst must first make a distinc-tion between athletes and entertainers. Although itmay appear that the terms ‘‘athlete’’ and ‘‘enter-tainer’’ are one and the same, there is a distinctionbetween the two categories. That distinction mustbe understood before a complete analysis of thefeasibility of a separate tax regime for nonresidentathletes can be comprehensively examined. Al-though it is important for tax administrators toprevent tax collection from becoming unreasonablyburdensome and expensive for athletes, if nonresi-dent athletes are treated in the same manner asother nonresident professionals providing personalservices, countries must be able to retain their shareof income earned by foreign athletes. Further, it isquestionable whether entertainers and athletesshould be treated differently for enforcement pur-poses compared to other individuals who provide

1‘‘Olympic Athlete Tax Appears Unlikely,’’ The AssociatedPress, Aug. 19, 2000, at A14382.

2Id.3Earl C. Gottschalk Jr., ‘‘Welcome Traveler,’’ Wall Street

Journal, Apr. 15, 1993, at A1, A6.

Ralph Winnie Jr. specializes in interna-tional corporate and nonprofit tax law as di-rector of government relations at Hume &Associates in Washington.

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highly mobile services, such as architects, engineers,or contractors. To the extent that a special regime isestablished just for entertainers and athletes, thoseindividuals are treated separately from other cat-egories of taxpayers.4

It is questionable whether athletesshould be treated differently forenforcement purposes than otherindividuals who provide highlymobile services.

It must be determined before any discussion ofthe taxation of entertainers or athletes just who isconsidered to be one. According to John J. ConeysJr., international tax partner, PricewaterhouseCoo-pers LLP, and Meril L. Benjamin, international taxmanager, PricewaterhouseCoopers LLP, Los Ange-les, individuals are treated as ‘‘entertainers’’ or‘‘athletes’’ if their activity constitutes a public per-formance. They must be engaged in public enter-tainment and must be a part of the actual perfor-mance, not simply working behind the scenes, like aproducer, director, coach, or trainer.5 It has beenwidely held that film actors, musicians, and news-casters constitute entertainers.6 Consequently, theterm ‘‘athlete’’ was derived to encompass all sports-men in the broadest sense of the word.7 Further-more, a ‘‘sportsman’’ is ordinarily ‘‘considered to bean individual who engages in some physical ormental activity which is exercised as an end in itself,usually in line with certain rules and in certainforms of organization designed specifically for it.’’8No particular degree of professionalism is required.9However, the terms ‘‘entertainer’’ and ‘‘sportsman’’have been used interchangeably in the 1992 OECDmodel treaty and the U.S. model conventions. Those

both discuss the avoidance of international doubletaxation on income and capital derived by nonresi-dent entertainers and athletes.10

When evaluating the feasibility of a separate taxregime for nonresident athletes, arriving at a fairand reasonable approach is difficult. Both the taxadministrator’s and the athlete’s goals must bebalanced. The tax administrator’s goal is to receive afair share of income derived from services performedby the athlete in the source country. The athlete, onthe other hand, wants to minimize the risk of doubletaxation.11 That term has been used to refer to allinternational and domestic provisions, specificallyin situations involving the territory of more than onestate, so-called cross-border situations.12 An ap-proach has evolved for addressing the concerns ofboth the tax administrator and the athlete with thecreation of bilateral treaties making reference to aprovision dealing with issues of international taxa-tion affecting the athlete and the entertainer.

II. U.S., Canadian, and MexicanTaxation of Nonresident Athletes

Consideration of how the United States, Canada,and Mexico tax their athletes can help evaluate thefeasibility of a separate tax regime for nonresidentathletes. It is important to see how domestic lawtranslates on an international level and how itcreates a focus toward a universal method of taxa-tion based on domestic law principles.

The concept of ‘‘source of income’’ is not welldeveloped in either international tax law or thedomestic tax law of most countries. The definition ofdomestic-source income varies from country to coun-try. It is possible that particular income may beconsidered to have a source in one country, but not inanother country, even though the income was earnedin exactly the same circumstances in each country.13

Entertainers and athletes have the potential to earnmany different types of income. Thus, characteriza-tion and source of some types can pose numerousdifficulties.14

4Daniel Sandler, The Taxation of International Entertain-ers and Athletes 3 (1995).

5John J. Coneys Jr., Jonathan Beck, and Charles T. Craw-ford, ‘‘U.S. Tax Planning for Non-U.S. Entertainers andAthletes,’’ PricewaterhouseCoopers (2000).

6Id.7Taxation of Entertainers, Artists and Sportsman, Organi-

zation for Economic Cooperation and Development, Issues inInternational Taxation, report no. 2, paragraph 70 (1987).

8Klaus Vogel, Klaus Vogel on Double Taxation Conven-tions: A Commentary to the OECD-, UN- and U.S. ModelConventions for the Avoidance of Double Taxation of Incomeand Capital, note 14 at 976 (1997); see also Stephanie Evans,‘‘U.S. Taxation of International Athletes: A Re-Examination ofthe Artist and Athlete Article in Tax Treaties,’’ 29 GeorgeWashington Journal of International Law and Economics 308(1995-1996).

9Id.

10Coneys Jr. et al., supra note 5.11Double taxation occurs when more than one country

imposes a comparable tax on the same taxpayer for the samesubject matter and for identical periods. See also Comm. onFiscal Affairs, Organization for Economic Cooperation andDevelopment, Model Tax Convention on Income and on Capi-tal, Mar. 1, 1994, at I-1.

12Klaus Vogel, Administrative Law, infra M. No. 24 at 40;J.M. Mossner, OZOFFR 255 (1974).

13Taxation of Non-resident Entertainers, proceedings of aseminar held in Cannes, France, during the 49th Congress ofthe International Fiscal Association s. 2.1 at 5-6 (1996).

14Id. at 6.

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A. U.S. Taxation of Nonresident AthletesIn the United States, nonresident entertainers and

athletes are treated in the same manner as othernonresidentsondomestic-source income.Unlikemostcountries, the United States taxes its citizens wher-ever they live and taxes U.S. resident aliens on theirworldwide income.15 The United States generallytaxes nonresident aliens16 only on U.S.-source in-come.17 Some categories of foreign-source income ofnonresidents are also subject to tax if that income isconsidered to be effectively connected with a U.S.trade or business. Further, some items of incomederived by a nonresident are subject to withholdingtax imposed at a flat rate of 30 percent on the totalgross amount of that income. However, a tax treatybetween the United States and a foreign nation gen-erally reduces the rate of withholding tax imposed onthe nonresident. Consequently, given the differencesin tax treatment, the distinction between an athlete’sstatus as a resident or a nonresident is crucial.

1. Definition of Nonresident AlienIf a foreign athlete can show that he is not a U.S.

citizen, the athlete is considered a resident forpurposes of U.S. income tax if the athlete is a lawfulpermanent resident or satisfies the substantial pres-ence test.18 Before 1985, the determination of theresidence of an individual was a question of fact.However, since 1985, the IRC has established twotests, one of which must be satisfied, for individualresidence. First, for U.S. tax purposes, any indi-vidual who is a lawful permanent resident of theUnited States at any time during the calendar yearis defined as a U.S. resident.19 An individual whoholds or applies for a green card during the calendaryear is also deemed to have attained U.S. residentstatus.20 Second, if an individual is present in theUnited States for at least 31 days during the calen-dar year and is/was present in the United States for183 days or more in the calendar year and thepreceding two years, he is generally classified as aU.S. resident for that year.21 That aggregate testconsists of the total number of days the individual ispresent in the United States in the current year,plus one-third of the number of days the individualwas present in the previous year, plus one-sixth of

the number of days that the individual was presentin the second preceding year. However, under IRCsection 7701(b)(3)(B), if the athlete was present inthe United States for less than 183 days during thecurrent tax year and can establish that he has a ‘‘taxhome’’ in a foreign country with which he had acloser connection than with the United States, theathlete would not be classified as being a U.S.resident in the current year.22

IRC section 7701(b)(5)(iv) provides a special ruleto encourage athletes to participate in tournamentsfor charitable purposes. Those types of events tendto enhance an athlete’s personal and professionalstanding in the international community and cangive an athlete enhanced exposure and favorablemedia attention. A professional athlete’s time spentcompeting in a ‘‘charitable sports event’’23 does notcount as time spent in the United States for thesubstantial presence test.24 Because many tourevents contribute a substantial portion of their pro-ceedings to local charities, it is possible for foreignathletes to spend most of the year in the UnitedStates without satisfying the substantial presencetest.25

If an individual meets the definition of a U.S.resident under IRC section 7701(b) and also is foundto qualify as a resident of another country, ‘‘tie-breaker’’ provisions determine residency.26 If a for-eign athlete is found to be a U.S. resident, the entireworldwide income of the athlete is subject to U.S.tax. If not, the athlete may find relief from U.S.income tax through an applicable tax treaty. How-ever, treaty provisions do not exempt the foreignathlete from state taxes.27

2. Taxable Income of a Nonresident for U.S. TaxPurposes

A nonresident alien may be subject to tax in twoways. First, income that is effectively connectedwith a trade or business in the United States issubject to tax at the same graduated rates that

15Sandler, supra note 4, at 149.16Internal Revenue Code 2000, as amended (IRC), section

7701(b)(1)(B).17IRC sections 2(d), 871, and 877.18IRC sections 7701(b)(1)(A)(i)-(ii), (b)(3); see also Evans,

supra note 8, at 299.19IRC section 7701(b)(1)(A)(1), Treas. reg. section

301.7701(b)-1(b)(1).20IRC section 7701(b)(3)(C).21IRC sections 7701(b)(1)(A)(ii) and 3(A).

22Factors evaluated include the location of the individual’spermanent home, the individual’s family, personal effects,social and political organizations with which the individual isassociated, where the individual votes, and jurisdiction of theindividual’s driver’s license.

23IRC section 274(1)(1)(B).24IRC section 7701(b)(5)(A)(iv).25Evans, supra note 8, at 300, 301; see also Victor Abrams

et al., International Taxation of Entertainers and Athletes:Report by Organization for Economic Cooperation and Devel-opment Spotlights the Area, 10 Ent. 1 Rep. 3, 8 (1988).

26American Law Inst., Federal Income Tax Project: Inter-national Aspects of United States Income Taxation II, at 131(1992).

27Evans, supra note 8, at 301.

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apply to U.S. citizens and resident aliens.28 Second,U.S.-source income that is not effectively connectedwith a trade or business in the United States istaxed at a flat rate of 30 percent.29

There is no comprehensivedefinition of source income inCanada.

Because the performance of personal services,either as an employee or as an independent contrac-tor, in the United States during the taxable year isconsidered to be engaging in a trade or business,that income is considered to be U.S.-source income.30

The length of time that is spent in the United Statesperforming those services is largely irrelevant fordomestic taxation, although it may be relevant whena tax treaty applies.31 However, income is not tax-able if it is for the performance of personal servicesby a nonresident alien temporarily present in theUnited States for a total of not more than 90 daysduring the calendar year and whose compensationfor the personal services performed does not exceedUS $3,000.32 If the services are performed for aforeign employer, they do not constitute a trade orbusiness within the United States.33

3. Signing Bonus

Consequently, a nonresident athlete’s salary, fees,wages, compensation, bonuses, or prize winningsreceived for performances in the United States aregenerally effectively connected U.S.-source incometaxed at the applicable graduated rates.34 If a non-resident alien performs services inside and outsideof the United States, deductions for expenses in-curred may be apportioned between U.S.- andforeign-source income.35 Thus, for members of U.S.sports teams whose schedules involve competitionsoutside of the United States, the income earned fromthose sporting contests must be allocated and appor-tioned between U.S. and foreign sources of income.The proper allocation is based on the number of daysthat the athlete is present in the United States.36

Bonuses must also be allocated unless they areconsideration for signing the contract in questionand are not based on services previously rendered.That issue came to light when a citizen and residentof Venezuela was recruited by a baseball team andsigned a minor league uniform player contract inwhich he agreed to play for a particular LatinAmerican team. The contract provided for a bonuson contract approval and a monthly salary. The IRSwithheld tax. Some players sought a refund statingthat the income was not U.S. source. Under Rev.Rul. 74-108, the IRS concluded that a preliminaryagreement that does not require the player to per-form any services is, in essence, a covenant not tocompete and the bonus was paid as consideration forthe agreement. If the bonus is not compensation forlabor or personal services performed and not effec-tively connected with a trade or business in theUnited States, income tax is withheld at a flat rateof 30 percent on the portion of the fee applicable tothe U.S.-source income. The apportionment of thefee between U.S and foreign sources must be reason-able under the circumstances.

After an analysis of Rev. Rul. 74-108, 1974-1 C.B.248 in an IRS legal memorandum, George M. Sell-inger, associate chief counsel (international), con-cluded that bonuses and salaries paid to LatinAmerican baseball players were not U.S.-sourceincome. The bonus paid to the Venezuelan baseballplayer after he signed an employment contract wasdistinguishable from the contracts cited in Rev. Rul.74-108, 1974-1 C.B. 248, and Linseman v. Commis-sioner, 82 T.C. 514 (1984), because the bonus paid inthose situations was paid before the players signedan employment contract as an inducement to sign.Sellinger felt that the bonus could properly be char-acterized as advance compensation for personal ser-vices. Thus, the taxation of the income depended onwhether the baseball players had performed anyservices within the United States.

4. Withholding

The IRC requires that taxes be withheld on pay-ments made to nonresident aliens for the perfor-mance of personal services.37 The rate of tax with-held by the IRS depends on whether the athleteperformed the personal services as an employee oras an independent contractor. If there is an employ-ment contract, the payments made to a nonresidentathlete for any personal services rendered in theUnited States are subject to graduated rates of

28IRC section 871(b)(1).29IRC section 871(a).30IRC sections 861(a)(3) and 864(b).31Sandler, supra note 4, at 152.32IRC sections 861(a)(3) and 864(b); see also Sandler, supra

note 4.33IRC section 861(a)(3); see also Sandler, supra note 4.34IRC section 871(b)(1).35IRC section 873(a).36Reg. section 1.861-4(b); see also Sandler, supra note 4, at

153.

37IRC section 1441(a) (there is no exception for an inde-pendent contractor); IRC section 3402(a)(1) (employers arerequired by statute to deduct and withhold tax on any wagespaid to their employees in the course of duty).

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withholding.38 Further, the employer must withholdthe tax ‘‘even if the employer is not a U.S. person orentity.’’39 If the nonresident athlete is an indepen-dent contractor, payments made are subject to a flat30 percent withholding rate.40

A nonresident entertainer or athlete performingin the United States may be considered an employeeof the person with whom he contracts to provideservices, including a loan-out corporation when oneis used and recognized for tax purposes.41 When thesalary relates to worldwide employment, withhold-ing is based on the salary applicable to servicesrendered in the United States calculated as a rea-sonable proportion of the overall salary. The IRStakes the strict position that tax must be withheld atthe rate of 30 percent on any payments to nonresi-dent athletes. Even though payments may be ex-empt from U.S. tax under either the IRC or anapplicable tax treaty, a nonresident athlete subjectto income tax withholding because of performancesin the United States may request a central withhold-ing agreement and qualify for a reduced withholdingrate.42

B. Canadian Taxation of NonresidentAthletes

Unlike the U.S. domestic tax law system in whichthe United States has adopted specific rules fordetermining the geographical source of varioustypes of income and expense, there is no comprehen-sive definition of source income in Canada. Instead,the determination of the source of income is aquestion of fact to be determined in each case.43

Canada does not have a separate domestic regimefor the taxation of nonresident entertainers andathletes.44 They are classified like any other non-resident for tax purposes. Thus, it is necessary toevaluate how Canada engages in the practice oftaxing nonresidents generally and how it deals withthe enforcement of that legislation.

1. Definition of Nonresident Alien

The taxation of nonresidents in Canada is dividedinto three categories:

• Nonresidents employed in Canada, carrying onbusiness in Canada, or disposing of taxableCanadian property. Those individuals are taxedon their net income based on investment inthose activities at applicable rates set forth inthe statute.45 The applicable tax rates for thosenonresidents are those that apply to individualresidents in Canada.46

• Nonresidents earning investment income fromsources in Canada. That includes interest, divi-dends, rents, and royalties, which are subject toa flat rate of tax on the gross amount of thepayments.47 The statute fixes the rate of tax at25 percent, but, like in U.S. domestic tax law,the rate may be reduced depending on anapplicable tax treaty. The tax is generally with-held and remitted at source by the personpaying the amount to the nonresident in-volved.48

• Other Canadian-source income. Income notclassified under the above-mentioned catego-ries generally is not taxed in Canada. Thatincludes some categories of income, such ascapital gains from the sale of property that isnot taxable Canadian property and businessincome derived from Canada when the nonresi-dent is not carrying on business in Canada.49

A nonresident is defined simply as ‘‘not residentin Canada.’’50 When analyzing whether an indi-vidual is a resident of Canada, some of the primaryfactors that are analyzed by the courts include: (1)the maintenance of a dwelling in Canada availablefor use by the individual; (2) where the individual’sspouse resides; (3) the individual’s desire to returnto Canada; (4) the length of time during which theindividual is physically present in Canada; and (5)the individual’s social and economic ties withCanada.51

2. Taxable Income of Nonresidents for CanadianTax Purposes

Under ITA section 4(1)(a), income is calculated ona source-by-source basis. Income of a particularsource is determined on the assumption that thetaxpayer has no income or loss except from that

38IRC section 3121(d).39Evans, supra note 8, at 303; see also Lindsay A. Histrop,

‘‘Taxation of Canadian Resident Athletes and Artists Perform-ing in the United States,’’ 32 Canadian Tax Journal note 39 at1068 (1984).

40IRC section 1441(a).41Sandler, supra note 4, at 163.42Evans, supra note 8, at 303 (referring to Rev. Proc. 89-47,

1989-2 C.B. 598).43Sandler, supra note 4, at 327, 328.44Id. at 37.

45Section 2(3) and Part I, Division D of the Income Tax Act,R.S.C. c. 1 (5th Supp.) (hereinafter, the ITA).

46ITA section 118.94.47ITA part XIII.48Sandler, supra note 4, at 38.49Id.50ITA section 249(1), that is, the definition of a nonresi-

dent.51Sandler, supra note 4, at 39 (reflecting factors that may

be relevant in determining an individual’s residence).

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source. ITA section 4(1)(a) further states that theindividual taxpayer is allowed no deduction in com-puting his income, except deductions ‘‘wholly appli-cable to that source . . . and except such part of anyother deductions as may reasonably be regarded asapplicable thereto.’’ Because income is a net concept,one must consider the source of both revenue andexpenses. Section 115 requires that all deductions beallocated to and matched to particular sources ofincome. If income is earned from more than onesource or in more than one place, it must be appor-tioned in a reasonable manner.52

An individual is required to file an income taxreturn in Canada containing information about hisactivities only if tax is payable for the year53 or if theminister of national revenue demands the filing of areturn.54 Because those obligations have been heldby the legal system in Canada to apply to residentsand nonresidents alike, nonresident entertainersand athletes are not required to file a return unlessrequested to do so if they have no Canadian taxpayable or are exempted by treaty from payingCanadian tax.55

Determining whether an individual entertaineror athlete can be considered to be employed orcarrying on a trade or business in Canada is done ona fact-by-fact basis. There must be an evaluation ofthe contractual relationship that exists with theperson who is requesting that the services be per-formed or rendered. According to Daniel Sandler, anoted international tax analyst and scholar, ‘‘recentauthority suggests that there is one test for deter-mining whether a relationship is one of employmentor independent contract, taking into account fourfactors being degree of control, integration into busi-ness operations, economic reality and specificationof results.’’ However, while it might be argued thatwhether the nonresident is classified as an employeeor independent contractor is not important whenevaluating a nonresident entertainer or athlete inCanada, the distinction is important when making acalculation of what constitutes Canadian-source in-come. There are stringent restrictions on deductionsavailable to employees that are not applicable tothose earning income from business.56

3. Signing Bonus

Given the varying opinions on the appropriateclassification and taxation of signing bonuses, theact was amended in 1981 to solve the issue of

whether a signing bonus made to a nonresident asan inducement to perform services in Canada isemployment income. In 1981 a law57 came into effectrequiring a nonresident to include a signing bonusin his income earned in Canada if the bonus wasclassified as a payment deductible by the payerwhen computing the payer’s taxable income inCanada. The motive behind the enactment of the1981 law was to target nonresident athletes whocame to Canada to play for Canadian teams. Allcompensation must be included in the nonresident’staxable income earned in Canada. The act is aimedmainly at professional athletes so that none of theirincome would escape Canadian taxation. However,the scope of the provision is broad enough to encom-pass any payment made to a nonresident to performin Canada. That includes entertainers, given theincrease in plays and films that have been per-formed in Canada.

4. Athlete Tax

The province of Ontario does not have a provisioncomparable to section 115(2)(c.1) in its Income TaxAct. Therefore, an individual athlete or entertainernot residing in Ontario on the last day of the taxyear would only be subject to income earned in thecalendar year in Ontario under ITA reg. part XXVI.Thus, it is not surprising that politicians have beenpushing for an athlete tax. An athlete tax is a taxlevied on professional athletes by the jurisdictionwhere they travel to play a game.58 According toRobert Macleod, a reporter with the Globe and Mail,‘‘The Councilors said the money raised through theAthlete Tax could be used to help subsidize theToronto Maple Leafs and Ottawa Senators, Ontar-io’s National Hockey League teams.’’ Many politi-cians see the athlete tax as a means to force profes-sional athletes to foot the bill for the stadiums andarenas where they engage in sporting events on aregular basis. Therefore, because of the clever appli-cation of tax laws, there is a strong likelihood thatthe revenue generated from the application of anathlete salary tax would be substantial. Any profes-sional athlete who played a game in Ontario wouldbe charged state income tax, most likely on a pro-rated basis.

While an athlete salary tax has the drawback ofbeing complicated, with professional salaries in themillions in some cases, it is not surprising that thepoliticians and the residents of Ontario would sup-port a tax to get funds back that might otherwiseescape taxation. Thus, the notion of an athletesalary tax ensures that the athletes are taxed on the

52Id. at 40 (1995).53ITA section 150 (1).54ITA section 150 (2).55Sandler, supra note 4, at 41.56Id. at 43.

57ITA section 115(2)(c.1).58Robert Macleod, ‘‘Toronto Councillors Want to Tax Visit-

ing Pros,’’ Globe and Mail, Feb. 3, 2000.

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remuneration received for their services. It is aconcept that is discussed later in the paper todetermine its applicability in an international con-text, when evaluating the feasibility of a separatetax regime for nonresident athletes.

Like many countries, Canada has withholdingrequirements on income payable to nonresidents.The withholding requirements are discussed and setforth in ITA section 153. Under 153(1)(g), withhold-ing must be made for ‘‘fees, commissions, or otheramounts for services.’’ The withholding require-ments for both resident and nonresident employeesare alike for employment income. The amount with-held at source increases at graduated rates depend-ing on the amount of remuneration paid59 and wherethe employee performs services. In more than onecountry, a reasonable apportionment must bemade.60 Consequently, any failure on the part of thepayer to withhold makes the payer liable to theamount of tax that should have been deducted,61

plus penalties62 and interest,63 for nonresident em-ployees.

5. Withholding

There is no withholding on payments for indepen-dent personal services to residents. Regulation 105provides that every person paying to a nonresidentperson a ‘‘fee, commission or other amount in respectof services rendered in Canada of any nature what-ever’’ shall deduct or withhold 15 percent of thatpayment.64 If the contract provides for services to beperformed by the nonresident athlete or entertainerin more than one country, an allocation of thecontract price must be given for the services per-formed in Canada. Only the portion of servicesattributable to services performed in Canada issubject to withholding under reg. 105.65

Finally, for both employees and independent con-tractors in Canada, an application may be made towaive or reduce withholding for undue hardship.66

The withholding is considered a payment of thenonresident athlete’s overall tax liability in Canada.According to Sandler, if the nonresident athlete canadequately demonstrate that the withholding nor-mally required is in excess of the Canadian tax

liability, the Department of Taxation may reduce thewithholding. Consequently, because there are noseparate provisions under Canada’s domestic taxlaws for nonresident entertainers and athletes, art-ists and musicians performing dependent personalservices can deduct specific related expenses underITA sections 8(1)(p) and (q). Canada is unique inthat it exempts from withholding tax copyrightroyalties paid to nonresidents. That income is gen-erally subject to withholding at fairly high rates inmost source countries. The rationale for that exemp-tion remains unclear and can lead to that income notbeing taxed. That is an important issue because itwould be possible for some foreign athletes, likerecently retired track star Carl Lewis, who alsoderives income as a singer, to substantially reducethe amount of Canadian income tax payable onincome received from a Canadian producer for per-forming in Canada by having the producer makeroyalty payments to his offshore corporation.

6. Deferral of Taxation for Nonresident Athletes

Because successful athletes often accrue a largeamount of money over a relatively short period oftime, sound tax planning is critically important tothose individuals. Tax planning is important notonly to minimize tax on large amounts of incomeearned in a particular year, but also to assist inplanning for the athlete’s future after his career hasfinished. That issue came to light in Canada whendealing with amateur athlete trusts. The propertaxation of endorsement and similar income earnedby Canada’s amateur athletes has long been thesubject of considerable uncertainty.67 Consequently,the new amateur athlete trust rules set out in BillC-92 were designed to remedy the situation and tobring consistency and coherency to the tax code.Although it is true that many of the internationalsports federations have loosened their rules forcompetition so that the line between amateur andprofessional athletes is no longer strictly drawn, thenew tax rules are a welcome addition in Canada toprovide assistance to the athletes.

Under the new rules, there is a limited amount oftax deferral for athletes who are not allowed toreceive income directly because of the rules govern-ing the applicable international sports federation.Under 143.1, an amateur athlete trust involves anational sport or organization that is a registeredCanadian amateur athletic organization receivingan amount of income earned for the benefit of anathlete under an arrangement made under the rulesof an international sports federation. Those rules

59Sandler, supra note 4, at 47.60Id.61ITA section 227(8.4).62ITA section 227(8).63ITA section 227(8.3).64Daniel Sandler is interpreting the wording in section

153(a), the statutory provision under which reg. 105 wasenacted.

65IC 75-6R, para. 4.66ITA section 153(1.1).

67Lindsay Ann Histrop, ‘‘The Taxation of Amateur Athlete‘Reserved Funds’ ’’ (1985), vol. 33, no. 6, Canadian Tax Jour-nal 1123-1153.

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require amounts to be held by the organization topreserve the eligibility of the athlete to competeinternationally.68 The organization that holds theamount of income earned is classified as the benefi-ciary.69 No tax is payable by the trust under part 1 ofthe act.70 When the athlete is a nonresident, with-holding applies to the income earned by the ath-lete.71 Finally, if the athlete is a nonresident, thetrust is subject to the special tax applied under partXII.2.72

There is no withholding onpayments for independentpersonal services to residents.

If an athlete has not competed internationally foreight years, the trust is characterized as havingdistributed to the athlete an amount equal to thefair market value of the property so that the athleteis subject to tax.73 That prevents an indefinite de-ferral of tax. If the athlete dies, there is a deemeddistribution of the property held by the athlete inthe year in which he dies.74

For most of the international professional leaguesoperating in North America, such as the NationalHockey League (NHL), Major League Baseball(MLB), and the National Basketball Association(NBA), all of the professional service contracts arevalued in U.S. dollars.75 As a result of the wideninggap in the Canada-U.S. dollar exchange rate, Cana-dian franchises are having difficulty attracting andretaining top athletes for their professional rosters,because of the notion that employment in Canadamay result in a heavier tax burden than in the

United States.76 This is why, for tax reasons, manyU.S. athletes refuse to sign contracts withCanadian-based teams.77

It must be examined if it is possible to structure acompensation package for a nonresident U.S. ath-lete so that the combined Canadian and U.S. incometax on that package would approximate the incometax that would be paid by the athlete playing for aU.S.-based professional team. A thorough knowledgeof the terms of the athlete’s contract and an under-standing of the possibility of deferring income areessential to evaluate the effectiveness of that plan.

To determine the amount of income to be allocatedto the athlete’s Canadian and U.S. performance ofservices rendered in the course of his or her partici-pation in sporting contests, there must be a record of‘‘duty days’’ prepared so that income can be taxedaccordingly. A duty day is based on the concept thatincome earned by the athlete is earned throughoutthe year.78 That would include practices, preseasoncamps, preseason and playoff games, and any otherdays during which the athlete is under contract tohis employer.79 Given a basic understanding of thecommitment by the athlete to his team, the team’stravel and practice schedule, and the activities of theleague, it is possible to determine a reasonableestimate of the duty days of a particular athletewhen determining the proper allocation of incomebetween Canada and the United States. From theCanadian tax compliance perspective, the nonresi-dent athlete’s U.S.- and Canadian-source incomewould be reported as a combined amount on astatement issued by the Canadian employer.80 Fromthe U.S. compliance perspective, the athlete canclaim a foreign tax credit for Canadian income taxpaid.81

Because a U.S. athlete wants to reduce the overalltax rate imposed on his Canadian-source income, hewill seek to decrease the number of duty daysallocated to Canada. To minimize the number ofduty days, it is advisable for the athlete to shift asmany duty days as possible to the United States.From an international perspective, that athletewould seek to shift the maximum number of dutydays possible to the country of residence. For non-resident U.S. athletes employed by Canadian-basedprofessional sports teams, it would be advisable toconsider holding the preseason training camp in a

68Eva M. Krasa, ‘‘Amateur Athlete Trusts,’’ in Report ofProceedings of the Forty-Fourth Tax Conference, 1992 Con-ference Report (Canadian Tax Foundation, 1993), 18:8-18:9.See also new paragraph 143.1(1)(a), at clause 81(1) of BillC-92.

69New paragraphs 143.1 (1) (e) and (f), at clause 81(1) ofBill C-92.

70Id.71New paragraphs 214(3) (k) and 212 (1) (u), at clauses

12.5(1) and 123(8) of Bill C-92.72New subsection 210.2 (1.1) at clause 122(1) of Bill C-92

extends the part XII.2 tax to amateur athlete trusts whenamounts are distributed to nonresident beneficiaries.

73New subsection 143.1(3), at clause 81(1) of Bill C-92.74Id.75Robert E. Beam, Stanley N. Laiken, and Darren A.

Raoux, ‘‘The Taxation of Non-Resident U.S. Athletes Em-ployed by Canadian Based Professional Sports Teams: At-tracting Athletes to Canada,’’ (1999) Vol. 47, no. 2, CanadianTax Journal 306.

76Id.77Id. at 307.78Id. at 309.79Id.80Id. at 310.81Id.

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U.S. location rather than in Canada. Also, the teamcould hold the camp in a U.S. state that does not levyincome tax. In the weeks leading up to a game thatis not played in the United States, the team couldconsider leaving a couple of days earlier and attemptto make arrangements with the opposing team topractice at their facility. If not, the athlete mightbecome involved in the situation that occurred inCharron v. U.S., 200 F.3d 785 (1995). In that case,the federal circuit held that NHL players could notexclude from their taxable U.S. income amount theportion of their salaries earned living and perform-ing services in Canada during the off-season as wellas the portion earned playing games in Canadaduring the season. The court reasoned that none ofthe players had substantiated their claims on thenumber of days spent in Canada playing games andattending training camps.

Another way for the nonresident athlete to defertaxation is through the establishment of a retire-ment compensation arrangement (RCA). An RCA isdefined as a ‘‘plan or arrangement under whichcontributions (other than payments made to acquirean interest in a life insurance policy) are made by anemployer or former employer of a taxpayer, or by aperson with whom the employer or former employerdoes not deal at arm’s length, to another person orpartnership in connection with benefits that are tobe or may be received or enjoyed by any person on,after, or in contemplation of any substantial changein the services rendered by the taxpayer, the retire-ment of the taxpayer or the loss of an office oremployment of the taxpayer.’’ While the RCA defini-tion excludes a deferral plan for an athlete, it addstwo conditions for exclusion: The plan must meet thedefinition of salary deferral arrangement, and thecustodian must have a fixed place of business inCanada and be licensed to carry on business inCanada as a trustee.82 Thus, if a plan is structuredso that it does not meet those two conditions, it isclassified as an RCA. The nonresident athlete is ableto reduce the Canadian taxes paid, provided that heis able to obtain as a foreign tax credit a full creditfor the Canadian taxes that were paid. The RCA canbe implemented while an athlete is already playingfor a Canadian team. The RCA allows the nonresi-dent athlete to reduce the overall effective Canadianincome tax rate to a level comparable to the U.S. taxrates. Because the RCA allows for deferral of incometax owed, the plan must provide for benefits receivedby the athlete after any substantial change in theservices rendered by the athlete, the retirement ofthe athlete, or the loss of work or employment by theathlete. From an international perspective, a com-prehensive knowledge of the terms of the athlete’s

contract and an understanding of the possibility ofdeferring income can be used to prepare a plan. Thatensures that the acceptance of an employment-based contract with a Canadian team does not placethe nonresident U.S. athlete in a worse tax positionthan if he had played for a U.S.-based franchise. Thegoal of a separate tax regime for the internationalathlete must not be to place the athlete at a signifi-cant income tax advantage, but to take into accountthe reasonableness of the deferral applied by anation like Canada to an athlete competing withinits borders.

C. Mexican Taxation of Nonresident AthletesThe Mexican tax system has evolved from what

used to be a fairly antiquated system of multipletaxes and high rates into the most developed taxsystem in Latin America. To avoid double taxation offoreign-source income, the Mexican tax system al-lows taxpayers a direct foreign tax credit againsttheir Mexican income tax for foreign income taxespaid on their foreign-source income. The amount ofthe credit cannot exceed the Mexican tax payable onthe net foreign-source income. No credit is allowedfor foreign taxes on income that is exempt fromMexican taxation. Consequently, any foreign taxesnot credited in a tax year cannot be deducted forincome tax purposes. Article 1 of the Income TaxLaw (LISR) provides that all legal entities residentin Mexico are subject to Mexican taxation for allincome from whatever source derived.83

1. Definition of Nonresident Alien

Nonresident individuals are subject to tax inMexico on income derived from Mexican sources.84

Except in limited cases, Mexican-source income of anonresident is subject to withholding tax at sourceon a gross basis.85 Individuals who become residentsof Mexico during the tax year are subject to tax onlyon income from Mexican sources during the part ofthe year before they became residents and aresubject to tax on their worldwide income during therest of the tax year.86 Nonresident individuals whoconduct business activities or render independentservices in Mexico through a permanent establish-ment or a fixed place of business are subject toMexican tax on income attributable to a PE or afixed base.87 Any residents who become nonresi-dents during the year are taxed only on incomeearned in Mexico. Residents are not required to filean annual tax return, but must submit estimated

82Beam et al., supra note 75, at 323.

83LISR, art. 15.84LISR, arts. 1 and 144.85Id., art. 144.86LISR, art. 1.87Id., art. 24.

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tax payments made during the period, which areconsidered to be definite for the period in which theincome was earned in Mexico.88 Consequently, awithholding obligation exists for all types of incomepaid to foreign residents either by corporations orindividuals. All withholding taxes from payments toforeigners should generally be remitted by the 17thof the month after the date the payment was due,even if no payment or withholding is actuallymade.89 If any payments are made in advance of theapplicable due date, withholding and remitting ofthe appropriate tax is accelerated.

2. Taxable Income of Nonresidents for MexicanTax Purposes

Under section 20.39 of the Mexican Tax LawCode, artists and athletes are classified as immi-grants admitted to Mexico to ‘‘undertake artistic,sports, or similar activities involving cultural pro-motional activities, and any other determined by theSecretariat of the Interior (Gobernacion)’’ providedthose activities are beneficial to Mexico in the opin-ion of the Gobernacion.90 Under article 159 of theIncome Tax Law,91 individuals or entities that re-ceive income from artistic activities in Mexico mustpay tax only when those activities are undertakenfor a period of greater than 183 days in a 12-monthperiod, provided that the individual does not have aPE or fixed place of business and they have signed alegally enforceable contract with the National Asso-ciation of Actors.92 Furthermore, because artists andathletes are an immigrant category created by theGeneral Population Act (GPA) for foreigners to con-duct activities beneficial to the public, the goal of theMexican income tax law regime is to ensure that thelevel of tax imposed on those types of activities isfair and reasonable. That tax law regime is designedto ensure that the level of tax is commensurate withthe type of activity involved and not unreasonablydisproportionate. Under articles 1 and 33 of theMexico Constitution, foreign athletes enjoy the sameindividual guarantees as Mexican citizens. The con-stitution states ‘‘no person can be prevented fromengaging in the professional, industrial, or commer-cial pursuit or occupation, provided it is lawful.’’Article 5 of the Income Tax Law imposes a three-month to three-year term93 for the failure to file

annual reports on investments held by nonresidentartists or athletes in countries considered to below-tax jurisdictions. Income from investments of anonresident artist and athlete must be included intaxable income, as it is earned from the performanceof services in Mexico, even though the money mightnot be repatriated. Mexico wants to exercise juris-diction to tax that income without it leaving thecountry and escaping taxation altogether. Unlessincome from the performance of sporting activities isincluded in the annual taxable income as it isearned, it is assumed that those transactions arerelated-party transactions at nonmarket prices.Thus, tax scholars and analysts must evaluate thefeasibility of a separate tax regime for nonresidentathletes to recognize the presence of tax havens andwork with countries to enact measures that close theloopholes allowing nonresident athletes to circum-vent the rules of the country of source.

3. Mexico-U.S. Double Tax Convention

Desiring to conclude a convention for the avoid-ance of double taxation and the prevention of taxevasion on taxes on income, Mexico has entered intotax treaties with various nations, including theUnited States. Article 18 of the Mexico-U.S. doubletax convention includes a provision dealing withartists and athletes because of the amount of incomegenerated by that category of taxpayers. The es-sence of that convention is to ensure the avoidanceof double taxation on earnings ‘‘where income isderived by a resident of a contracting state as anentertainer including theater, motion picture, radioor television artist or a musician or as an athletefrom activities conducted in Mexico may be taxed inMexico except where the amount of income that isearned by the entertainer or athlete, including anyexpenses that are reimbursed to him from his activi-ties does not exceed 3,000 United States dollars orits equivalent in Mexican pesos for the taxable yearconcerned.’’ The other contracting state may imposetax by withholding on the entire amount of all grossreceipts derived by the entertainer or athlete duringthe particular tax year, ‘‘provided that the enter-tainer or athlete is entitled to receive a refund ofthose taxes when there is no tax liability for thetaxable year.’’ Consequently, if income is derived bya resident of a contracting state as an entertainer oran athlete, it is exempt from tax by Mexico if thevisit to Mexico was ‘‘substantially supported bypublic funds of the first mentioned state or a politi-cal subdivision or local authority thereof.’’

88Id.89Jorge Vargas, Mexican Law: A Treatise for Legal Practi-

tioners and International Investors at 17.31 at 57 (1998).90Id. at 190 (1998). See also Ley Generalde Poblacion

(GPA) D.O., July 22, 1992, art. 48 (VII).91ITL, art. 159 at section 4438, income from public events.92Id.93Vargas at 86, supra note 89; see also Leydel Impuesto

Sobre La Renta (Income Tax Law) D.O., Dec. 30, 1980, Title

IV, art. 74; and by changes to art. 111 of the Codigo Fiscal LaFederacion (Federal Tax Code), D.O., Dec. 31, 1981, Title IV,Capitulo I.

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III. Distinct Treatment ofNonresident Athletes

When evaluating the feasibility of a separate taxregime for the nonresident athlete, the tax scholarshould examine whether nonresident athletesshould be treated differently from others providingpersonal services, such as architects, engineers, con-tractors, or lawyers.

A. Criticism of a Separate WithholdingRegime

There is consensus among many nations thatathletes should not be treated differently from oth-ers providing personal services. In fact, in the OECDmodel convention, any measures to eliminate taxevasion and avoidance must ‘‘preferably use waysand means which would not divorce the artist orathlete from the main categories of taxpayers towhich they belong (providers of dependent or inde-pendent services).’’ In many countries, nonresidentsare treated differently from residents to ensureenforcement of the paying of taxes owed by personsbased on services performed that are subject to taxin that country. According to Daniel Sandler, aseparate withholding regime enacted just for artistsand athletes, rather than a general withholdingregime applicable to all nonresidents who providepersonal services in the source country, createsenormous difficulties. First, additional legislationwould have to be enacted that is specific and clearlydefined in scope so that resident taxpayers and taxauthorities in the country of source know what isexpected and required. Second, a comprehensivedefinition of the terms ‘‘entertainers and athletes’’would have to be established, as well as the differenttypes of incomes subject to that taxation regime.

A tax scholar like Daniel Sandler would supportthe idea that income from dependent or independentservices should be sourced where those services arephysically performed. Thus, nonresident athleteswould be treated the same as resident athletes tostop the abuse of loanout companies, including theproliferation of offshore entities. Taxing all incomefrom the performance of personal services, regard-less of the residence of the person performing theservices, creates uniformity. Treating nonresidentathletes the same as resident athletes serves thegoal of both the tax administrator and the athlete.The goal of the tax administrator is to receive a fairshare of the income derived from services performedby the athlete in the source country. The goal of theathlete is to minimize the risk of double taxationand have sufficient knowledge and informationabout the degree of the cost of compliance.

Thus, tax scholars like Daniel Sandler feel that aseparate regime for nonresident athletes is not nec-essary and only complicates matters.

B. Justification for a Separate WithholdingRegime

A separate tax regime for athletes takes intoaccount the diversity of the types of income that canbe derived by the international athlete and thenature of the services being performed, makingathletes the most mobile individuals in the businessworld. Having athletes in the same category as otherpeople providing personal services could create ad-ministrative difficulties and be disruptive to smallbusinesses and corporations that create jobs, invest-ment, and economic opportunities in the sourcecountry. That is especially true when the govern-ment of a nation is influenced by free marketeconomy principles and a laissez-faire economic ra-tionale and the government is in the hands of thebusinesses themselves.

The RCA allows the nonresidentathlete to reduce the overalleffective Canadian income tax rateto a level comparable to the U.S.tax rates.

The importance of having a separate tax regimefor nonresident athletes may also be justified undera benefits theory. The predominant theory underly-ing a state’s tax claim is the ‘‘benefits theory’’ — ‘‘thetaxes levied by the State are the price of all servicesprovided by the State to its Taxpayers.’’94

High-profile nonresident athletes have the capac-ity to earn significant amounts of money in a coun-try within a short period of time without establish-ing a fixed base. Source countries want to tax thatincome because it may not be subject to tax in anyother jurisdiction. Well-known athletes receivegreater benefits from the country in which theycompete, unlike other individuals providing per-sonal services in that country. Those benefits includeenhanced security measures, the availability of ap-propriate venues, free press, and a market in whichthe athlete can perform and promote his products.All of those benefits may create a greater economicallegiance to the source state.95

IV. Difficulties Faced byNonresident Athletes

To accurately assess the feasibility of a separatetax regime for nonresident athletes, governmentsmust recognize the difficulties facing nonresident

94Sandler, supra note 4, at 340.95Taxation of Non-resident Entertainers, supra note 13, at

18-19.

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athletes. Only then can they establish uniform rulesand guidelines that provide consistency in the treat-ment of that highly specialized class of taxpayers.

A. Diversity of IncomeMany high-profile sports stars earn substantial

amounts of income in the international arena andcan afford to pay their share of taxes. Thus, nonresi-dent athletes are not as financially disadvantagedby tax regimes compared with other highly mobileprofessionals. In view of the great difficulties facedby tax authorities in the assessment and collectionof tax resulting from the diverse sources of anathlete’s income, governments should be cognizantof the difficulties encountered by nonresident ath-letes. In many instances, athletes receive a widevariety of different types of income, but not all ofwhich is necessarily related to the actual perfor-mance of the athlete. Many athletes are paid forusing or advertising products unrelated to theirsporting activities.96 In addition, tax collection canbe very difficult because of the inherent mobility ofthe athletes. As a result, problems can arise inidentifying the income associated with the indi-vidual athlete.

B. Information and Disclosure of EarningsGovernments should also recognize the difficul-

ties faced by the nonresident athlete, because thetax administrator in the country of source must beable to obtain information about an athlete’s activi-ties to prevent possible nondisclosure of earnings.That can be accomplished if the countries where theathlete performs cooperate by exchanging informa-tion and providing documentation on the incomegenerated by the nonresident athlete. When taxingathlete income at the international level, it is quitepossible for athletes ‘‘at the low end of the incomescale to fail to report income, either intentionally orunintentionally.’’ Conversely, athletes with substan-tial earnings may be able to hide their money inoffshore tax havens.

A separate tax regime for nonresident athletesmust focus on improving the ability of a country toretain its fair share of the athlete’s earnings gener-ated within its borders. If that does not happen,governments will continue to face the administra-tive burden of processing multiple individual taxreturns and the enforcement burden of dealing withthe noncompliance of the athlete.97

From a policy perspective, it can be argued thatgovernments should care about the difficulties facedby the athlete in the international community, be-

cause athletes derive income through cultural andpromotional activities as well as sporting eventsdesigned to benefit the country where the athletecompetes. That leads to increased travel and tour-ism opportunities in the country where the athleteperforms. Given the globalization of the worldeconomy, an athlete can reach into every corner ofthe globe through television, radio, and other pro-motional activities. That can lead to the creation andpromotion of new business ventures that market theathlete in the world community. Thus, investmentopportunities are created that might otherwise belost if a government is too oppressive in the way ittaxes an athlete’s income. As athletes travel exten-sively, it is often possible for them to cease being aresident of their respective home countries. Athletescan establish a new residency in offshore locations,such as the Cayman Islands, Panama, the Bahamas,and Monaco. Governments should work together tolessen the difficulties faced by athletes as theytravel abroad and derive income. It is important torespect the livelihood of the athlete and understandthe difficulties faced by the athlete in the interna-tional community. Thus, countries must not createtaxation regimes that are overburdensome in theirapplication, given the potential for increased rev-enue derived by the performance of the interna-tional athlete.

V. Characterization of IncomeTo properly assess the feasibility of a separate tax

regime for the nonresident athlete, it is important torecognize and identify the diversity of income sub-ject to tax in the countries where the services areperformed.

A. Endorsement and Sponsorship IncomeThe characterization of income streams received

by the international athlete is not always clear-cut.Athletes usually receive endorsement and sponsor-ship income in addition to other fees incurred. En-dorsement income arises when there is a paymentreceived by the international athlete from a manu-facturer of a particular product in return for the useof his name or image in marketing the product. Inthe United States, sponsorship income arises whenthere are payments made to a foreign athlete undersponsorship contracts related to a period when theforeign athlete performs in the United States. Forexample, when a car racer competes at the India-napolis 500 wearing a helmet bearing the name of asponsor, or when a swimmer competes in the UnitedStates as part of the World Cup of Swimmingwearing a swimsuit bearing the name of a sponsor,the portion of his total sponsorship income receivedfrom that company and relating to the United Statesshould be subject to U.S. tax.

When characterizing endorsement and sponsor-ship income, the classification of the income as

96Evans, supra note 8, at 324; see also Abrams et al., supranote 25.

97Evans, supra note 8, at 325.

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royalty or personal income compensation for ser-vices rendered in the source country is complex.Under Rev. Rule 81-178 and 1981-2 CB 135, royal-ties are payments based on the use of the items likethe athlete’s name, likeness, or signature. Royaltiesfor the use of intangible property are sourced wherethe property is used. Conversely, payments requir-ing rendering services, like playing in a golf tourna-ment, count as personal service income. If the in-come is characterized as personal service income, itis deemed to be effectively connected with a trade orbusiness in the United States and subject to U.S. taxat graduated rates up to 39.6 percent. However, ifthe income is classified as royalty income, it ischaracterized as income not effectively connectedwith a trade or business in the United States subjectto tax at a flat 30 percent rate on the gross amount,unless reduced by an applicable tax treaty. In addi-tion, when classifying payments as royalties or per-sonal service income, various factors need to beconsidered. Those factors include whether the com-pensation is based on a percentage of sales (royaltiesare usually based on sales), whether the athlete isrequired to render the services to earn the income (ifthe services are required it is likely to be deemedpersonal service income), and whether there is acontract with payment dependent on performance.

There is consensus among manynations that athletes should not betreated differently from othersproviding personal services.

In many instances, there are athletes who as partof a team receive a ‘‘flat retainer’’ in exchange forwearing a particular brand in competition. Thatmight occur when basketball players on the HoustonRockets wear Adidas apparel in exchange for a fee.The athletes may be asked to make personal appear-ances on behalf of Adidas and agree to associatetheir name with the Adidas company. Some athletesmay receive a percentage of the sales based on thenumber of items sold to the general public.

As previously discussed, those endorsement con-tracts either are taxed as royalty income or aspersonal service income, depending on the degree ofactive participation by the athlete. If the athlete isrequired to perform services as part of earning theendorsement fee, like appearing in a commercial orwearing the item in competition, the United Statesclassifies that fee as compensation for personalservices and taxes it at graduated rates, based onthe location of the services performed.

If payments are made based on the use of theathlete’s name or likeness, that income is classifiedas a royalty under U.S. law. That classification isbased on the U.S. sales of the endorsed product

relative to sales in the rest of the world. Thus, ifMichael Jordan is paid to wear Nike apparel whenplaying for the Houston Rockets and Nike apparel ismarketed in both the United States and Japan, thenumber of sales determine how the royalties aresourced based on the U.S. and Japanese markets.

1. Contractual Language

An examination of the feasibility of a separate taxregime for nonresident athletes requires an evalua-tion of the language of the contract and the sub-stance of the transaction based on an objectivereasonable standard. That should be conclusive as towhether the payments can be classified as personalservices income or royalty income. That issue cameto light in the U.S. Tax Court’s opinion in Boulez v.Commissioner, 810 F.2d 209 (D.C. Cir. 1987), whichillustrated the analysis used for determiningwhether payments were royalty income or incomefrom personal services under U.S. tax law. PierreBoulez was a German resident who filed U.S. incometax returns. He performed services in the UnitedStates for the New York Philharmonic Orchestraand also entered into contracts with CBS Records toconduct an orchestra for a studio recording in NewYork. His contract with CBS stated that he was toreceive a percentage of the proceeds received fromthe sale of the records. The contract did not providethat Boulez was to retain a copyright interest in therecording. The Boulez decision stated that, eventhough his income was based purely on a percentageof sales, the payments were for personal servicestaxable in the United States. After analyzing theterms of the contract, the Tax Court concluded thatBoulez had been hired as an independent contractorby CBS and that the recordings were entirely theproperty of CBS Records.

B. Signing Bonus

Another type of income that athletes receive is asigning bonus. A signing bonus occurs when anathlete signs a contract agreeing to play for aparticular team and receives a bonus on contractapproval. A tax scholar or analyst must first look atthe domestic laws of both the United States andCanada on how a signing bonus is taxed to deter-mine how that system might be applied on theinternational level. As discussed earlier, the IRS haslooked at how signing bonuses should be taxedunder Rev. Rule 74-108. The IRS has considered thatthe source of the signing bonus is the place wherethe promisor decided to forfeit his right to act,thereby treating the agreement as a covenant not tocompete. It would only be classified as U.S.-sourceincome when the athlete gave up a right to play foranother team in the United States. If the bonus isnot compensation for labor or personal servicesperformed and not effectively connected with a tradeor business in the United States, the income tax

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must be withheld at the flat rate of 30 percent on theportion of the fee that is U.S.-source. The apportion-ment of the fee between U.S. and foreign sourcesmust be reasonable under the circumstances.

Under Canadian law, most signing bonuses re-ceived by an athlete for services rendered in Canadaas an employee are subject to Canadian income taxunder paragraph 115(2)(c)(1). However, under theCanada-U.S. tax treaty, Canadian tax required to bepaid on a signing bonus received by a U.S. athletemay only be subject to a 15 percent Canadian federaltax rate. Thus, it is advantageous to convert aportion of U.S. athletes’ earnings into signing bo-nuses to reduce Canadian tax liability.

C. Creative Service ContractAnother type of income that comes up quite

frequently involves creative service contracts. Whenanalyzing creative service contracts on a domesticlevel to see how those contracts can be taxed on theinternational level, it is important to recognize thatCanada does not have a separate domestic regimefor the taxation of nonresident entertainers andathletes. Under the application of creative servicecontracts, Canadian taxes payable by a foreign art-ist can be substantially reduced when the artist notonly renders services, but also plays an importantrole in creating the work that he presents. Thus, if asinger is also a music composer, he could benefit bytransferring his copyrights to an offshore corpora-tion in the Cayman Islands and have royalties paidto the corporation so that the individual obtains theright to sing his songs in public. Copyright royaltiesare exempt from Canadian withholding tax. Thus,foreign athletes, like recently retired Carl Lewiswho also derives income as a singer, may substan-tially reduce the amount of Canadian income taxpayable on income received from a Canadian pro-ducer for performing in Canada by having the pro-ducer make copyright royalty payments to his off-shore corporation.

D. Training IncomeMany professional athletes receive income during

training. Training usually takes place in their coun-try of residence. However, according to many inter-national treaties that contain specific provisionsdealing with full-time education, training, and ap-prenticeships, income for training activities is onlytaxable in the country of residence of the foreignperformer. That provision exists in article XIX of theCanada-U.K. tax treaty. However, the application ofthose treaty provisions to athletes is not alwaysobvious. Therefore, a careful analysis is usuallyrequired.

VI. Allocation MethodsWhen analyzing the feasibility of a separate tax

regime for nonresident athletes, it is important to

evaluate the most effective method of allocating thatincome to different jurisdictions and the reason whyallocation is an important consideration. It is undis-puted that countries may impose income taxes onnonresident professional athletes provided thattaxes are not unduly burdensome on trade andcommerce and are reasonable. Thus, an interna-tional tribunal court would, in all likelihood, upholdthe imposition of an allocation method of taxation bycountries. Although legal, the imposition of thosetaxes by nation states creates a difficult complianceburden. Therefore, adopting a uniform allocationsystem for the nonresident athlete’s endorsement,sponsorship, and training income, creative servicecontracts, and signing bonuses could alleviate boththe compliance burden on athletes and the enforce-ment burden on countries.

The essence of a uniform allocation method is anagreement among nation states hosting sportsteams to treat all nonresident athletes playing intheir respective nations in the same manner. Ath-letes would allocate their income for tax purposes inthe same way for each nation in which they partici-pate in sporting activities. That method must ad-dress the problems facing athletes and taxing au-thorities and would include compliance, uniformity,discrimination, and tax warfare.

As previously discussed, the lack of a uniform,comprehensive tax system places unreasonable bur-dens on athletes and fosters incomplete and in-adequate compliance. The result is a lack of compli-ance efforts by athletes and arbitrary and unfairenforcement efforts by tax administrators. There-fore, any allocation method agreed to by the nationsof the world community and the international ath-lete must dramatically reduce the compliance bur-den.

An allocation method must also provide unifor-mity and protect against discrimination in inter-national trade and commerce, as well as ‘‘over andunder taxation.’’ It must be adopted by all thenations where the teams are based. Both the non-resident athlete and the country where the compe-tition is taking place will definitely benefit from thisuniformity. Also, there will be protection from therisk of multiple taxation. Consequently, the alloca-tion method must eliminate international tax war-fare and ensure full compliance with a country’s taxlaws. Finally, the allocation method must be reason-able and fairly related to the services provided bythe nation involved. Therefore, both the legitimateinterests of the country and the athlete are met andsafeguarded.

A. Home State Allocation

Several allocation methods have been advancedand discussed by tax administrators and players

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associations. Under home state allocation, all of thesports income of a player would be allocated to thenation state in which his team is based.98 Thatmethod is revenue neutral and easy to comply withfor both the teams and the players. It is based on thereciprocal nature of professional sports. Under therules of all professional sports leagues, every teammust play an equal number of home games andaway games during the regular season. Everyteam’s home game is another team’s away game.Thus, there is reciprocity to the sports industry thatguarantees economic neutrality for the states wherethe teams are based. The continuous yet reciprocalinterstate activity of each club is essential to all theothers. Therefore, the home state allocation methodwould result in a fair allocation of tax. However, theprimary disadvantage is that home state allocationmethods tend to merge together the two taxingconcepts of source and residence. Those two rulesare competing theories under which states haveestablished their taxing jurisdiction. Nonresidentathletes will avoid double taxation of the incomeallocated to their home state only if the country ofthe athlete in question gives a credit for taxes paidto their home state. Thus, athletes might be taxedtwice on their earned income in places other thantheir state of residence.

B. Duty Day

A second allocation alternative, the duty dayconcept, might be adopted because it focuses on thecontractual obligation of the athlete. That methodcalculates the athlete’s tax obligation by dividing thenumber of duty days spent by the athlete in the stateby the total number of days that the athlete iscontractually obligated to his team.99 The athlete isoften required to perform services on days when nogame is played, like travel, team meetings, andpublic appearances. The duty days method takesinto account the athlete’s full contractual obligationsto his team rather than simply the number of gamesplayed. Thus, an advantage to using that method isthat it clearly reflects the athlete’s activity occurringin the taxing state, which results in fairer allocation.However, a disadvantage to countries is that it coulddecrease the amount of income that can be allocatedto a particular country for the athlete’s activitiesthere. That is due to the increase in the denominatorof the allocation fraction and by increasing theamounts of income allocable to the athlete’s activi-ties elsewhere.

C. Games Played and De Minimis Exception

An alternative allocation method called thegames played concept100 is not a practical alterna-tive because it fails to consider the entire contrac-tual obligation of the athlete and fails to define whatconstitutes a game. There is another method calledthe de minimis exception method, which exemptsathletes from filing or paying tax if they spend lessthan a specified amount of time in a particularcountry.101 That is also not a practical alternativebecause it would reduce or eliminate a country’sability to tax nonresident athletes, even though itmight be accepted by countries in which athletesspend a small amount of time if uniformity is tooccur.

VII. Jurisdiction to Tax NonresidentAthletes — Advertising and

MarketingAnother issue that must be addressed is jurisdic-

tion. It is important to evaluate whether a countryshould have the right to tax an athlete if the athletenever physically enters the country, but insteadmarkets and promotes himself through the use oftelevision advertising that is broadcast and trans-mitted into that particular country. There must be aproper analysis of the requisite degree of contactthat is necessary between the athlete and thatcountry to invoke tax consequences.

A. Minimum Contacts

Given the globalization of the world economy, theinternational athlete has the potential to reach intoevery corner of the globe regardless of whether he isphysically present in a particular jurisdiction. It canbe argued that it would not be fair and reasonablefor a country to assert jurisdiction to tax the non-resident athlete if that athlete does not have suffi-cient minimum contacts with the particular countryinvolved. In the United States, simply placing aproduct within the stream of commerce does not inand of itself give rise to jurisdiction in a particularstate where the product ended up and caused injuryto a citizen of that state. There must be somethingmore involved to show a sufficient nexus with thestate, so that it would be foreseeable to hold themanufacturer of the product liable.

From an international perspective, a separate taxregime for nonresident athletes should analyze thenature and intent of the athlete’s advertising andpromotional activities to determine if it was foresee-able that the athlete marketed and publicized his

98Jeffrey L. Krasney, ‘‘State Income Taxation of Non-Resident Professional Athletes,’’ 47 Tax Law 395, 27 (1994).

99Id.

100Id. at 29.101Id.

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image in a particular country. If it can be shown thatthe athlete intended to have direct access to aparticular nation, through advertising and market-ing objectives designed to promote the image of theathlete, the athlete should have foreseen that par-ticular country would exercise jurisdiction to imposea tax on the income generated. That the athlete isnot physically present in the country should notmatter because the athlete is purposefully making amedia campaign in that country to generate in-creased revenue and investment opportunities.Thus, a tax scholar and analyst must examine thenature and extent of the athlete’s contact with acountry to determine if that country has the right toassert jurisdiction to tax. If it can be proven that theathlete does not intend to market and promotehimself in a particular nation, that nation wouldhave insufficient grounds to impose tax.

However, it can be argued that because income isbeing derived through the publicity and promotionalcampaign orchestrated by the athlete, it would notbe fair and reasonable for that nation not to have theright to a portion of the income simply because theathlete never intended to broadcast in that particu-lar nation. Consequently, that income would escapethe net of taxation. That argument refuses to con-sider that that income is being generated from theperformance of personal services by the athlete.Furthermore, the goal of the tax administration is toreceive a fair share of that income. That the athletedid not physically perform the services in the coun-try is accurate. However, the promotional and pub-licity campaign undertaken by the athlete to markethimself indirectly creates the performance of ser-vices in that country through increased revenuefrom media coverage. To foster investment and jobcreation in that country, a portion of the income ofthe athlete must be subject to tax to ensure unifor-mity and nondiscrimination.

It is also important to consider the degree of thecost of compliance involved when that athlete neverenters the country physically but is active in thecountry through media coverage designed to pro-mote and popularize the athlete. Because the ath-lete never physically enters the country, it could bedifficult to enforce the collection of tax based on hisor her earnings. However, mandatory withholdingmay be a distinct possibility if the athlete has assetsin the country based on the creation and promotionof new business ventures and other investmentholdings. Asking the athlete to come forward volun-tarily does little or no good in that situation becausethe athlete will just assert a lack of any type ofnexus or contact with the country. Instead, theathlete will claim that any broadcasting of his ac-complishments amounts to inadvertent publicity ina country where he did not intend to do any type ofmarketing.

B. Role of the United Nations

The United Nations, as a global institution com-prised of nations bound by goals and objectivesdesigned to facilitate mutual cooperation and under-standing, must take the initiative in setting policyobjectives designed to create an international con-sensus of what constitutes effective jurisdiction.Those standards would allow a country to have thelegal authority to assert the right to tax the inter-national athlete. As a highly mobile and transientindividual, there must be guidelines on what consti-tutes sufficient contact with a country to subject thenonresident athlete to tax by that country. Becauseadvertising can be beamed into every corner of theworld, it is not clear what amounts to sufficientcontact with a country for that country to have theright to tax. If an athlete has no connection with acountry other than through advertising, it might beunfair to tax that athlete even though he is derivingpotential future income through a publicity cam-paign. The intent of the advertising must be estab-lished to objectively establish what connection, ifany, there is to that country.

Advertising is usually intended to promote anathlete, to further his career goals and objectives,and to lead to a greater understanding of the audi-ence of what the athlete represents. However, thereis also advertising that is unauthorized and pirated,which many times is intended to portray the athletein a false light. In an international context, a taxanalyst and scholar must recognize and differentiatebetween that type of advertising to determinewhether the advertising alone is enough to createthe sufficient minimum contacts necessary with thecountry to establish jurisdiction. While advertisinghas enormous revenue potential, it can also under-mine the credibility and respect of an athlete in acountry. Exposés and wild rumors about the lifestyleof an athlete, as well as personal triumphs andtribulations, may create unwarranted publicity thatthe athlete never intended. Thus, that type of pub-licity has nothing to do with the career and profes-sional objectives of the athlete. While it may gener-ate increased revenue in the country where theadvertising occurred, it would not be reasonable andfair, based on an objective standard, to impose a taxon income involving advertising and publicity thatthe athlete never intended.

VIII. Methods of Taxation

When evaluating the feasibility of a separate taxregime for nonresident athletes, one must first ex-amine and evaluate how athletes are actually taxedand why legal scholars and analysts would call thosemeasures undertaken by a country to be a tax.

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A. Enforcement Mechanisms

Because nonresident athletes generally spendshort periods of time in a particular country but canderive substantial amounts of income in that time,enforcement mechanisms must be used so as not tocreate an overly complex tax regime through theproliferation of deductions, credits, and other specialpreferences. Many professionals, not just athletes,receive deductions for expenses that would be clas-sified as ordinary and necessary expenses. However,because of long-standing practice and policy, somebusiness expenses should not be deductible eventhough they may be incurred as a business expense.For example, there is no reason why a businessmanshould be allowed to deduct the cost of a speedingticket while he was traveling to attend a conference.Instead, the cost of the ticket is a fine incurred bythe businessman for failing to obey the laws of thejurisdiction where the incident occurred. Likewise, ifan athlete fails a drug test in the ordinary course ofsports-related competition, the athlete should not beallowed to deduct the costs associated with theadministration of that test because it would under-mine the goal and purpose of the tax system imposedby the country where performance was rendered.The idea is to ensure uniform treatment of taxpay-ers by promoting and rewarding fair play insporting-related competitions. The object is to act asa deterrent and punish unethical and inappropriatebehavior without creating loopholes through the useof deductions that would reward an athlete forviolating an implied contract with the country wherethat athlete performs the services. In effect, theathlete agrees to compete in the spirit of true sports-manship without the aid of performance-enhancingdrugs or devices.

B. Value Added Tax

VAT is routinely applied by countries to peopleengaged in the performance of personal services.Because athletes participate in sporting events andcompetitions, they are in the class of taxpayersproviding personal services. That class of taxpayersincludes architects, engineers, and contractors.However, it is well established that nonresidentathletes receive greater benefits from the sourcecountry compared with other service providers. Asstated previously, some of those benefits includeenhanced security, the availability of appropriatevenues, free press, and a market where the athletecan perform and promote his products. Thus, be-cause those benefits can create a greater economicallegiance to the source country, nonresident ath-letes are different from other service providers.

Applying VAT to activities undertaken by athletesin the contracting state might pose some difficultiesbecause a country enforces its VAT regime by requir-ing the supplier of goods or services to register for

VAT purposes, charge VAT on a taxable supply,collect the VAT payable, and remit it to the taxauthorities.102 Because the athlete is a nonresidentof the nation where the services are performed andis thus classified as the supplier of services, enforce-ment of VAT against the athlete may be difficult. Itcan be argued that the VAT regime constitutes anindirect quid pro quo with the government of thenation where the athlete is performing the servicesbecause the athlete is allowed to perform in thecountry in exchange for a portion of the athlete’sincome that results from services performed in thecountry. That remittance should reflect any accom-modation and travel expenses incurred during theperformance of services in that country to ensurethat there is uniform treatment of nonresident ath-letes and is not fundamentally unfair and at oddswith investment and job creation purposes.

Adopting a uniform allocationsystem could alleviate both thecompliance burden on athletes andthe enforcement burden oncountries.

Some mechanism is absolutely necessary to en-sure that the VAT is properly charged and collectedwhen the athlete is performing the services in thetarget country. The nonresident athlete has a vestedinterest in registering for VAT in the country be-cause the athlete may want to claim back business-related VAT paid in the country for promotional andother sports-related activities. However, the non-resident athlete may not want to pay too much VATin the course of providing the services because theathlete may not want to be bothered by complyingwith potential administrative burdens under a VATregime. That can make compliance an extremelydifficult and complicated matter even though thereis significant growth in the use of indirect taxes anda decrease in the use of income taxes by countriesbecause of the view that indirect taxes are easier toadminister by the tax authorities. Consequently,even in a nation that employs a VAT regime, prob-lems can arise if the nonresident athlete does not filea tax return in that country despite being requiredto or is unwilling to declare the income in theathlete’s home country. A possible solution underthis type of system might include exempting part ofthe nonresident athlete’s income if that athleteagrees to participate in a charity event. That wouldgive the athlete an incentive to comply with the

102Sandler, supra note 4, at 9.

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administrative requirements of a VAT system be-cause the publicity and news coverage surroundingthat charity event would further enhance the ath-lete’s image and reputation as a responsible andcaring individual. That would increase the possibil-ity that the athlete would receive endorsement op-portunities and would give him the ability to makeeven more money than he might have originallyanticipated earning in the foreign country. In addi-tion, a charity event might generate increased traveland tourism opportunities, offsetting whatever in-come is lost on the portion of the athlete’s earningsthat is exempt from tax.

C. Flat Tax

Some tax scholars might suggest that a flat taxsystem should be imposed to effectively tax theinternational athlete because, unlike other highlymobile professionals who render personal services,nonresident athletes have the capacity to earn hugeamounts of money within a relatively short period oftime and use significantly more benefits produced bythe country of source. As opposed to the conventionaltaxpayer that is limited by the tax strictures of hisor her locale, the international athlete has theeconomic mobility to select the country with themost advantageous tax structure. Therefore, it canbe argued that an international flat tax levels theplaying field and takes the tax issue off the table indetermining where an athlete lives and performs.

Many countries have no effective means of taxingtheir own residents due to outdated and antiquatedlegal systems and lack the modern infrastructureand technology necessary to compete in the globalmarketplace. Further, given the globalization of theworld economy, it can be argued that it is necessaryto create a universal tax system that treats everyathlete the same regardless of how much money isearned or the sporting enterprise the athlete isengaged in. Because the flat tax treats all economicactivity equally, it is argued that the flat tax canpromote greater economic efficiency and increasedprosperity. When an athlete’s income is no longertaxed twice, the athlete may be more inclined to saveand invest more of his earnings in the country wherehe is performing services as part of sports-relatedcompetition or promotional activities. Thus, a flattax could lead to higher productivity and greatertake-home pay and create an incentive for the inter-national athlete to devote fewer resources, if any, totax avoidance and evasion. Also, because the taxrules would be uniform, the international athletewould base his financial decisions on common senseeconomics rather than arcane tax law.

In effect, the flat tax would replace the income taxcode of the nations that enter into an agreement toinvoke that tax system. Given that many countrieshave arcane tax laws or none at all, the flat tax

eliminates exemptions, loopholes, and targetedbreaks with a system that is so simple that theinternational athlete could file his taxes on a post-card size form. In a country like the United States,the Tax Foundation estimates that a flat tax wouldreduce compliance costs by 94 percent, saving tax-payers more than US $100 billion in compliancecosts each year. Further, according to one study by aformer chief economist for Congress’s Joint Commit-tee on Taxation, under the flat tax, the economy ofjust the United States would be 5.7 percent largerafter five years than under the current system. Thattranslates into US $522 billion in higher output orUS $3,000 in take-home income for the typicalfamily of four.

Under the flat tax, the more the international ath-lete earns in the country of source, the more he has topay. As incomes rise under the flat tax so too willdonations to charities in the country of source by theinternational athlete. Thus, under a flat tax system itcan be argued that taxpayers like international ath-leteswithsimilar incomeswillnotpayvastlydifferentamounts in taxes. It could be argued that the flat taxwill restore fairness by treating everyone the same,thereby minimizing the rate of tax imposed by thesource country and avoiding the possibility of doubletaxation. The flat tax provides that, no matter howmuch money the international athlete earns in thecountry of source, what kind of business or sports-related activity the athlete chooses to engage in, orwhether the athlete has strong ties or close connec-tions with lobbyists or politicians in the source coun-try, that athlete will still be taxed at the same tax rateas every other athlete.

D. Athlete TaxThe concept of an athlete tax was first discussed

under the domestic law of Canada. As athletes travelthe globe to compete in sporting events, nationshave a legitimate interest in reassessing whether ornot they are retaining a fair share of the earningsgenerated by the nonresident athlete. Because manycountries are faced with an exponentially growingnational debt and must search for revenue to allevi-ate the economic situation, the concept of an athletetax is an attractive option. An athlete tax is an‘‘income tax levied on athletes when they travel to aparticular jurisdiction to play a game.’’ The moneyraised through that tax could be used to foot the billfor the stadiums and arenas where the sportingevent takes place. It ensures that revenue is gener-ated to pay for facilities that help to generate tour-ism. However, because the athlete would be awarethat a tax would be imposed if he came to thatjurisdiction to participate in a sporting event, anathlete tax might make that country less appealingto those individuals and result in a loss of staterevenue that would not be offset by the tax imposedon the nonresident athlete. The mobility of athletes

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and the existence of other sites for sporting eventspermit athletes to choose the events in which theyparticipate.103 Thus, it is not surprising that famouscelebrities, such as Boris Becker, Bjorn Borg, andSteffi Graf, will forgo playing a major tournament ina country based on an awareness of the tax conse-quences.104

IX. ProposalsA special income tax and withholding tax regime

for nonresident athletes must incorporate four keyprovisions to establish uniform rules and guidelinesamong nations where the athlete performs.

A. Disclosure of Tax Information BetweenCountries

Given the globalization of the world economy, it isimportant for countries to exchange informationwhen athletes travel to compete in sporting compe-titions. Countries should agree to provide informa-tion to verify the residence of the athlete, theamount of income incurred by the nonresident ath-lete, the tax rate levied by the country of source, andthe nature of the activity involving the nonresidentathlete. That sharing of information must be basedon objectively defined criteria and must not serve asa vehicle to exploit the athlete. Thus, it is importantto create a system to ensure that countries collecttheir fair share of income earned by the nonresidentathlete and, at the same time, protect and safeguardthe identity of the athlete.

B. Mandatory Withholding by Country ofSource

The tax authorities of the source country shouldwithhold taxes on a nonresident athlete’s income ata fixed rate. The country of residence would eitherexempt the amount earned in the source country orgive a credit for the amount of tax paid. For with-holding to be effective, the Committee of FiscalAffairs of the OECD recommends that withholdingshould apply regardless of whether the athlete had afixed base in the source country or is earning incomeas an employee of a foreign company that has nopermanent establishment in that country. Conse-quently, the nonresident athlete would no longer befaced with the difficult task of filing a foreign taxreturn or submitting additional documentation.

C. Filing With the Country of ResidenceAthletes should be required to file an annual tax

return in their respective countries of residence.Therefore, the country of residence would have the

obligation to provide information and documenta-tion to the source country on the income earned bythe athlete. That would prevent the athlete fromhaving to file multiple tax returns for every countryin which he competed and would lessen the admin-istrative and compliance difficulties faced by ath-letes and the people who manage their finances.

D. Team Filing With the Country of Source

When athletes compete as part of a sports team,thereshouldbeasingleannualfilingofacompositetaxreturn submitted by the team on behalf of each non-resident athlete to the source country.105 The compli-ance burden would shift from the athlete to the teambecause the team would be responsible for withhold-ing the tax from the athlete and turning it over to thesource country. The team is in a better position toallocate an athlete’s wages among the various coun-tries where performance occurred. Thus, because theteamhasgreaterresourcesat itsdisposal, therewouldbe a decrease in the reporting requirements placed ontheathlete,whichtranslates intoagreater increase inrevenue for the source country.

X. ConclusionWhen Sydney hosted the 2000 Summer Olympic

Games, it should have been a natural starting pointfor assessing the feasibility of implementing a sepa-rate tax regime for international athletes. Given themagnitude of the event, which generated enormouspopularity and revenue potential, the lack of a sepa-rate tax regime applicable to the international ath-lete led to revenue escaping the net of taxation of theAustralian government. Compliance, administra-tive, and enforcement difficulties associated with col-lecting the revenue could have been prevented byusing a separate tax regime that reflected the uniquerole of the international athlete. That regime shouldhave taken into account the diversity of income gen-erated by the nonresident athlete, as well as the useby nonresident athletes of more benefits provided bya nation, compared to other people performing per-sonal services. Establishing uniform rules and guide-lines for taxation of international athletes shouldinclude mandatory withholding by the source coun-try at a fixed rate. Thus, Australia should have with-held at a fixed rate from the athlete’s income bonusesreceived from national Olympic committees or spon-sors. Disclosure of information between countriesand a single filing by the athlete in his country ofresidence or a single filing by the team on which anathlete competed would also be necessary in evalu-ating and examining the feasibility of a tax regime fornonresident athletes. ◆

103Evans, supra note 8, at 323.104Evans, supra note 8; see also ‘‘Graf Case Transfixes

Germans,’’ The New York Times, Oct. 13, 1995, at B11. 105Evans, supra note 8, at 331.

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Documents

Special Reports A Separate International Tax Regime for ...taxprof.typepad.com/taxprof_blog/files/2005-2745-1.pdf · A Separate International Tax Regime for Nonresident Athletes