What is tax?
If you asked the average person, they might tell you it is a fee imposed by governments on your income and assets, in order to raise revenue, which they may use in various ways. Although the concept of tax is well known and understood by most, not many know what it really is, or how it works. Part of this is due to the fact that it is rarely taught. Most schools and universities do not bother with teaching their students how to do their taxes, or better yet, when and how to pay them. Even in adulthood, many people will not have to deal with taxes directly. For example, in Hungary, not only will the employer withhold the taxes on an employee’s income and pay for social security, but the government will also make every applicable individual’s basic tax return. One simply logs into a portal, checks the document, and clicks accept.
Taxes can cause more significant issues in sports where athletes are lucratively paid and participate internationally. Recent high profile tax issues in the world of football include Lionel Messi, Cristiano Ronaldo, and Jose Mourinho; Two of the top players of all time and a legendary coach. Why would people of their status have issues with paying taxes?
There are two major issues: the diversity of applicable laws and the diversity of sources of income. Firstly to understand this issue, one has to look at where these players’ get their income from. There are sponsorship deals, advertising, image rights (which capture anything where the image of the athlete is used), bonuses, and salary, just to name a few. To complicated the matter further the sources of these incomes stem from various countries. These athletes are international but the laws that govern them are only national. Therefore, even if Ronaldo who is Portuguese and lives in Italy, might have to pay taxes in Japan. Furthermore, because of the diversity of their income, the type of taxes are also abundant.
So what are the principles of international taxation?
- Principle of Territory/Source: All the income generated and assets based on the state territory are subject to taxation.
- Principle of Residence: People who reside on the State territory are subject to taxation.
- Principle of Universality or Worldwide Income Taxation: Once one individual is subject to taxation by the state, taxation will be levied over his/her worldwide income – regardless of their nationality, the source of their income or location of their assets.
- Principle of Nationality: People who are nationals of the state are subject to taxation over their worldwide income – does not matter where they are residing.
Organisation for Economic Co-operation and Development (OECD)
This was a tax treaty designed to avoid double taxation, define the concepts of tax residents, exceptions and to decide conflicts between competing national interests. The “centre of vital interests” test is employed where someone has a permanent home in multiple states. The general rule is that if you spend more than 183 of the tax year then you are considered a tax resident in a certain state.
Most athletes leave the management of their finances to someone else, in many cases, their agents. Agents often want to maximise profits, and devise complicated schemes for the athlete to receive their income like trusts. Unfortunately, most players receive zero to no education about taxes before, during, or after their careers. This leaves them with little chance of understanding the schemes behind their finances. They are here to play, not to pay. This does not mean they are bad or selfish people who avoid taxes on purpose. It means that they do what they are good at, and leave the rest to their managers, just like any reasonable person would.
To give one last example, tennis players or formula one drivers, who participate in competitions across the globe, do not even have a place where most of their income comes from. Where are they meant to be taxed? Their resident country? The location of each competition?
The purpose of this article was to highlight that athletes are not bad people. The general public receives little education on taxes and athletes receive even less during their career. Of course, ignorance of law is not an excuse. They could easily hire an accountant or tax lawyer. However, maybe Federations should introduce mandatory training on taxes for their athletes. If there’s education about doping, why not for taxes?