Taxation of Entertainers and Sportspersons Details
INTERNATIONAL TAXATION: TAXATION OF ENTERTAINERS AND SPORTSPERSONS
Taxation of entertainers and sportspersons of one state performing in another state is governed by special article in the arena of International Taxation. Both OECD and UN convention gives the Source Country greater taxing powers through Article 17. Article 17 of the OECD Model Convention has overriding effect over Article 7 and 15, and it gives source state those taxing rights which are not otherwise available to a Source State under Article 7 and 15. Under Article 7 the entertainers or sportsperson might not be taxable in the source country at all as neither they stay in the country they have come to perform for sufficiently long time nor they conduct any business activity in the source country through any PE. So Article 17 of both OECD and UN Model convention gives source country the right to tax the performance fees of residents of the other states, earned in the source state even when the artistes does not have any PE in the source state. This taxation right of the source state is reasonable on the ground that government of the state of performance gets its share of tax on the income generated by the non residents from the activities performed in its jurisdiction which the government of the source state otherwise could not have get. Further Article 17.1 does not restrict the right of the residence state to tax the income of artistes/sportsperson, who are its resident, under its domestic tax laws. Now when residence state also levies tax on the income of artistes/sportsperson on the basis of residence of the said persons, double taxation may occur. This double taxation effect is mitigated in the residence state by either the way of tax credit or tax exemption method. Source countries are mostly withholding tax on Gross Receipts of the non resident artistes or sportspersons.
ARTISTES Vs ENTERTAINERS
Though the Article in most of DTAA's has been labeled as Artistes and Sportspersons but the first para of the Article uses the term "entertainer" instead of "artistes". The term sportsperson is more or less clear, so concentrating on the term "entertainer" and "artistes" and reading the relevant part of first para of Article 17 it can be concluded that not all the artistes would fall under the net of Article 17. Article 17.1 of OECD Model Double Taxation Convention read as under and relevant portion has been underlined.:
"Notwithstanding the provisions of Article 7 and 15, income derived by a resident of a Contracting State as an entertainer , such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsman, from his personal activities as such exercised in the other Contracting State , may be taxed in that other state. "
So only those activities of the artistes which have entertainment character in them would fall under this Article. Example of "entertainer" provided in Article 17.1 is not exhaustive and would clearly include the stage performer ,film actor, actor in a television commercial and further this article may apply to activities of political, social , religious or charitable nature , if an entertainment character is present. This may also include prize money of an amateur and advertisements and interviews directly related to entertainment and sports events. So what has to be kept in mind is that first Para of Article emphasis on the term "entertainer" instead of "artistes". As such this article would not extend to visiting conference speaker or to administrative or support staff (e.g. cameraman for a film, producers , film directors, choreographers, technical staff etc.) . Further it may also not apply to commentators or reporters in broadcasting, if person himself does not participate himself in the match or tournament.
Income earned by entertainers or sportsperson from endorsements in the country of performance would also clearly fall under the purview of Article 17.1. This point of view was further given enlarged dimension by UK courts. In one case of Mr. Andre Aggasi , an US Citizen, in which he played tennis matches in UK with Nike logo, shoes and shirts, it was held by UK court that income received by the player from Nike through its 100% owned company was liable to withholding tax in UK to the extent the worldwide endorsement was attributable or allocable to UK performances. So Nike was held liable to withhold UK taxes on payments to the player though neither the player or his 100% owned company nor Nike were UK residents.
FORGOING OF TAXING RIGHTS BY SOURCE STATE
Due to small tax effect and high administrative costs some countries like Netherlands have taken unilateral decision not to use taxing right as source state under Article 17 for non resident artistes and sportspersons from the countries with which it was bilateral tax treaties. Further other countries have been forgoing there taxing rights as source state for specific big sports events being organized in their country. Some big sports bodies have also been laying this condition before the source states to forgo their taxing rights for non resident sportspersons during specific sports events before giving them organizing rights.
INCOME ACCRUING TO ANOTHER PERSON IN RESPECT OF ACTIVITIES OF PERFORMER
Article 17.2 of the OECD Model Double Taxation Model Convention reads as under:
" Where income in respect of personal activities exercised by an entertainer or a sportsman in his capacity as such accrues not to the entertainer or sportsman himself but to another person, that income may, notwithstanding the provisions of Article 7 and 15, be taxed in the Contracting State in which the activities of the entertainer or sportsman are exercised."
Plain reading of Article 17.2 gives an impression that it has unlimited approach of catching every payment to any third party under its ambience. But in fact it is an anti-avoidance provision. There are situations where services of artistes are engaged through artiste companies and payments are made to artiste companies and not to artistes directly. Now these companies are in fact formed in tax heaven or low tax base countries and allow entertainer performing in international circuit to plan their income to be received in tax heaven or low tax base countries. By this provision the source state may tax the income derived by an artiste or a sportsperson from the source state by the resident of other contracting country. Commentary on the Model Convention on Para 2 of article 17 given at para 4 Page 850 of Book by Klaus Vogel on Double Taxation Convention reads as follows:-
"The purpose of para 2 is to counteract certain tax avoidance devices in case where remuneration for performance of an entertainer or athlete is not paid to the entertainer or athlete himself but to another person , e.g. a so-called artiste-company, in such a way that the income is taxed in the State where the activity is performed neither as personal service income to the entertainer or athlete nor as profit of the enterprise in the absence of a PE. Para 2 permits the state in which the performance is given to impose a tax on the profits derived from the income of the entertainer or athlete to the enterprise where for instance the entertainer or athlete has control over or rights to the income thus diverted or has obtained or will obtain some benefit directly or indirectly from that income. It may be however, that the domestic laws of some states do not enable them to apply such a provision. Such state are free to agree to alternative solution or to leave para 2 out of their bilateral convention. The relevant article applicable in case of agent is article 7 dealing with business profit which is discussed in subsequent para "
However wording of Article 17.2 is such that revenue officials may tend to bring all the income accruing to another person because of personal activities in a contracting state by an entertainer or sportsperson within the purview of Article 17.2. One such issue came before Mumbai Tribunal in the case of Asstt. DIT vs Wizcraft International Entertainment (P) Ltd. reported in (2011) 135 TTJ 647. In this case an Indian Company "Wizcraft" was engaged in the business of entertainment event management and marketing by organizing events/performance of renowned foreign artistes in India. For various events of international artistes in India , the assessee entered into agreement with an UK agent for coordination with various international artistes. "Wizcraft" also paid remuneration to UK agent for acting as agent in procuring the presence and performance of renowned artistes in India.. It also paid reimbursement expenses in connection with the visit and performance of artistes in India. The assessee company deducted tax and paid to the credit of the Central Government on the fees paid to the artistes but it did not deduct tax on commission payment made to the UK agent who acted as agent between the Indian Company and artistes who performed in India. Similarly for reimbursement of expenses incurred in connection with the visit of the artiste for performance in India, the assessee company did not deduct tax at source. The assessee company took the following plea for non deduction of tax from the aforesaid payments:-
a) That the UK agent had rendered services outside India for limited purpose of coordinating the engagement of artiste from outside India to perform the services on the dates of engagement.
b) That services were rendered by UK agent outside India and such services and income arising there from that would be subject to Article 7 of Indo-UK Treaty. That no services were rendered in India and the UK agent does not have any PE or Business Connection in India. That he even did not visit India before or during the performances in India.
c) The assessee company also put reliance on the Book by Klaus Vogel on Commentary on Model Convention.
d) Further reliance was placed on CBDT Circular No.786 dt 07/02/2000 regarding taxability of export commission payable to non resident agents rendering services abroad.
e) Further regarding reimbursement of expenses it was stated by the assessee company that it agreed to reimburse the cost of travel of the artiste, out of pocket expenses while in India and expenses for transit of equipments used by the artiste and that in respect of such reimbursement of expenses there is no element of income and therefore there is no obligation to deduct tax at source at the time of making payment.
However the assessing officer did not accept the contentions of the assessee company and held that payment of commission to UK agent and reimbursement of expenses would also be covered by Article 18 of Indo-UK treaty relating to "Artistes and Athletes" (Corresponding to Article 17 of OECD and UN Conventions) and as such assessee company was liable to deduct tax at source while making the aforesaid payments.
The Mumbai Tribunal ,however held that payment of commission to UK agent would not be covered by Article 18 of Indo-UK treaty as UK agent himself has neither taken any part in events during dates of engagement nor exercised any personal activities in India. The Tribunal upheld the contentions of the assessee company and held that since services are rendered outside India and they would be covered by Article 7 and since UK agent did not have any PE in India , hence their was no obligation on part of assessee company to deduct tax at source on payments made to UK agent. Regarding reimbursement of expenses also the Tribunal held that the law is well settled that any payment made towards reimbursement of expenses is not chargeable to tax and therefore their was no obligation to deduct tax from reimbursement of expenses also.
CONCLUSION
Article 17 has to be applied by the source state as per the spirit of the said article after understanding the objective behind the same. This article singles out a specific group of services from entertainers and sportspersons for special treatment. They are taxed at source even without any Business Connection and PE. Source state should exercise this special right only to the extent envisaged by the Article and not go beyond and try to tax every payment even remotely linked to artistes. Source country gets its share of taxes by way of withholding taxes from payments made to entertainers and sportspersons and then it is left to residence state of the performer to provide relief by tax credit or exemption or other way. Proper application by source state would avoid double taxation of the income received by artistes , help in proper tax sharing between source and residence state and thus achieve the objectives of Double Tax Avoidance Agreements.